FINM2416 Asset Pricing Topic 2: Financial statement and ratio Analysis

FINM2416 ASSET PRICING

TOPIC 2 - FINANCIAL STATEMENT AND RATIO ANALYSIS

TUTORIAL QUESTIONS

Objective 1: DuPont System Analysis

8. Use the DuPont system and the following data to find return on equity.

14. A firm has a tax burden ratio of .75, a leverage ratio of 1.25, an interest burden of .6, and
a return on sales of 10%. The firm generates $2.40 in sales per dollar of assets. What is
the firm’s ROE?

Non-Textbook Problem 1
Your earnings expectations for NCK are summarised in the table below. All items are in
$million unless otherwise stated.

Year end 30 June 2016 2017 2018

Income statement
Revenue 43.4 55.1 74.3
EBITDA 10.3 12.9 17.6
Earnings Before Interest And Taxes (EBIT) 9.6 11.8 16.4
Pretax Income 9.6 11.6 16.2
Net Income 6.7 8.1 11.3
Earnings per share ($) 0.08 0.10 0.14
Dividends per share ($) 0.00 0.06 0.07

Balance sheet
Total Assets 17.1 20.3 26.0
Debt 2.2 2.2 2.2
Non interest-bearing liabilities 7.4 7.4 7.4
Common Equity 7.5 10.7 16.4

NCK has 81 million shares on issue. Assume that investments made in 2017 and 2018 are
funded entirely by the reinvestment of earnings.
Determine whether the return on equity capital is increasing from 2016 to 2018 and analyse
the financial ratios that can explain this change. That is, break down return on equity into a
number of components.

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FINM2416 Asset Pricing Topic 2: Financial statement and ratio Analysis

Non-Textbook Problem 2

You have compiled the following financial information on Forrester Group Ltd. All financial
statement numbers are in millions of dollars unless otherwise indicated.

2016 2017 2018

Statement of Financial Performance

Revenue 3,164.8 4,079.8 4,572.0

EBIT 765.7 832.2 985.4
Net interest expense 183.4 172.1 182.4
Pre-tax profit 582.3 660.1 803.0
Income tax expense 154.5 194.9 242.1
Net profit 427.8 465.2 560.9
Average shares on issue (m) 1,705.6 1,878.7 2,034.8
Number of shares at year-end (m) 1,724.3 1,993.4 2,056.3
Dividends per share (c) 14.5 15.5 17.0

Balance Sheet

Assets
Current assets 1,367.1 2,230.8 2,641.2
Non-current assets 3,734.3 7,018.7 6,869.8
Total assets 5,101.4 9,249.5 9,511.0
Liabilities
Interest-bearing current liabilities 473.1 365.3 237.1
Other current liabilities 543.4 1,060.6 1,459.8
Total current liabilities 1,016.5 1,425.9 1,696.9
Interest-bearing non-current liabilities 1,535.6 3,715.6 3,148.3
Other non-current liabilities 241.5 329.0 453.9
Total non-current liabilities 1,777.1 4,044.6 3,602.2
Total liabilities 2,793.6 5,470.5 5,299.1
Net assets 2,307.8 3,779.0 4,211.9
Equity
Contributed equity 1,871.2 3,151.1 3,445.5
Reserves 234.6 134.0 61.6
Retained profits 202.0 493.9 704.8
Total equity 2,307.8 3,779.0 4,211.9

Analyse the historical performance of Forrester Group in terms of profitability, financial risk
and the ability of management’s investment decision-making to maximise the value of the
firm. Your analysis should be no more than 150 words and be substantiated by relevant data.

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FINM2416 Asset Pricing Topic 2: Financial statement and ratio Analysis

Objective 2: Cash Flow Activities

15. Use the following cash flow data for Rocket Transport to find Rocket’s
a. Net cash provided by or used in investing activities.
b. Net cash provided by or used in financing activities.
c. Net increase or decrease in cash for the year.

Objective 3: Economic Value Added

16. Here are data on two firms.

a. Which firm has the higher economic value added?

b. Which has the higher economic value added per dollar of invested capital?

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FINM2416 Asset Pricing Topic 2: Financial statement and ratio Analysis

Objective 4: Ratio Calculation Practices (If time permitted)

Use the financial statements of Heifer Sports Inc. in Table 19A to find the following
information for Heifer’s:
a. Inventory turnover ratio in 2020.
b. Debt/equity ratio in 2020.
c. Cash flow from operating activities in 2020.
d. Average collection period.
e. Asset turnover ratio.
f. Interest coverage ratio.
g. Operating profit margin.
h. Return on equity.
i. P/E ratio.
j. Compound leverage ratio.
k. Net cash provided by operating activities.

Table 19A Heifer Sports Inc. Financial Statements