YORK UNIVERSITY

SCHULICH SCHOOL OF BUSINESS

FINANCIAL STATEMENT ANALYSIS AND VALUATION
ACTG 3000C
Fall 2021
MIDTERM EXAM
Duration: 120 minutes
Total Marks: 40
30% of overall grade

Instructors: Beppino Pasquali

INSTRUCTIONS:

1. Please type your name and student I.D. number as follows:

“LastNameFirstNameStudent #” (e.g. SmithJane123456789) at top of your Word file.

2. This exam is to be completed on an individual basis. You may not collaborate, compare responses or
work with anyone else on this assessment. All of the work must be your own. You may not contact
anyone, classmates or others, during the exam or write the exam as a group. In the event that there
are undue similarities between your response and the response of one or more other students, all
students with similar responses will be referred to the Associate Dean's Office for an academic integrity
investigation.

3. Do not contact the instructor to interpret or provide further guidance on the question.

4. Make any necessary assumptions and be sure to state your assumptions in your answer.

5. The assignment has seven (7) pages (including the cover pages) and one (1) question, with two parts.

6. The questions must be answered on your computer and only typed Word responses submitted
through the Assignment function on Canvas will be accepted. If you use Excel for calculations, copy
and paste them into your Word document.

After you upload the file on Canvas, send an e-mail to - actgexams@schulich.yorku.ca with the file as a
backup. The subject line of the email should be “ACTG3000 LastNameFirstNameStudent#”.

7. The exam details are as follows (sample based on 8:30am start time):

Action Specific Task When Duration of Task

Download Download, Save & Read 8:30 am EST 5 minutes
Instructions carefully
Write Start Writing your response in 8:35 am EST 120 minutes
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STOP Writing your response 10:35 am EST

© Beppino Pasquali FCPA,FCA 2021

 Upload Upload your Word response to Deadline 10 minutes
Canvas & Email to 10:45 am EST
actgexams@schulich.yorku.ca
as a backup
135 minutes

LATE SUBMISSIONS WILL NOT BE ACCEPTED AND WILL RECEIVE A GRADE OF ZERO – NO
EXCEPTIONS WHATSOEVER WILL BE MADE.

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file will be saved on your computer.

9. By writing the exam, you certify that you are committed to ethical conduct in this assignment by not
engaging in behaviours that are counter to the intent and integrity of the exam or to the policies of the
Schulich School of Business.

As a member of this class and of York University, you commit to the values and practices as spelled out
by Schulich School of Business’s and York University’s Policy of Academic Honesty.

You understand that you have a responsibility to maintain these values, and in order to do so, you will not
engage in any form of cheating or other breaches in academic honesty as defined by Schulich School of
Business’s and York University’s Policy of Academic Honesty.

GOOD LUCK!

Brian Sital- 216933848

Spirits Inc. (40 marks)

Spirits Inc. (“Spirits”) operates companies engaged in the manufacture, production and sale of distilled
spirits (liquor), home and security products, and golf products.

The company operates in three business segments: spirits; home products; and, golf products. Though
the products are different, they all generate the same profit margins for Spirits.
Sales of golf products had been decreasing steadily in 2019 as Tiger Woods was not participating in any
professional golf tournaments. Therefore, on December 31, 2019, management of Spirits recorded an
impairment of its capital assets of $870 million. The capital assets are depreciated on a straight-line basis
over 10 years, which is the average useful life of all capital assets in these industries.

© Beppino Pasquali FCPA,FCA 2021

The attached are the financial statements for Spirits’ December 31, 2020 and 2019 fiscal years.

Part A (15 marks)

You are the CFO of Spirits and you need to prepare for the upcoming board of directors meeting.
The board would like to know the projected earnings per share and working capital, dollars (Accounts
Receivable + Inventory – Accounts Payable) for Spirits’ December 31, 2021 fiscal year.
You gather the following information:
- Revenues are expected to increase 20% in 2021 and Spirits will improve gross margins by 2%,
from 2020. In order to support the increase in sales, selling and administrative expenses are
expected to increase $50 million.
- As a result of substantial changes implemented in late 2020, Spirits has improved its working
capital management. Spirits expects that accounts receivable, inventory and accounts payable
turnover rates will return to 2019 levels.
- The approved capital expenditure budget (capital asset purchases) for 2021 is $250 million. It
will be financed by $100 million in long term bank loans and the remaining funds from cash
from operations. The interest rate on the bank loans is expected to be consistent with the past.
There are no principal repayments required on this new bank loan until 2025.
- No assets are planned to be sold in 2021.
- Spirits’ existing long-term debt, as at December 31, 2020, has principal repayment requirements
as follows:
o 2021 $2,367 million
o 2022 $ 400 million
o 2023 $ 400 million
o 2024 $1,513 million
- No shares will be issued or bought back in 2021
- No management bonuses were paid in 2020, however due to the improvements expected,
management bonuses are expected to be $20 million in 2021
- Inflation is expected to be 0% in 2021 and no tax rate changes are expected in 2021.

For Projected basis, would not consider cap ax impairment of $870,000 Million.

© Beppino Pasquali FCPA,FCA 2021

Gross Margin Gross Profit
2,875 43%
Sales 6695

Depreciation Expense Ratio Dep Exp

254 10%
Begin Cap Assets ½ Cap ex 2382 +1/2 158

Interest Expense Ratio Interest Expense

222 4.74%
Begin LTD +/- ½ Change
(5+4689) – 1/2(14)

Income Tax Exp Ratio Income Tax Exp

118 26%
Pre-tax income 453

All 3 Ratios , return to 2019 Rates so use 2019 report #’s

A/R Turnonver Sales

7609 8.88
A/R 856

Inventory Turnover Cost of Sales

4334 2.19
Inventory 1975

A/p turnover Cost of Sales

4334 4.12
A/P 1051

PROJECTIONS:

Projected Sales:

Prior year sales: $6695

20% increase: $1339
Sales: $8034

Cost of Sales:
Projected Sales with 2% GM Improvement (1-.43-.2): $4418.7

SGA:
Prior Year SGA + 50 Million= (1946+50million) =1996

Depreciation/Ammort:
Begginning Cap Asset- $ 2,540
Plus ½ Cap Ex- $125
AVG Cap asst cost * dep expense= 3,665 *10%= $366.5
© Beppino Pasquali FCPA,FCA 2021

Increase 40%
Interest Exp:
Beginning LTD + Debt due in 1 year= 4680
Less ½ repayment= (1183.5)
Plus ½ additions- 50
AVG LTD * interest Expense= 3546.5 * 4.74% = $168.1

$8034 -$4418.7- 1996- $366.5- $168.1 = $1084.7- Pre tax earnings

Income tax Expense= $1084.7 *26%= 282

Net earnings= $802.7

Projected EPS is : projected NI/ #common Shares

= 802.7/151.7
= 5.3
Diluted projected EPS:
= 802.7/200.1
=4

- EPS alone will not provide enough information, however cannot accurately capture a
future share price number to do P/E ratio. Would look at 2020’s P/E ratio and see what market
thinks of Spirits growth.

Working Capital dollars (A/R+Inv-A/p)

A/R: Projected Revenues/A/R turnover= 8034/8.88= 904.73

Inventory: Projected cost of sales/ Inv turnover= $4418.7/ 2.19= 2017.67

A/P: projected Cost of sales/ A/P turnover= $4418.7/4.12= 1072.5

Projected working capital would then be:

904.73+2017.67-1072.5= $1849.9

© Beppino Pasquali FCPA,FCA 2021

Part B (Ignoring Part A) (25 marks)
You are a Schulich BBA grad and after working for the past 5 years, you have managed to save
$100,000. You have decided to invest the $100,000 in the stock market. After reading about Spirits Inc.
(above, excluding Part A) and gathering the attached financial statements you must decide whether to
invest in Spirits Inc.
Evaluate Spirits’ financial performance between 2019 and 2020, from the point of view of a prospective
investor. Would you buy shares in Spirits Inc. What are your major concerns? Provide all reasoning and
support. Present all calculations.
Need Adjustments for Gain on sale of wine business makes year over year uncomaprable and impairment of
capital assets.

Would add back 870 and it’s tax implications of 26% (226.2)

Gain on sale would subtract 433, and implications of 112.58

2020 2019
ROI ADJ Ni
658.38 12.65% 622.38 12.39%
Equity 5205.38 5022.38
4,882 4,699
Add: 643.8 (impairment)AT Add: 643.8 (impairment)AT
Deduct: 320.42 ( gain) AT Deduct: 320.42 ( gain) AT

=5205.38 =5022.38
Gross Margin Gross Profit
2,875 43% 3,275 43%
Sales 6695 7,609

Sales Return (prof margin) AdJ NI

658.38 10% 622.38 8%
Revenue 6695 7,609

EBITDA ADJ EBITDA

1799 1343
Add Impairment -870 Add Impairment -870
Add Depreciation - 254 Add Depreciation -265

Debt to Equity Total Liabilities

6,934 1.33% 6,919 1.37%
Total ADJ Equity 5205.38
5022.38

Interest Coverage EBITA Adjusted

1799 8.1% 1343 5.6%
Interest Expense 222 237

- As a potential investor the ratios calculated above, shows areas of interest into my
analysis on whether or not to invest in Spirits Inc. The slight increase in ROI shows me that the
company is has generated more money for every $ invested (approx. $.024). Based on the eluded
diverse business operations and high gross margins, Spirits INC would be a mix of operational
excellence and differentiation company. Their sales return has increased by 2% which shows that
© Beppino Pasquali FCPA,FCA 2021
 money made for every $ of sales went up, which is a good sign for an investor reinforcing
business profitability. The adjusted EBITDA for both years shows that 2020’s EBITDA
increased significantly by $456(in millions), showing that the PV of future cash flows has
increased. In correlation the stock price should also rise in accordance. The high debt to equity %
shows a drop of 4%, but it still is very high in 2020 at 1.33%. It shows that Spirits Inc uses $1.33
for every $ the shareholder gives them, which indicates high risk.
- A concern from this finding at an investor point of view is why are they operating at such
a risky level, yet ROI and Gross margins are not increasing from this input. Interest coverage has
also increased by 2.5%, showing that they can pay their interest for 2020 8.1 times a year. This
shows that risk is being offset by their EBITDA. Based on cash flow interpretations Capital
expenditures decreased by $18(in millions), however business acquisitions have increased
significantly. Is Spirits Inc, planning expansion through acquisition of other companies in the
related industry, and will these expenses be offset by future sales?
- Based on these concerns and analysis, I would invest a portion of my $100,000 into
Spirits Inc given its EBITDA, and other metrics. Another promising insight is their financials
shift that shows possibility of expansion, and increase my return on investment.

Spirits Inc.
Balance Sheet
As at December 31, 2020 and 2019 (in $ millions)
2020 2019
ASSETS
Cash $ 366 $ 131
Accounts Receivable 907 856 Inventories 2,017 1,975
Prepaids 531 464

Total Current Assets 3,821 3,426

Capital Assets - Cost 2,540 - 2,382 -

Less: Accumulated Depreciation 1,072 1,468 818 1,564
Goodwill 3,572 3,572

Intangible Assets 2,769 2,769

Other Non-Current Assets 186 287

Total Assets 11,816 11,618

LIABILITIES
Line of Credit $ - $ -

Accounts Payable 1,140 1,051

© Beppino Pasquali FCPA,FCA 2021

 Debt Due in One Year 2,367 5

Other Current Liabilities 354 103

Total Current Liabilities 3,861 1,159

Long-Term Debt 2,313 4,689

Other Long-Term Liabilities 760 1,071

Total Liabilities 6,934 6,919

SHAREHOLDERS' EQUITY
Preferred Shares 6 6

Common Shares 1,463 1,463

Treasury Stock, at cost (3,338)

(3,338)
Retained Earnings 6,751 6,568

4,882 4,699

Total Liabilities and Shareholders' Equity 11,816 11,618

Spirits Inc.
Statement of Operations
For the Year Ended December 31, 2020 and 2019
'(in $ millions)
2020 2019

Revenue $ 6,695 $ 7,609

Cost of revenue (3,820) (4,334)

© Beppino Pasquali FCPA,FCA 2021

Gross Profit 2,875 3,275
Selling, general and administrative expenses (exclusive of depreciation and amortization) (1,946)
Amortization (254) (1,932)
Impairment of capital assets - (265)
Operating Income 675 (870)
Interest Expense (222) 208
Gain on sale of wine business Pre-tax - (237)
earnings 453 433
Income taxes (118) 404
Net Earnings 335 (105)
299

Net earnings per common share - basic $ 2.21

Net earnings per common share - diluted $ 1.68 $ 1.97
$ 1.66
Dividends per common share $ 1.00
$ 1.72
Average number of common shares outstanding- basic (millions) 151.7
Average number of common shares outstanding- diluted (millions) 200.1 151.7
180.3
Spirits Inc.
Statement of Cash Flows
For the Year Ended December 31, 2020 and 2019
(in $ millions)
2020 2019
Cash Flows From Operating Activities
Net earnings 335 299
Non-controlling interest - -
Adjustments to reconcile net income to operating cash flows:
Depreciation and amortization 254 265
Gain on sale of wine business -
(433)
Capital Asset impairment charges - 870
Operating assets and liabilities (61)
(135)
Net cash provided (used) by operating activities 528 866

Cash Flows From Investing Activities

Capital expenditures (158) (176)

© Beppino Pasquali FCPA,FCA 2021

 Business acquisitions (net of proceeds on sale) (106)
(86)
Other 136
(57)
Net cash used in Investing Activities (128)
(319)

Cash Flows From Financing Activities

Issuance of debt, net of repayments (14) 387
Repurchase of common shares -
(279)
Repurchase of preferred shares -
(455)
Cash dividends paid on common and preferred shares (152)
(261)
Other -
(14)
Net cash used in Financing Activities (166) (622)
Net increase (decrease) in cash 235 (75)
Cash and cash equivalents - beginning of period 131 206
Cash and cash equivalents - end of period 366 131

© Beppino Pasquali FCPA,FCA 2021