Accountancy & Finance

Module Leader - Noel Cassar

Resmi Vellithodi Accountancy & finance GCM-M02

7/10/23
(RVEL01MBA23FEB) Word count-3166, Pages 1-16
Case Study 1

i) Income Statement for FY2022

Revenue 32800
(-) Expenses
Salaries Exp 17000
Advertising Exp 5000
Fuel Exp 2000
Depreciation Exp 5000
Interest Exp 1200
Total expenses 30200
Net Income 2600

ii) Statement of Retained Earnings

Retained Earnings, January 1,

0
2022
(+)Net Income 2600
(-)Dividend -1000
Retained Earnings, December 31,
1600
2022

iii) Balance Sheet as of 31st December 2022

Asset Amount Liability &Capital Amount

Accounts Payable 4,000
Cash 15500 Unearned Revenue 1,200
A/C Receivable 4500 Salaries Payable 2,000
Equipment 45000 Interest Payable 1,200
(-)Accumulated Depreciation 5000 Notes Payable 20,000
Total Liabilities 28,400
Capital Stock 30,000
Retained Earnings 1,600
Total Equity 31,600
Total Liabilities and
60000 60000
Total Assets Equity

pg. 1
Case Study 2
i) Calculations of ratios are as flows (Ryanair, 2023):
Current Ratio

Fiscal Year Current Assets Current Liabilities Current Ratio

31-03-2021 3.458 B 3.527 B 1.0x
31-03-2022 5.475 B 5.398 B 1.0x
Current Ratio is defined as:
Current Ratio = Current Assets / Current Liabilities
For Year 2022:
[5.475 B] / [5.398 B] = [1.01]
For Year 2021:
[3.458 B] / [3.527 B] = [0.98]

Quick Ratio

Fiscal Year Current Assets - Inventory Current Liabilities Quick Ratio

31-03-2021 3.456 B 3.527 B 1.0x
31-03-2022 5.470 B 5.398 B 1.0x

Quick Ratio (Acid Test Ratio) is defined as:

Quick Ratio = Current Assets - Inventory / Current Liabilities
For Year 2022:
[5.470B] / [5.398B] = [1.01]
For Year 2021:
[3.456 B] / [3.527 B] = [0.98]

pg. 2
Return on Equity

Net Income after tax and Return on

Fiscal Year dividends Shareholder's fund Equity
31-03-2021 -1.19B 5.43B -21.91%
31-03-2022 -0.28B 6.45B -4.34%

Return on Equity is defined as:

Return on Equity % = Earnings after tax and preference dividends / shareholder’s funds
For Year 2022:
-1.19B / 5.43B = -21.91%

For Year 2021:

-0.28B / 6.45B = -4.34%

ROA

Net Average
Fiscal Year Income Assets Return on Assets
31-03-2021 -1.015 B 13.538 B −7.5%
31-03-2022 -0.2408 M 13.739 B −1.8%

Return on Asset is defined as:

Return on Assets = Net Income / Average Total Assets
For Year 2022:
[ -0.2408 B] / [13.739 B] = [ −1.8%]
For Year 2021:
[-1.015 B] / [13.538 B] = [−7.5%]

pg. 3
Return On Capital Employed

Earnings Before Interest and Average Capital Return on Capital

Fiscal Year Taxes Employed Employed

31-03-2021 -8.394 B 8.801 B −9.5%

31-03-2022 -3.396 B 9.751 B −3.5%

Return on Capital Employed or ROCE is defined as:

Earnings Before Interest and Taxes / Average Capital Employed = Return on Capital Employed
For Year 2022
[-839.4 M] / [8.801 B] = [−9.5%]
For Year 2021
[-3.396 B] / [9.751 B] = −3.5%
Where Invested Capital is calculated as follows:
Capital Employed = Total Assets – Current Liabilities
For Year 2022
15.149 B – 5.398 B = 9.751 B
For year 2021
12.328 B – 3.527 B = 8.801 B

Gross Profit Margin

Gross
Fiscal Year Profit Revenue Margin
31-03-2021 -0.67 B 1.636 B −4.1%
31-03-2022 7.91 B 4.801 B 16.50%

Gross Profit Margin is defined as:

Gross Profit Margin = Gross Profit / Total Revenue
For Year 2022
7.91 B / 4.801 B = 16.50
For year 2021
-0.67 B / 1.636 B = -4.1

pg. 4
Interest Coverage Ratio

Interest Interest Coverage

Fiscal Year EBIT Expense Ratio
31-03-2021 -8.394 B 2.971 B −2.8x
31-03-2022 -3.396 B 0.914 B −3.7x

Interest Coverage Ratio is defined as:

Interest Coverage Ratio = Profit Before Interest and tax / Interest
For year 2022:
-3.396 B / 0.914 B = -3.71

For Year 2021:

-8.394 B / 2.971 B = -2.82

Earnings Per Share

Income After
Tax and
Fiscal Year Dividends No. of ordinary share issued EPS
31-03-2021 -1.19B 11.10 B 1.1x
31-03-2022 -0.28B 11.30 B 0.2x

Earnings Per Share is defined as:

EPS = Earnings after tax and preference dividends / Number of issued ordinary shares
For year 2022:
-0.28B / 11.30 B = 0.2
For year 2021
-1.19B / 11.10 B = 1.1

pg. 5
 i) Ratio Analysis of last two years (Ryanair, 2023)

Ratios 2022 2021Analysis

Current Ratio 1.0x 1.0xRyanair had enough short-term assets to pay its short-term
liabilities, as shown by a current ratio above 1. A current
ratio that is marginally higher than 1 for both fiscal years
indicates that the liquidity situation is generally sound.
Quick Ratio 1.0x 1.0x Quick ratios of 1.0 are seen as desirable. For both fiscal
years ratio is 1.0 indicating that the business has sufficient
funds on hand to meet its obligations.
ROE -4.34% -21.91% Ryanair's return on equity (ROE) decreased from -21.23%
in 2021 to -4.73% in 2022, indicating a decline in losses.
ROA −1.8% −7.5% Ryanair's return on asset (ROA) decreased from -7.5% in
2021 to -1.8% in 2022, indicating more asset efficiency.
ROCE -3.5 -9.5 Ryanair's return on capital employed (ROCE) decreased
from -9.5% in 2021 to -3.5% in 2022, indicating a decline in
losses.
Gross Profit 16.50% −4.1% Ryanair's gross profit increased from -4.1% in 2021 to
16.50% in 2022, indicating a huge improvement in financial
health from the previous year.
Interest Coverage Ratio −3.7x −2.8x Ryanair's interest coverage ratio decreased from -2.8x in
2021 to -3.7x in 2022, indicating that the company is not
doing in repayment of its debt from last year.
Earnings Per Share 0.2x 1.1x Ryanair's earnings per share decreased from 1.1x in 2021
to 0.2x in 2022, indicating a dip in companies performance
compared to last year.

pg. 6
 ii) Ratio Comparison with peer company (Ryanair, 2023) (Wizzair, 2023)

Ratios Ryanair Wizzair Analysis

Current ratio of Wizzair is marginally higher than 1
compared to Ryanair indicates that the liquidity situation is
Current Ratio 1.0x 1.1 generally sound.
Quick ratios of 1.0 are seen as desirable. Wizzair is
Quick Ratio 1.0x 0.69 lagging in terms of quick ratio compared to Ryanair
Ryanair's return on equity (ROE) percent is less compared
to Wizzair which means Wizzair has experienced less loss
ROE -4.34% -1.10% compared to Ryanair
Ryanair's return on asset (ROA) percent is less compared
ROA −1.8% -0.12% to Wizzair which means Wizzair has more asset efficiency.
Ryanair's return on capital employed (ROCE) is
significantly more compared to Wizzair, indicating a
ROCE -3.5 -13.90% decline in losses.
Ryanair's gross profit is significantly more compared to
Gross Profit 16.50% 4.40% Wizzair.
Ryanair's interest coverage ratio is better than Wizzair
indicating that the Ryanair is doing better than Wizzair in
Interest Coverage Ratio −3.7x -5.8x repayment of its debt.
Ryanair's earnings per share is much better than Wizzair,
where Wizzair is trending in negative and Ryanair has
Earnings Per Share 0.2x -6.3x positive ratio

pg. 7
 iii) Common Size Statement (Balance sheet) (Ryanair, 2023)

Common size
At March 31,
Particulars figures
2022 2021 2022 2021
€M €M % %
Total Revenue 15,150 12,328 100 100
Non-current assets
Property, plant and equipment 9,095.10 8,361.10 60.03% 67.82%
Right of use assets 133.7 188.2 0.88% 1.53%
Intangible assets 146.4 146.4 0.97% 1.19%
Derivative financial instruments 185.1 111.3 1.22% 0.90%
Other assets 72.1 48.7 0.48% 0.40%
Deferred tax 42.3 14 0.28% 0.11%
Total non-current assets 9,674.70 8,869.70 63.86% 71.95%
Current assets
Inventories 4.3 3.6 0.03% 0.03%
Other assets 401.1 179.8 2.65% 1.46%
Current tax — — 0.00% 0.00%
Assets held for sale — — 0.00% 0.00%
Trade receivables 43.5 18.6 0.29% 0.15%
Derivative financial instruments 1,400.40 106 9.24% 0.86%
Restricted cash 22.7 34.1 0.15% 0.28%
Financial assets: cash > 3 months 934.1 465.5 6.17% 3.78%
Cash and cash equivalents 2,669.00 2,650.70 17.62% 21.50%
Total current assets 5,475.10 3,458.30 36.14% 28.05%
Total assets 15,149.80 12,328.00 100% 100%
Current liabilities
Provisions 9.2 10.3 0.06% 0.08%
Trade payables 1,029.00 336 6.79% 2.73%
Accrued expenses and other
2,992.80 1,274.90 19.75% 10.34%
liabilities
Current lease liability 56.9 52.5 0.38% 0.43%
Current maturities of debt 1,224.50 1,725.90 8.08% 14.00%
Current tax 47.7 48.1 0.31% 0.39%
Derivative financial instruments 38.6 79.2 0.25% 0.64%
Total current liabilities 5,398.70 3,526.90 35.64% 28.61%
Non-current liabilities
Provisions 94.1 47.4 0.62% 0.38%
Trade payables 49.2 179.9 0.32% 1.46%
Derivative financial instruments — 6.4 0.00% 0.05%
Deferred tax 266.5 272.4 1.76% 2.21%
Non-current lease liability 81.4 130.6 0.54% 1.06%
Non-current maturities of debt 3,714.60 3,517.80 24.52% 28.54%
Total non-current liabilities 4,205.80 4,154.50 28% 34%
Total liabilities 9,604.50 7,681.40 63% 62%
Shareholders’ equity
Issued share capital 6.8 6.7 0.04% 0.05%

pg. 8
 Share premium account 1,328.20 1,161.60 8.77% 9.42%
Other un-denominated capital 3.5 3.5 0.02% 0.03%
Retained earnings 2,880.90 3,232.30 19.02% 26.22%
Other reserves 1,325.90 242.5 8.75% 1.97%
Shareholders’ equity 5,545.30 4,646.60 36.60% 37.69%
Total liabilities and shareholders’
15,149.80 12,328.00 100.00% 100.00%
equity

By examining the provided data, which highlights a number of significant trends, it is possible to predict the
company's financial situation and future developments between 2021 and 2022.
 Intangible assets, non-current assets account for 63.86% of total assets in 2022, down from 71.95%
in 2021. Property, plant, and equipment made up the majority of non-current assets, and its share of
total assets also slightly declined. This shows a decline in the company's investment in long-term
assets based on its total asset base.
 Current assets: According to the normal size study, the share of current assets is expected to rise
from 28.05% in 2021 to 36.14% in 2022. This shows that a larger percentage of the company's
assets are likely to produce cash flow or be used up over the course of the coming year. What is
particularly interesting is that cash and cash equivalents, which have largely remained steady over
the previous two years, make up a sizeable portion of current assets.
 Liabilities: It climbed from 62% of total liabilities in 2021 to 63% in 2022. As a percentage of total
liabilities, both current and non-current liabilities increased, showing a greater reliance on debt
financing. Trade payables, accrued expenses, and other liabilities ratios all experienced
considerable increases, indicating that the company's short-term liabilities had increased.
 Shareholders equity slightly declined from 37.69% in 2021 to 36.60% in 2022. The company's
cumulative profits, or retained earnings, decreased both as a percentage of total assets and in
absolute terms.
 Reserves besides cash: From 1.97% in 2021 to 8.75% in 2022, the percentage of reserves other
than cash climbed dramatically. This shows that the company's reserves were significantly altered,
possibly as a result of situations like asset revaluation or profits or losses on financial instruments.
Overall, the study shows that the company's financial structure has changed, with a decrease in the
percentage of owners' equity and non-current assets and an increase in the percentage of current assets
and liabilities. This shift can signify a preference for short-term debt over long-term investments.

pg. 9
Case Study 3

i) When you are an equity investor, you are always entitled to a dividend.” Do you agree
with the statement? Critically discuss.
No, I do not agree with the statement that an equity investor is always entitled to a dividend. Dividends are
payments made by a company to its shareholders out of their profits. Companies are not obligated to pay
out dividends and there is no guarantee that any dividends will be paid.
Many companies do not pay dividends to their shareholders, including some of the largest and most
successful companies in the world. For example, Apple Inc and Amazon Inc., two of the most successful
companies of the past decade, have not paid dividends since their inception.
Moreover, the amount of dividends paid out by companies differ greatly. Companies which pay out more
dividends are usually older, more established companies with strong and consistent earnings. Companies
with weaker earnings or more volatile earnings tend to have lower dividend payouts.
Finally, the decision to pay dividends is left to the discretion of the board of directors of the company. While
some boards may decide to pay dividends regularly, others may choose to retain profits for reinvestment or
to shore up their balance sheet. (www.nerdwallet.com/article/investing/what-are-dividends)
In conclusion, while many companies do pay dividends, there is no guarantee that an equity investor will
always be entitled to a dividend. Ultimately, the decision to pay a dividend is left to the board.
(https://www.investopedia.com/terms/d/dividend.asp)

ii) Default risk for a corporate bond is lower than Treasury Bond.” Do you agree with the
statement? Critically discuss.
Yes, I agree with the statement. Corporate bonds generally carry more risk than Treasury Bonds due to
several reasons. Firstly, the creditworthiness of the company itself is subject to change. Companies can fail
and cause a default on their bonds. If there is an economic downturn, the company may not be able to pay
the debt obligations on its bonds and default on them. Therefore, corporate bonds generally have a greater
risk of default than Treasury Bonds. (https://www.sec.gov/files/ib_corporatebonds.pdf)
Additionally, corporate bonds are not always backed by the full faith and credit of the government, as
Treasury Bonds are. This means that corporate bonds are subject to market volatility and fluctuations.
Lastly, corporate bonds are often subject to more complex terms and conditions which can make them a
higher-risk investment. These risks are not as applicable with Treasury Bonds.
(https://www.bankrate.com/investing/treasury-bonds/)
Overall, corporate bonds typically carry more risk than Treasury Bonds. Consequently, default risk for a
corporate bond is lower than Treasury Bond. (https://www.investopedia.com/terms/d/dividend.asp)

pg. 10
 iii) If Mrs. Williams has €10,000 in her bank account and she earns an annual interest of
4.5%, what is her account balance after 15 years, assuming compound interest?
A = P (1 + r/n) nt
Where
A = Account Balance after 15 years
P = Initial Deposit (€10,000 in this case)
r = Interest Rate (4.5%)
n = Number of Times Compounded Per Year (1 in this case)
t = Number of Years (15 in this case)
A = €10,000(1 + 4.5%/1)^15
A = €10,000(1.045^15)
A = 19,723.37
Therefore, Mrs. William's account balance after 15 years of compound interest would be €19,723.37.

iv) What is the difference between the Pure Expectations Theory and Liquidity Preference
Theory?

The Pure Expectations Theory posits that the expected future path of short-term interest rates will
determine current interest rates. This theory assumes that the expected future path of interest rates is
stationary and that expectations are formed rationally and consistently over time. In this theory, current
short-term interest rates are determined by investors' expectations of future short-term rates. (The Cyclical
Behavior of the Term Structure of Interest, 1965)
The Liquidity Preference Theory states that investors have a preference for liquidity and therefore demand
a premium for holding money over other assets. This theory assumes that current short-term interest rates
are determined mainly by the demand for money in the economy. This theory does not consider investors'
expectations of future rates, instead focusing on the current demand for liquidity in the economy.
(Analystprep.com)

pg. 11
 Case study 4

i) Dominika Co. has €20,000 to invest for a five-year period. She could deposit it in a bank
earning 8% per year compound interest. She has been offered an alternative: investment
in a low-risk project that is expected to produce net cash inflows of €6,500 for each of the
first three years, €7,500 in the fourth year, and €3,000 in the fifth year.

a. Calculate the NPV Method and the Internal Rate of Return for the project.

NPV Method Present Value of Cash Inflows:

Year 1: €6,500 / (1+0.08) ¹
Year 2: €6,500 / (1+0.08) ²
Year 3: €6,500 / (1+0.08) ³
Year 4: €7,500 / (1+0.08) ⁴
Year 5: €3,000 / (1+0.08) ⁵

[6500/1.08] + [6500/1.17] + [6500/1.26] + [6500/1.36] + [6500/1.47]

[€6018.5] + [€5,555.5] + [€5,158.7] + [€5,514.7] + [€2,040.8]

Total PV of Cash Inflows = €24,288.2

Initial Investment = €20,000.00

Net Present Value = €24,288.2 - €20,000.00 = €4,288.2

Internal Rate of Return IRR = 7.45%

The project has a positive net present value of €4,288.2 with IRR being 7.45% which is less than
the bank earnings.

ii) Shabbir Co is reviewing investment proposals that have been submitted by divisional
managers. The investment funds of the company are limited to $800,000 in the current
year. Details of three possible investments, none of which can be delayed, are given
below.

Project 1
An investment of $300,000 in workstation assessments. Each assessment would be on an
individual-employed basis and would lead to savings in labour costs from increased efficiency and
from reduced absenteeism due to work-related illness. Savings in labour costs from these
assessments in money terms are expected to be as follows:

Project 2
An investment of $450,000 in individual workstations for staff is expected to reduce administration
costs by $140,800 per year in monetary terms for the next 5 years.

Required: Determine the best way for Shabbir Co to invest the available funds and calculate the
resultant net present value, based on the assumption that each of the two projects is divisible

pg. 12
 Solution:

To determine the best way for Shabbir Co to invest the available funds and calculate the resultant
net present value (NPV), we need to analyse the cash flows and calculate the NPV for each project.
The project with the highest NPV should be chosen.

Let's calculate the NPV for each project:

Project 1:

Investment: $300,000
Cash Flows: $85,000, $90,000, $95,000, $100,000, $95,000

To calculate the NPV, we need to discount each cash flow to its present value.
NPV = CF1 / (1+r) ^1 + CF2 / (1+r) ^2 + CF3 / (1+r) ^3 + CF4 / (1+r) ^4 + CF5 / (1+r) ^5
where CF is the cash flow and r is the discount rate.

NPV1 = [$85,000 / (1+0.08) ^1] + [$90,000 / (1+0.08) ^2] + [$95,000 / (1+0.08) ^3] + [$100,000 /
(1+0.08) ^4] + [$95,000 / (1+0.08) ^5]

NPV1 = [$85,000/1.08] + [$90,000/1.17] + [$95,000/1.26] + [$100,000/1.36] + [$95,000/1.47]

NPV1 = [78,703.7 + 76,923.1 + 75,396.8 + 73,529.4 + 64625.8]

NPV1 = $300,000 - $3,69,178.8 = $69,178.8

Calculating the above expression, we find NPV1= $69,178.8

Project 2:
Investment: $450,000
Annual administration cost savings: $140,800

Since the administration cost savings are constant each year, the NPV can be calculated as follows:

NPV2 = Annual savings / (1+r) + Annual savings / (1+r) ^2 + Annual savings / (1+r) ^3 + Annual
savings / (1+r) ^4 + Annual savings / (1+r) ^5

NPV2 = [$140,800 / (1+0.08) ^1] + [$140,800 / (1+0.08) ^2] + [$140,800 / (1+0.08) ^3] + [$140,800 /
(1+0.08) ^4] + [$140,800 / (1+0.08) ^5]

NPV2 = [$140,800 / 1.08] + [$140,800/ 1.17] + [$140,800 / 1.26] + [$140,800 / 1.36] + [$140,800 /
1.47]

NPV2 = [1,30,370.4 + 1,20,341.8 + 1,11,746.03 + 1,03,529.4 + 95,782.3]

NPV2 = $450000 - $5,61,769.93 = $1,11,769.93

pg. 13
 Calculating the above expression, we find NPV2 = $1,11,769.93
Now, let's compare the NPVs:

NPV1 = $69,178.8
NPV2 = $1,11,769.93

The investment with the highest NPV is Project 2, which involves an investment of $450,000 in
individual workstations for staff. Therefore, Shabbir Co should invest the available funds in Project 2
to maximize the NPV.

pg. 14
 References

1. (1965). In R. A. Kessel, The Cyclical Behavior of the Term Structure of Interest.

2. Analystprep.com. (n.d.). PE theory & LP theory.
3. https://www.bankrate.com/investing/treasury-bonds/. (n.d.). Treasury bonds.
4. https://www.investopedia.com/terms/d/dividend.asp. (n.d.). Dividend.
5. https://www.sec.gov/files/ib_corporatebonds.pdf. (n.d.). Corporate Bonds.
6. Ryanair. (2023). Annual Report.
7. Wizzair. (2023). Annual Report.

8. www.nerdwallet.com/article/investing/what-are-dividends. (n.d.). Dividends.

pg. 15