Semester One Final Examinations, 2019
ACCT7106 Financial Statement Analysis
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School of Business EXAMINATION
Semester One Final Examinations, 2019
ACCT7106 Financial Statement Analysis
This paper is for St Lucia Campus students.
Examination Duration:
Reading Time:
Exam Conditions:
This is a Central Examination
This is a Closed Book Examination – no materials permitted During reading time, write only on the rough paper provided This examination paper will be released to the Library Materials Permitted In The Exam Venue:
Calculators – Casio FX82 series or UQ approved (labelled)
(No electronic aids are permitted e.g. laptops, phones)
Materials To Be Supplied To Students:
1 x 14-Page Answer Booklet
1 x Multiple Choice Answer Sheet
Instructions to Students:
Additional exam materials (e.g. answer booklets, rough paper) will be provided upon request.
Please manage your time and attempt all questions. Provide all workings.
120 minutes 10 minutes
For Examiner Use Only
Question Mark
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Total ________
Semester One Final Examinations, 2019 ACCT7106 Financial Statement Analysis
Question 1: Multiple Choice Questions (20 Marks)
Select the best answer for each of the following questions, and enter the answer in the answer sheet. Choose only one answer for each question, and note that only the answer sheet will be marked. 2 marks for each question.
1. ‘Industry growth is slow’ is a factor in which of Porter’s Five Forces? A. ThreatofNewEntrants
B. BargainingPowerofSuppliers
C. Bargaining Power of Buyers
D. ThreatofSubstitutes
E. RivalryBetweenExistingCompetitors
2. Airlines pilots are difficult and expensive to replace. From the perspective of an airline company (e.g. Qantas), this is an example of which of Porter’s Five Forces?
A. ThreatofNewEntrants
B. BargainingPowerofSuppliers
C. Bargaining Power of Buyers
D. ThreatofSubstitutes
E. RivalryBetweenExistingCompetitors
3. Which of the following is NOT an example of a way that a company might compete on differentiation?
A. Offeringahigherqualityproductthancompetitors
B. Exploitingeconomiesofscale
C. Investinginadvertisingtodevelopbrandimage
D. Developingnewproductsthroughinvestmentinresearchanddevelopment E. Offeringcustomerscustomisableproducts
4. Which of the following is NOT an indicator that an operating revenue/expense might be Unusual Operating Income?
A. Theamountoftherevenue/expenseisveryvolatile
B. Theamountoftherevenue/expenseiszeroinsomeyears C. Theitemisdescribedasa‘restructuringcharge’
D. Theitemisarecurringpartofthecompany’s‘otherincome’ E. Theamountoftherevenue/expenseisunpredictable
5. A chief financial officer wants to inflate earnings using accrual-based earnings management. Which of the following will increase earnings in the current year?
A. OverestimatetheProvisionforDoubtfulDebts
B. UnderestimatetheProvisionforWarrantyExpenses
C. UnderestimatetheusefullifeofProperty,PlantandEquipment D. Write-downInventorytolowerofcostandnetrealisablevalue E. Alloftheabove
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Semester One Final Examinations, 2019 ACCT7106 Financial Statement Analysis
6. A company called ABC has a small investment in the shares of a private company. ABC cannot observe the market price of the private company’s shares, so the management of ABC estimates the fair value of the private company’s shares using a discounted free cash flow model, internal estimates of future free cash flow, and internal estimates of weighted average cost of capital.
How would this fair value be described under accounting standards? A. Level1fairvalue
B. Level2fairvalue
C. Level3fairvalue
D. Level1or2fairvalue E. Level2or3fairvalue
7. Which of the following is NOT a reason why price-to-book (P/B) ratios are usually greater than 1?
A. Mostassetsaremeasuredatfairvalue
B. Accountingdoesnotrecognisemostinternallygeneratedintangibleassets C. ExpendituresonR&Dandadvertisingareexpensedasincurred,butmay
generate value for multiple periods
D. Acollectionofassetscanbeworthmorewhenusedtogetherthanwhenused
separately, but accounting generally records each asset individually E. Alloftheabove
8. Which of the following is NOT a typical disadvantage of using comparable company multiples to value a company?
A. Itcanbedifficulttofindgenuinelycomparablecompanies
B. Thevaluationdependsonwhichmultipleisused
C. Itdoesnotrequireforecasting
D. Itimplicitlyassumesthatmarketpricesofcomparablecompaniesare
accurate
E. Thedenominatorcanbenegativeforsomemultiples,makingthemnot
meaningful
9. The weighted average cost of capital (WACC) is the appropriate discount rate for which two valuation models?
A. Dividenddiscountmodel(DDM)anddiscountedfreecashflows(DCF)
B. Discountedfreecashflows(DCF)andresidualoperatingincomemodel
(ReOI)
C. Residualincomemodel(RIM)andresidualoperatingincomemodel(ReOI)
D. Dividenddiscountmodel(DDM)andresidualincomemodel(RIM)
E. Residualincomemodel(RIM)anddiscountedfreecashflows(DCF)
10. Suppose you are using the dividend discount model (DDM) to value a company. You calculate the terminal value by assuming that the company’s dividend will be the same forever after the company reaches a steady state. Which valuation Scenario are you assuming?
A. Scenario1
B. Scenario2
C. Scenario3
D. Scenario1or2
E. Noneoftheabove
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Semester One Final Examinations, 2019 ACCT7106 Financial Statement Analysis
Question 2: Balance Sheet Reformulation (20 Marks)
Suppose you have been given the following Balance Sheet, prepared under Australian Accounting Standards. The company is an ordinary retail company.
Current Assets
Cash & cash equivalents Accounts receivable Inventories
Other financial assets
Non-Current Assets Goodwill
PPE (net) Equity-accounted investments
Deferred tax asset
Total Assets
FY18 $m
150.0 125.0 70.0 10.0 355.0
200.0 400.0
40.0
40.0 680.0
1,035.0
FY18 $m
Current Liabilities
Accounts payable 30.0 Current tax liability 20.0 Other current liabilities 25.0
Note the following additional information:
• Revenue for FY18 was $750m
• Assume operating cash is 0.5% of revenue
Required: Reformulate the Balance Sheet, following the approach taught in the course.
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Non-Current Liabilities
75.0
Interest-bearing liabilities 400.0 Provision for employee
benefits 50.0
Deferred tax liabilities 50.0 500.0
Total Liabilities 575.0
Shareholders’ Equity
Share capital 300.0 Retained earnings 110.0 Preferred equity 50.0
Total Equity 460.0 Total Equity and Liabilities 1,035.0
Semester One Final Examinations, 2019 ACCT7106 Financial Statement Analysis
Question 3: Cash Flow Statement Reformulation (10 Marks)
Suppose you have been given the following extract from a Statement of Cash Flows, prepared under Australian Accounting Standards. The company is an ordinary retail company.
Cash Flow from Operations:
Cash receipts from customers Payments to suppliers and employees Royalties received
Interest paid
Interest received
Income tax paid
Cash Flow from Operations
FY18 $m
200.0 (100.0) 10.0 (40.0) 10.0 (60.0) 20.0
(50.0) (20.0) (20.0)
10.0 (80.0)
Cash Flow Investing:
Purchases of PPE
Purchases of short-term money market investments Purchase of business acquisition
Proceeds from sale of PPE
Cash Flow from Investing
Other information:
• The company had an increase in operating cash of $10.0m in FY18 • The company’s corporate tax rate is 30%
Required: Reformulate the Cash Flow from Operations and Cash Flow from Investing sections of the Statement of Cash Flows, following the approach taught in the course.
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Semester One Final Examinations, 2019 ACCT7106 Financial Statement Analysis
Question 4: Accounting and Financial Analysis (30 Marks)
Below are the reformulated Balance Sheet, Income Statement, and Equity Statement for Blackmores, the Australian vitamin and health supplement manufacturer.
Operating assets
Operating cash
Receivables
Inventories
Other assets
Property, plant and equipment Goodwill and intangible assets Deferred tax assets
Amounts advanced to related parties
Operating liabilities
Trade and other payables Current tax liability Provisions
Other liabilities
Deferred tax liabilities
Net operating assets (NOA)
Financial assets
Financial cash Derivative assets Investment property Other financial assets
Financial obligations
Derivative liabilities Interest-bearing liabilities
Net financial obligations (NFO) Common Shareholders’ Equity (CSE)
FY18 $000
6,011 150,788 103,965 10,811 76,261 66,212 12,590 3,600 430,238
157,868 4,246 9,294 4,568 9,341 185,317
244,921
30,457 475 2,160 1,520 34,612
203 86,000 86,203
51,591 193,330
Reformulated Balance Sheet
FY17 $000
5,522 132,146 84,794 7,463 74,207 61,754 9,960 4,111 379,957
124,365 1,811 12,921 4,581 10,224 153,902
226,055
28,729 8 2,160 1,320 32,217
485 78,968 79,453
47,236 178,819
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Semester One Final Examinations, 2019 ACCT7106 Financial Statement Analysis
Reformulated Income Statement
Core Operating Income from Sales (before tax):
Sales
Raw materials and consumables used
Gross profit
Other core operating expenses (total)
Core Operating Income from Sales (before tax)
Core Other Operating Income (before tax):
Government grant
Core Other Operating Income (before tax)
Unusual Operating Income (before tax):
Proceeds from the disposal of fixed assets
Unusual Operating Income (before tax)
Net Financial Expense (before tax):
Interest revenue Interest expense Dividends received Bank charges
Net Financial Expense (before tax)
Tax Allocation:
Income tax expense
Tax shield from NFE
Tax allocation to Unusual OI Tax allocation to Core Other OI
Tax Allocation to Core OI from Sales
After Tax Amounts:
Core OI from Sales (after tax) Core Other OI (after tax) Unusual OI (after tax)
NFE (after tax)
Operating OCI (after tax):
Exchange differences arising on translation of foreign subsidiaries Page 7 of 11
FY18 $000
601,136 (232,374) 368,762
(266,727) 102,035
602 602
29 29
416 (4,346) 87 (1,141)
(4,984)
28,459 1,495 9 181
29,765
72,270 421 20 (3,489)
2,625
Semester One Final Examinations, 2019 ACCT7106 Financial Statement Analysis
Financing OCI (after tax):
Net gain/(loss) on hedging instruments entered into for cash flow hedges (net of tax)
Total Operating income (OI) after-tax
Total Net financial expense (NFE) after-tax
Comprehensive income (CI)
Reformulated Equity Statement
Beginning balance
Comprehensive income (CI)
Net profit after tax (NPAT)
Other comprehensive Income (OCI)
Transactions with shareholders (d)
Dividends declared/paid
Share-based payments
Issue of shares under employee long-term incentive plans
Ending balance
Required:
603
75,337 (2,886)
72,451
FY18 $000
178,819
69,223 3,228 72,451
49,957 (1,259) 9,242 57,940
193,330
a. Briefly explain why ‘Proceeds from the disposal of fixed assets’ is classified as Unusual Operating Income. (2 marks)
b. Briefly explain why ‘Exchange differences arising on translation of foreign subsidiaries’ is classified as Operating OCI, rather than Financing OCI. (2 marks)
c. Blackmore’s ‘Investment property’ is carried at historical cost. What other measurement method is permitted for investment properties under accounting standards? (2 marks)
d. Show that the clean surplus relation holds for FY18. Show workings. (2 marks)
e. Calculate free cash flow (FCF) for FY18. Show workings. (2 marks)
f. Sales in FY17 was $552,160,000. Calculate normal change in net operating assets (NOA) for FY18. Assume that normal asset turnover (ATO) is 2.62. Show
workings.
(3 marks)
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Semester One Final Examinations, 2019 ACCT7106 Financial Statement Analysis
g. Compare normal change in net operating assets (NOA) to the actual change for FY18. Briefly state what the difference between the normal change in NOA and the actual change in NOA suggests about Blackmore’s accounting quality.
Note: You do not need to discuss why the two numbers are different. Simply comment on what the difference suggests about Blackmore’s accounting quality.
(2 marks)
h. Calculate ROCE, and show that ROCE = RNOA + FLEV x SPREAD holds for FY18. Show all workings. (6 marks)
i. Show that RNOA = ROOA + OLLEV x OLSPREAD holds for FY18. Assume a short-term borrowing rate after tax of 3%. Show all workings. (6 marks)
j. Calculate profit before tax (PBT). Show all workings. (3 marks)
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Semester One Final Examinations, 2019 ACCT7106 Financial Statement Analysis
Question 5: Valuation (20 Marks)
Suppose you have been given the following information about an Australian company called Acme. Acme operates entirely within Australia.
Beta (β) = 1.2
Market risk premium = 6.5% Risk-free rate = 3.2%
Acme currently has Common Shareholders’ Equity (CSE) per share of 200 cents/share. Analysts have issued the following forecasts:
2018A
Dividends per share 15.00 Earnings per share 35.00
2019E
17.00 30.00
2020E
23.00 35.00
2021E
28.00 37.00
2022E
30.00 39.00
Assume that Acme will reach a steady state in 2022. Analysts forecast Acme’s terminal growth rate to be 6.0% after 2022.
Required:
a. Calculate Acme’s cost of equity using the CAPM. (2 marks)
b. Using the analysts’ forecasts and the analysts’ terminal growth rate assumption, calculate the value per share of Acme’s shares using the Dividend Discount Model. Show all workings. (5 marks)
c. Using the analysts’ forecasts and the analysts’ terminal growth rate assumption, calculate Acme’s residual income for 2019, 2020, 2021, and 2022.
Calculate the value per share of Acme’s shares using the Residual Income Model. Show all workings. (8 marks)
d. Why might the analysts’ terminal growth rate assumption be too high? (3 marks)
e. Compare your Residual Income Model valuation to Acme’s current Common Shareholders’ Equity (CSE). What explains the difference between your valuation and Acme’s current CSE? (2 marks)
END OF EXAMINATION
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Semester One Final Examinations, 2019
ACCT7106 Financial Statement Analysis
∆CSE=CI− d
C − I = d +F
C−I =OI(aftertax)−∆NOA
C−I =NFE(aftertax)−∆NFO+d C−I =−NFI(aftertax)+∆NFA+d
Normal ∆NOA = ∆Sales Normal ATO
Normal OI = C −I +Normal ∆NOA
Formula Sheet
ROCE = RNOA +FLEV ×SPREAD RNOA=ROOA+ OLLEV× OLSPREAD
ROOA = OI (aftertax)+ Implicit Interest(aftertax)
AvgOA RIt =CIt rEC−SEt−1
ReOI =OI(aftertax) −r NOA
t tFt−1
E[d1] E[d2] E[dT ] E[dT+1]
(1 + rE ) (1 + rE ) (1 + rE ) rE − g (1 + rE )
1 VE=1 +2…++T +×T
E[RI1] E[RI2 ] E[RIT ] E[RIT +1] 1 VE=CSE0 +1 +2…++T + ×T
(1 + rE ) (1 + rE ) (1 + rE ) rE − g (1 + rE ) E[FCF ] E[FCF ] E[FCF ] E[FCF ] 1
V = 1 + 2 +…+ T + T+1 × F12Tr−gT
(1 + rF ) (1 + rF ) (1 + rF ) F (1 + rF ) E[ReOI1] E[ReOI2 ] E[ReOIT ] E[ReOIT +1] 1
V=NOA+ + …++ + × F012Tr−gT
r+=r β−E[r]r ()
EfMf
(1 + rF ) (1 + rF ) (1 + rF ) F (1 + rF )
rE
rF= NFO rD+ VE
VE +NFO VE +NFO
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