Faculty of Creative Industries & Business Department of Accounting and Finance Bachelor of Business ACTY 7292 Financial Statement Analysis Final Exam Semester 2, 2016 Date: Wednesday 23 rd November 2016 Start time: 9.00 AM 12.10 PM Time allowed: 3 hours, plus 10 minutes reading time Total marks: 100 marks Weighting: 40% of course Instructions: Answer ALL questions. Answer the questions directly in the answer booklet and worksheets provided. Please write clearly. You may use a translation dictionary A formula list is provided at the end of this exam. Summary of paper: Question Type/Topic Marks Suggested Time (minutes) 1 Prospective Analysis 30 54 2 Financial Statements and Analysis 30 54 3 Risk 15 27 4 Analysing Other Activity 15 27 5 Accounting Analysis and Financial Statements 10 18 Total 100 180
Question 1 30 Marks Prospective Analysis Part A You have been provided with the following information in relation to Tegel Group Holdings Limited. Table 1.1 TEGEL GROUP HOLDINGS LTD Financial Profile Statement of Comprehensive Income NZ$000 Year Ending: 24/04/16 24/04/15 Revenues 582,361 562,650 Cost of Sales (434,925) (429,645) Gross Profit 147,436 133,005 Other Income 0 4,649 Expenses Distribution (50,479) (47,866) Administration (48,280) (35,763) Other (3,998) (8,317) Operating Profit 44,679 45,708 Finance Income 229 113 Finance Costs (28,204) (35,038) Net Finance Cost (27,975) (34,925) Share of Profits/(Loss) in Associates and JVs 0 0 Profit before income tax 16,704 10,783 Income Tax (5,393) (2,051) Profit After Tax 11,311 8,732 Other Comprehensive Income Cash flow hedge net of tax (5,004) 3,431 Increases/(decreases) in fair value of other financial assets 0 0 Total Other Comprehensive income (5,004) 3,431 Total Comprehensive income 6,307 12,163 Page 2 of 11
Table 1.2 TEGEL GROUP HOLDINGS LTD Balance Sheet as at 24 April 2016 NZ$000 24/04/16 24/04/15 ASSETS Current Assets Cash and Equivalent 4,002 11,964 Trade and other receivables 78,064 73,873 Inventory 82,338 59,429 Derivative Financial Instruments 386 3,749 Biological assets 31,517 30,327 Deferred IPO costs 12,246 0 Total Current assets 208,553 179,342 Non-Current Assets Property Plant and Equipment 151,351 141,570 Receivables 352 0 Intangible Assets 335,393 337,386 Total Non-Current Assets 487,096 478,956 TOTAL ASSETS 695,649 658,298 LIABILITIES Current Liabilities Tax Payable 1,036 2,521 Derivative Financial Instruments 5,629 13 Trade and other payables 81,977 76,912 Borrowings 130,000 0 Other Payables 21,754 0 Total Current Liabilities 240,396 79,446 Non-Current Liabilities Deferred tax liabilities 18,393 20,616 Derivative financial instruments 0 1,293 Borrowings 123,000 268,476 Total non-current liabilities 141,393 290,385 TOTAL LIABILITIES 381,789 369,831 NET ASSETS 313,860 288,467 EQUITY Issued Capital 284,423 265,337 Reserves (3,149) 1,855 Retained Earnings 32,586 21,275 TOTAL EQUITY 313,860 288,467 Page 3 of 11
Table 1.3 Revenue and Expenses Ratios Ratios Sales growth rate 0.0350 Cost of Sales/Sales 0.7468 Growth in other income Finance Income Distribution Expenses/Sales 0.0867 Administration Cost/Sales 0.0829 Other Expenses/Sales 0.006865158 Finance Income/Prior Year Cash and Equivalent 0.0191 Finance Cost/Prior year borrowings 0.1051 Income Tax/profit before tax 0.3229 Other Comprehensive Income Derivative financial instruments assume zero Other Information 1 Assume the current borrowing will be paid in the current year and that the long term component will become the current component in 2017. 2 Retained earnings for the current 2017 year should be the current year profit plus the prior year balance less any adjustments to reserves 3 Assume the company refinances its short term borrowing from the prior year of $130K Table 1.4 Asset and Liability Ratios Ratios ASSETS & LIABILITIES Current Assets Trade and Other Receivables/Revenue 0.1340 Inventory/Cost of Goods Sold (COGS) 0.189315399 Derivative Financial Instruments Investment in Joint Ventures Biological Assets/Revenue 0.054119352 Deferred IPO Cost Non-Current Assets Property plant and equipment/revenue 0.25989 Receivables/Revenue 0.00060 Intangible Assets/Prior year Intangible assets 0.99409282 Current Liabilities Tax Payable/prior year profit before tax 0.096077158 Derivative Financial Instruments Trade and other payables/cogs 0.188485371 Borrowings Refer other information Other Payables/COGS 0.050017819 Non-Current Liabilities Deferred tax liability/prior year DTL 0.892171129 Derivative financial instruments Borrowings Refer other information Page 4 of 11
Table 1.5 Equity Ratios Ratios EQUITY Capital and Reserves attributable to equity holders Share capital Reserves Set to Zero Retained Earnings Refer Other Information Required: a) Using the template worksheet provided (worksheet 1) and the information from the tables above, prepare the projected statement of comprehensive Income for the 2017 financial year. b) Using the template worksheet provided (worksheet 2) and the information from the tables above, prepare the projected/forecast balance sheet as at 24 April 2017. c) Comment in the projected income statement and balance sheet that you have prepared for 24 April 2017. d) Discuss the benefits for preparing a projected set of financial statements given that Tegel have just gone IPO. [11 marks] [13 marks] Page 5 of 11
Question 2 30 Marks Financial Statements and Analysis Hallenstein Glasson Holdings Limited Required: Answer the following questions in relation to the Hallenstein Glasson Holdings Limited Annual report 2016. (attached). a) Provide a brief outline of the company in terms of the products or services they provide and the industry and market in which they operate. b) Comment on the financial performance of the company for the year ended 1 August 2016. As part of your answer, you should make references to the relevant financial statement and use no fewer than two performance ratios. [4 marks] [8 marks] c) Comment on the segmented results on page 22 of the annual report. d) Comment on the capital structure of the company as at 1 August 2016. As part of your answer you should make references to the relevant financial statement and use no fewer than three ratios. e) Comment on the liquidity status and performance of the company for the year ended 1 August 2016. In your answer, you should make references to the relevant financial statement and use no fewer than three ratios. e) Comment on the types of risks that the company faces and how these are being managed. [6 marks] [6 marks] Page 6 of 11
Question 3 15 Marks Risk Required: Answer the following questions. a) Briefly discuss the following risks and how they may impact on the analysis and evaluation of company performance and position. In each case, you should define the risk and the implication that it potentially has for analysis. [6 marks] 1. Debt Servicing risk 2. Basis Risk 3. Gap risk b) Discuss translation risk in the case of a multinational company and the implications that this may have on the financial analysis of such a firm. c) From an analysis perspective, the existence of risk is often inevitable. What should analysts look for in relation to risk. d) Briefly discuss Beta in relation to the measurement of risk and what this means to existing and potential investors. In your answer, you will need to define beta, describe how it is calculated and interpret what it means. (2 marks) [4 marks] Question 4 15 Marks Analysing Other Activity Required: a) Using an appropriate example, define and discuss contingencies and the potential impact that they may have on the analysis of financial statements. b) Explain how the existence of off balance sheet financing can help cast a better picture of the organisation than would otherwise be the case. Use an example as part of your explanation. c) Suggest the possible implications and or rationale for why a company may engage in securitisation or factoring of its debts. [4 marks] [2 marks] Page 7 of 11
d) How should analysts account for the existence of income in advance and prepayments in the financial statements. In your answer, you should outline the implications for the analysis and any adjustments that may need to be made by the analyst. e) What should analysts look for in relation to intangible assets when conducting a financial analysis of an organization? [4 marks] [2 marks] Question 5 10 Marks Accounting Analysis and the Financial Statements Required: Answer the following questions. a) Use an example to illustrate the potential impact that depreciation may have on the financial analysis. b) In an inflationary environment, outline the impact on the financial performance and position of an organization that uses the weighted average method rather than the first in first out (FIFO) for determining the value of inventory. c) Explain the impact on the financial performance and position of an organization that favours the use of operating leases over financial leases. [4 marks] End Page 8 of 11
Common Analysis & Interpretation Ratios PROFITABILITY OPERATING PERFORMANCE Revenue growth rate Gross Profit Margin Operating profit margin Net Profit Margin Current year revenues Prior year revenues Prior year revenues Gross Profit Revenues Net operating income (EBIT) Revenues Net Profit (NPAT) Revenues PROFITABILITY ASSET UTILIZATION Accounts receivable turnover Inventory Turnover Total asset turnover Sales Average Accounts Receivable Cost of Goods Sold Average Inventory Sales Average total assets PROFITABILITY RETURN ON INVESTMENT Rate of Return on Assets (ROA) Operating Profit (EBIT) Average Total Assets Return on Assets (ROA) (alternative approach) Rate of Return on Ordinary Shareholder s Equity (ROE) Return on Equity (ROE) (alternative approach) Rate of Return on Sales x Asset Turnover Ratio Net Profit (or NPAT) Average Ordinary Shareholder s Equity Return on Assets x Financial Leverage Multiplier CREDIT (RISK) ANALYSIS LIQUIDITY Net Working Capital (NWC) Current Assets Current Liabilities Page 9 of 11
Current Ratio Quick Ratio (Acid Test) Current Assets Current Liabilities Current Assets Inventories - Accruals Current Liabilities Bank O/D CREDIT (RISK) ANALYSIS LIQUIDITY CONT D Average Inventory Period (AAI) Average Inventory x 365 Cost of Goods Sold Average Collection Period (ACP) Average Payment Period (APP) Average Accounts Receivable x 365 Revenues Average Accounts Payable x 365 Cost of Sales Operating Cycle (OC) Cash Conversion Cycle (CCC) Average Inventory Period + Average Collection Period Average Inventory Period + Average Collection Period - Average Payment Period Cash flow to debt ratio Cash Cover (Short Term Liquidity) Cash Cover (Long Term Solvency) Cash Cover (Long Term Solvency) Cash flow Total liabilities Cash Flow from Operations Current Liabilities Cash Flow from Operations Total Liabilities Cash Flow from Operations Capital Expenditure CREDIT (RISK) ANALYSIS CAPITAL STRUCTURE & SOLVENCY Debt to Equity Ratio Interest Coverage (Times Interest Earned) Total Debt (usually interest bearing debt) Total Equity Operating Profit (EBIT) Annual Interest Paid MARKET MEASURES Price to Earnings Ratio (P/E) Market Price per Share Earnings per Share Page 10 of 11
Earnings per Share Earnings Yield Dividends per Share Dividend Yield Dividend Payout Ratio Market to Book Ratio Net Profit (NPAT) Number of Ordinary Shares Earnings per share Market Price per Share Divdends paid to ordinary shareholders Number of Ordinary Shares Dividends per Share Market Price per Share Dividends Net Profit Market Price per Share Book value per share VALUATION S Fixed Asset monitoring Valuation Dividend Discount Model Accumulated Depreciation Original Cost of PPE P0 = D1 / ke or P0 = D1 / (ke g) Valuation FCFE Model VE = FCFE1 / ke or VE = FCFE1 / (ke g) Valuation FCFF Model VF = FCFF1 / WACC or VF = FCFF1 / (WACC g) P/E Ratio (alternative approach) P/E = (1 + g) / (ke g) Page 11 of 11