Financial Statement qAnalysis
1 RMIT Classification: Trusted Financial Statement Analysis_BAFI1070_Final individual Assignment (2021 Semester 2) (40 Marks) Please analyse each Case in a report in Word or PDF format (on the first page of word file, please clarify your course code, name and student ID). You could add a sperate Excel spreadsheet to support calculations in related questions if needed. Rubrics has already been provided to you on Canvas. Case 1(24 Marks): Wonderplayer develops video game products for consumers. In June 2012, a team of analysts issued a research report that valued Wonderplayer’s stock at $11.6 per share, compared to the then- current market price of $13. The research report’s discounted cash flow valuation table is reproduced below. The 2012 figures are as reported by Wonderplayer, but the 2013 through 2020 figures are analysts’ forecasts. Key assumptions include a weighted average cost of capital of 10% and a perpetual growth rate of 2%. All dollar amounts are in millions except share value. Required: 1, Comment on how the analyst of Wonderplayer calculate free cash flow compares with how the professional CFA might compute free cash flow directly from the company’s financial statements. (4 marks) 2, What role does the 10% WACC play in the discounted cash flow valuation analysis? How about the role of WACC in the abnormal earnings valuation analysis? (2 mark) 3, Explain in detail to someone unfamiliar with present value calculations about how the Present value 2013–2020(i.e. $170.9977) is computed. (4 marks) 4, Explain in detail how the figure $468.7 for Present value beyond 2020 is computed. (5 marks) 5, Why does the analyst team subtract an amount for net debt in arriving at Equity value? (Note: The term net debt is defined for spreadsheet purposes as financial liabilities (e.g., loans) minus any financial assets (e.g., money market investments)) (2 marks) 6, What share value estimate would the Wonderplayer have calculated if they had used an abnormal earnings value approach rather than a discounted cash flow approach and had developed forecasts Actual 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total Revenues: 100 127.3 224.4 336.1 590.2 680.5 785.1 903.2 1010.3 EBITDA 5.8 8.5 14.9 30.1 58.3 68.2 86.5 113.1 134.4 Capital expenditures -0.2 -1.7 -1.9 -2.3 -2.9 -3 -3.1 -3.3 -3.5 Cash taxes -1.6 -2.1 -4.5 -10.8 -21.9 -25.6 -32.6 -43.5 -52.1 Free cash flow 4 4.7 8.5 17 33.5 39.6 50.8 66.3 78.8 Discount factor: 0.909091 0.826446 0.751315 0.683013 0.620921 0.564474 0.513158 0.466507 Present value 4.272727 7.024793 12.77235 22.88095 24.58848 28.67528 34.02238 36.76078 Present value beyond 2020 468.7 Present value 2013-2020 170.9977 639.6977 Less net debt 54.1 Equity value 585.5977 Shares ourstanding 50.35 Share value 11.63054 Analyst Forecast 2 RMIT Classification: Trusted of abnormal earnings and book values that were consistent with the cash flow forecast in the above worksheet? Why? (3 marks) 7, Sometimes analysts’ research reports contain inadvertent computational errors. What would the estimated value of Wonderplayer’s stock have been if the analysts mistakenly used 60 million shares outstanding rather than the correct 50.35 million share count? (2 marks) 8, If you were the analyst of Wonderplayer in June 2012, what would be your investment recommendation advice to the investors of Wonderplayer based on your discounted cash flow valuation analysis? (2 marks) Case 2(7 Marks): Siemens AG: Identifying differences and similarities between IFRS and GAAP Presented below are excerpts from the 2018 annual report of Siemens AG, a German company that operates in numerous industries, including technology, power generation, and medical diagnostics. NOTE 1 Basis of presentation Inventories—Inventories are valued at the lower of acquisition or production costs and net realizable value, costs being generally determined on the basis of an average or first-in, first-out method. NOTE 11 Inventories Cost of sales includes inventories recognized as expense amounting to €57,029 million and €57,176 million, respectively, in fiscal 2018 and 2017. Compared to prior year, write-downs increased (decreased) by €(19) million and €15 million as of September 30, 2018 and 2017. Source: Siemens AG 2018 annual report. Required: 3 RMIT Classification: Trusted Using the Siemens AG note as an example, identify the similarities and differences between U.S. GAAP and IFRS regarding inventory financial accounting and reporting. Case 3(9 Marks): Walla Corporation’s International Division consists of two of Walla’s subsidiaries. One of the subsidiaries operates in the United Kingdom and the other on the European continent. The U.K. subsidiary had identical sales revenue amounts, as measured in British pounds, in 20X1 and 20X2 and reported a 25% gross profit margin in both years. Similarly, the European subsidiary’s sales revenue was the same in 20X1 and 20X2 when measured in euros. It reported a 33.33% gross profit margin in both years. Both subsidiaries account for their inventories under FIFO. Assume the British pound was rising steadily in value versus the U.S. dollar throughout 20X1 and 20X2. Assume the euro was declining steadily in value versus the U.S. dollar throughout 20X1 and 20X2. Required: 1, If Walla uses the current rate method to translate the British subsidiary’s financial statements into U.S. dollars, how is the British subsidiary’s 20X2 gross margin percentage, based on its U.S. dollar financial statements, most likely to compare to its gross margin percentage based on the 20X2 British pound financial statements? Explain. (3 Marks) 2, If Walla uses the temporal method to translate the British subsidiary’s financial statements into U.S. dollars, how is the British subsidiary’s 20X2 gross margin percentage, based on its U.S. dollar financial statements, most likely to compare to its gross margin percentage based on the 20X2 British pound financial statements? Explain. (3 Marks) 3, If Walla uses the current rate method to translate both subsidiaries’ financial statements into U.S. dollars, how is the gross margin percentage for the International Division in 20X2 most likely to compare to the gross margin percentage of the International Division in 20X1? Explain. (3 Marks)