PRIFYSGOL BANGOR BANGOR UNIVERSITY ARHOLIADAU DIWEDD SEMESTER 2 MAI 2013 END OF SEMESTER 2 EXAMINATIONS MAY 2013 YBB GRADD MEISTER BBS MASTERS DEGREES AMSER A GANIATEIR: 2 AWR TIME ALLOWED: 2 HOURS ASB4406/ASB4806 Financial Analysis NI CHANIATEIR CYFRIFIANELLAU Y GELLIR EU RHAGLENNU NO PROGRAMMABLE CALCULATORS ARE PERMITTED. Answer question one (compulsory) AND any other question (all questions carry equal marks)

SECTION A ANSWER QUESTION ONE (COMPULSORY QUESTION) Question 1 Answer both parts a) and b)

a) The reformulated annual accounts for TFQ Ltd. are given below for the year to 31 December

2008 and 31 December 2012. The financial statements show that Return on Common Equity stood at 21% in 2008 and 1% in 2012. By analysing the drivers of earnings based on the financial statement data provided, you should explain why profitability has increased and the key drivers which have caused this.

31/12/2008 31/12/2012

Net operating assets (NOA):

Operating assets

Cash 825.00 424.00

Accounts receivable, less allowance for doubtful account 845.00 909.00

Inventories 4966.00 4902.00

Property, plant and equipment, net 14147.00 13929.00

Other assets 2056.00 2275.00

Total operating assets 22839.00 22439.00

Operating liabilities

Accounts payable 3528.00 3213.00

Income taxes payable 220.00 341.00

Other liabilities 5925.00 5957.00

Total operating liabilities 9673.00 9511.00 9511.00

Net operating assets (NOA): 13166.00 12928.00

Net financial assets (obligations) (NFA/NFO):

Financial assets

Short term investment 666.00 654.00

Total financial assets 666.00 654.00

Financial liabilities

Current portion of long-term debt 1287.00 1256.00

Long-term debt 7247.00 7420.00

Preferred Stock 0.00 0.00

Total financial liabilities 8534.00 8676.00

NET FINANCIAL OBLIGATIONS (ASSETS) 7868.00 8022.00

less minority interest 2.00 74.00

Common Shareholders' Equity (CSE) 5296.00 4832.00

(35 marks)

b) Why are reformulated financial statements necessary to discover operating profitability? By using examples, differentiate between permanent and transitory earnings.

(15 marks)

(Total = 50 marks)

SECTION B - ANSWER ONE QUESTION ONLY

2. Answer both parts a) and b):

a) Critically appraise why analysis of accounting quality is an important component of financial statement analysis. Define the concept of accounting quality as part of your answer.

(25 marks)

31/12/2008 31/12/2012

Operating Income

Revenues 82189.00 76733.00

Cost of sales 63927.00 58958.00

Gross margin 18262.00 17775.00

Operating expenses 16146.00 15634.00

Other operating income (expense) 68.00 -1054.00

Operating income from sales(before tax) 2184.00 1087.00

Taxes

Tax as reported 601.00 532.00

Other tax adjustments

Tax on net interest 127.81 123.74

Operating income from sales (after tax) 1455.19 431.26

Adjustment: Dirty surplus items -7.00 0.00

Equity Earnings 0.00 0.00

Operating Income (after tax) 1448.19 431.26

Financing Expense (Income)

Interest expense 457.00 508.00

Interest income 0.00 0.00

Other interest adjustments -7.00 -10.00

Net interest expense 450.00 498.00

Tax benefit from Net Interest Expense -127.81 -123.74

Preferred dividends

Net Financial Expense (after tax) 322.19 374.26

Minority interest 17.00 -13.00

Comprehensive income to Common 1109.00 70.00

b) By giving examples, explain circumstances where companies are more likely to manipulate reporting earnings.

(25 marks) (Total = 50 marks)

3. Answer both parts a) and b):

a) At the end of its financial year 2012, an analyst made the following forecast for Aled

Ltd., a company operating in telecommunications sector, for 2013 2016 (in millions

of pounds):

Aled Ltd reported 6,222 million in short-term and long-term debt at the end of 2012 but very little interest-bearing debt assets. Use a required return of 9% to calculate both the enterprise value and equity value for Aled Ltd. at the beginning of 2013 under two forecasts for long-run cash flows:

i. Free cash flow will remain at 2016 levels after 2016. ii. Free cash flow will grow at 5 percent per year after 2016.

Aled Ltd. had 390 million shares outstanding at the end of 2012, trading at 60 per share. Calculate value per share under both scenarios.

(30 marks)

b) Critically appraise issues related to the dividend discount model in equity

valuation.

(20 marks)

(Total = 50 marks)

4. Answer both parts a) and b):

a. The following provides GUN Ltds earnings per share and dividends per share for the years 2013 2016.

2013 2014 2015 2016

Cash flows from Operations 2000 2352 2532 2522

Cash Investment 300 380 442 470

2013 2014 2015 2016

EPS 2.19 2.4 2.13 1.41

DPS 0.33 0.72 0.75 0.81

BPS 10.74

Suppose these numbers were given to you at the end of 2012, as forecasts, when the book value per share was 10.74, as indicated. Use a required return of 9 percent for calculations below:

i. Calculate the residual earnings and return of common equity (ROCE)

for each year, 2013-2016. (20 marks)

ii. Value the firm at the end of 2012 under the assumption that the residual earnings will be 0 after 2016.

(5 marks) iii. Based on your analysis, estimate a target price at the end of 2016.

(5 marks)

b. Explain the advantages and disadvantages of residual earnings valuation model and what are its drivers? Define the concept of residual earnings as part of your answer.

(20 marks) (Total = 50 marks)

5. Answer both parts a) and b):

a) One of the fastest growing industries in the last 20 years is the memory chip

industry, which supplies memory chips for personal computer and other

electronic devices. However, the average profitability for this industry has

been very low. Using the industry analysis framework, explain all the possible

factors that might explain this apparent contradiction.

(30 marks)

b) Explain the procedures of fundamental analysis in estimating the value of an

entity.

(20 marks)

(Total = 50 marks)