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Model Answers For Extra Practicing Problems in Financial Statement Analysis
Model Answers For Extra Practicing Problems in Financial Statement Analysis
Model Answers For Extra Practicing Problems in Financial Statement Analysis
22
The loss is obtained from the tax benefit, reported in the equity statement. The 34 (rounded) is
the amount that draws a tax benefit at a 35% tax rate: Method 1 in the text. The after-tax loss, 22,
goes into comprehensive income.
The reformulation:
1,430
844
(720)
(180)
(56)
Comprehensive income:
Net income
Unrealized gain on debt investments
Loss on exercise of employee options
468
50
(22)
496
1,870
Financial obligations
Financial assets
Net financial obligations
Common shareholders equity
$190
145
45
370
$415
$4,356
3,487
869
428
441
$132
56
76
$ 365
$100.0
$25.0
3.5
28.5
71.5
$6,450
3,870
2,580
1,843
737
231
506
135
50
85
421
Bottom-down method:
Earnings
Net interest:
Interest expense
Tax benefit at 37%
Operating income after tax
$421
135
50
85
$506
$ 23
1,827
2,876
3,567
8,293
$1,245
1,549
712
3,506
4,787
$( 435)
3,678
432
3,675
$1,112
Income statement:
Revenue
Operating expenses
Operating income before tax
Tax expense:
Tax reported
$295
Tax on interest expense
80
Operating income after tax
Net financial expense:
Interest expense
Tax benefit at 36%
Preferred dividends
Net income to common
$7,493
6,321
1,172
375
797
221
80
141
26
167
$630
60
940
910
2,840
4,750
$1,200
390
1,590
3,160
$( 550)
1,840
1,290
$1,870
$1,430
Comprehensive income:
Net income
$ 468
Unrealized gain on debt investments
50
Balance, end of 2012
78)
518
$1,870
$3,726
3,204
522
98
15
83
29
54
50
4
$ 518
After calculating the net financial expense, the bottom-up method is used to get operating
income after tax. That is, net interest expense is calculated first (= $4 million). Then, as
comprehensive income is $518 million, operating income must be 518 + 4 = 522. The
number for operating expense (3,204) is then a plug to get back to the $3,726 million revenue
number. Bottom up.
E11.5 Free Cash Flow for a Net Debtor
By Method 2 in Box 11.1,
C - I = NFE NFO + d
NFO = 37.4 54.3 = -16.9 (net debt declined)
= OI - NOA
= 29.3 - 34.5
= -5.2
where
OI
= Comprehensive income (25.3) + NFE (4.0) = 29.3
NOA = CSE - NFO
= 51.4 - 16.9 = 34.5
Comprehensive income is plugged from the equity statement.
Operating assets
Operating liabilities
NOA
2012
2011
640
20
620
590
30
560
C - I = OI - NOA
= 100 - 60
= $ 40 million
(b)
The net financial assets for 2012 and 2011 are as follows:
Financial assets
Financial liabilities
NFA
C-I
2012
2011
250
170
80
110
130
(20)
= NFA - NFI + d
= 100 - 0 - 60
= $40 million
The firm invested the $40 million of free cash flow in financial assets. In
addition, it raised a net $60 million from shareholders which it also invested in
financial assets.
(c)
Net financial income or expense can be zero if financial income and financial
expense exactly offset each other. This firm moved from a net debtor to a net
creditor position in 2012 such that the weighted-average net financial income was
zero.
2011
$
60
940
910
50
790
840
PPE
Operating assets
Operating liabilities:
Accounts payable
Accrued expenses
Net operating assets
Net financial obligations:
Short-term investments
Long-term debt
Common shareholders equity
2,840
4,750
$1,200
390
2,710
4,390
1,040
450
1,590
3,160
$( 550)
1,840 1,290
$1,870
( 500)
1,970
$1,430
$ 822
(720)
(180)
$ 468
50
518
$1,870
$3,726
3,204
522
98
15
83
29
54
50
78)
4
$ 518
1,490
2,900
1,470
1,430
After calculating the net financial expense, the bottom-up method is used to get operating
income after tax.
b. Free cash flow = OI NOA
= 522 (3,160 2,900)
= 262
c. Ratio analysis
Profit Margin (PM) = 522/3,726 = 14.01%
Asset turnover (ATO) = 3,726/2,900 = 1.285
RNOA
= 522/2,900 = 18%
d. Individual asset turnovers
Operating cash turnover = 3,726/5 = 74.52
Accounts receivable turnover = 3,726/790 = 4.72
Inventory turnover = 3,726/840 = 4.44
PPE turnover = 3,726/2,710 = 1.37
Accounts payable turnover = 3,726/1,040 = 3.58
Accrued expenses turnover = 3,726/450 = 8.28
1/individual turnover aggregate to 1/ATO:
1/ATO = 1/1.285 = 0.778 = 0.013 + 0.212 + 0.225 + 0.730 0.279 0.121
(allow for rounding error)
e. ROCE = 518/1,430 = 36.22%
Financial leverage (FLEV) = 1,470/1,430 = 1.028
Net borrowing cost (NBC) = 4/1,470 = 0.272%
ROCE = 36.22% = 18.0% + [1.028 (18.0% - 0.272%)]
f. NBC = 4/1,470 = 0.272% (as in part e)
If RNOA = 6% and FLEV = 0.8,
ROCE = 6.0% + [0.8 (6.0% - 0.0.272%]
= 10.58%
Note: it is more likely that NBC will be at the core borrowing rate (that excludes
The unrealized gain of debt investments): Core NBC = 54/1,470 = 3.67%.
1.9%
RNOA
-1.47%
3.37%
This change due to financing is due to a change in leverage and a change in SPREAD:
FLEV
0.4101
SPREAD
-1.17%
The explanation of the change in ROCE due to change in operating profitability (RNOA) is
given in Exercise E13.3. Using a similar scheme, the explanation of the change due to financing
is
ROCE due to financing = 3.37% = (-1.17% x 0.0577) + (0.4101 x 8.38%)
=
-0.07%
+ 3.44%
667.3
580.1
(73.4 +13.8)
87.2
18.3
(0.39 20.5)
8.0
26.3
5.4
31.7
55.5
(4.3)
(13.4)
3.9
(13.8)
5.4
(8.4)
Translation gain
Comprehensive operating income
8.9
0.5
56.0
Note:
1. The currency translation gain is transitory; it does not affect core
income.
2. Translation gains, like all items reported in other comprehensive
income are after-tax.
3. The gain on disposal of plant may attract a higher tax rate than 39% due
to depreciation recapture.
55.5
667.3
8.32%