CONFIDENTIAL BAJJAN 2018/FING58/665 UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION COURSE FINANCIAL STATEMENT ANALYSIS COURSE CODE : FING58/665 EXAMINATION : JANUARY 2018 TIME : 3HOURS INSTRUCTIONS TO CANDIDATES 1 This question paper consists of two (2) parts: PART A (1 Question) PART B (6 Questions) 2 ‘Answer ALL questions from Part A and Part B in the Answer Booklet. Start each answer on a new page. 3 Do not bring any material into the examination room unless permission is given by the invigilator. 4 Please check to make sure that this examination pack consists of i) the Question Paper ii) an Answer Booklet ~ provided by the Faculty 6. Answer ALL questions in English DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO D0 SO This examination paper consists of 7 printed pages (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL 2 BAJJAN 2018/FIN658/665, PARTA QUESTION 1 ‘Aura Corporation is trying to issue the Initial Public Offering (IPO). Below are the financial information provided: ‘Aura Corporation ent of Financial Position as at December 31 Assets 2017 (RM) 2016 (RM) __ 2015 (RM) Cash and equivalent 435,628 422,106 215,000 Accounts receivable 760,000 598,600 428,000 Inventories 4,250,000 857,000 910,000 Plant and equipment, net 1,015,000 928,000 850,000 Land Total assets Liabilities and Equity Accounts payable 890,000 450,000 135,000 Accruals 231,980 210,000 198,000 Short term notes payable 356,000 326,000 286,000 Long term debt 970,000 517,610 403,500 Debentures 670,000 589,000 625,000 ‘Common stock 2,769,000 2,500,000 2,500,000 Retained earnings 373,648 313,096 145,500 Total liabilities and equity 6,260,628 4,905,706 __4,293,000 Aura Corporation Statement of Financi ion as at December 31 2017 (RM) 2016 (RM) _—_2015 (RM) Net sales 2,950,000 2,800,000 2,800,000 Cost of goods sold 1,450,000__1,680,000 637,000 Gross profit 7,500,000 1,120,000 1,863,000 Selling & administrative expenses 456,000 385,000 395,000 General expenses 240,000 210,000 185,000 Depreciation 380,000 302,000 274,000 Operating profit ‘444,000, 223,000 ‘1,009,000 Interest expense 279,440 200,565 184,030 Income before tax 134,560. 22,435 824,970 Income taxes, 30% 33,840 6,731 247,491 Net income 100,920 15,705 577,479 (© Hak Cipta Universiti Teknologl MARA, CONFIDENTIALCONFIDENTIAL 3 ‘Aura Corporation Common Size of Financial Position as at December 31. BA/JAN 2018/FING58/665 Assets 2017 2016 2015 Cash and equivalent 6.96% 8.60% 5.01% Accounts receivable 12.14% 12.20% 9.97% Inventories 19.97% 17.47% 21.20% Plant and equipment, net 16.21% 18.92% 19.80% Land 44.12% 42.81% 44.03% Total assets 100.00% 100.00% 100.00% Lia and Equity Accounts payable 14.22% 9.17% 3.14% Accruals 3.71% 4.28% 4.61% Short term notes payable 5.69% 6.65% 6.66% Long term debt 15.49% 10.55% 9.40% Debentures 10.70% 12.01% 14.56% Common stock 44.23% 50.96% 58.23% Retained earnings 5.97% 6.38% 3.39% Total liabilities and equity 100.00% 00.00% 10.00% Aura Corporation Common Statement of Financi n as at December 31, 2017 2016 2015 Net sales 100.0% 10.00% 10.00% Cost of goods sold 49.15% 60.00% 25.48% Gross profit 50.85% 40.00% 74.52% Selling & administrative expenses 15.46% 13.75% 15.80% General expenses 8.14% 7.50% 7.40% Depreciation 13.22% 10.79% 10.96% Operating profit 14.03% 7.96% 40.36% Interest expense 9.47% 7.16% 7.36% Income before tax 4.56% 0.8% 33.00% Income taxes, 30% 1.14% 0.24% 9.90% Net income 3.42% 6%. 23.10% CONFIDENTIAL (© Hak Cipta Universiti Teknologi MARACONFIDENTIAL 4 BAJJAN 2018/FING58/665, Before the company decides to issue the IPO they need a brief report from Finance Department. As a Financial analyst of Aura Corporation, you need to determine whether the financial performances for the company's in 2017 is significantly better than the previous year with higher profitability, stable cash flows and lower financial risks. a) b) °) d) e) Prepare Statement of Cash flow for Aura Corporations for the year ended December 31, 2017 (12 marks) Using average value, calculate any two relevant financial ratios for each of the following areas to determine the financial performance of Bright Ideas Corporation for the Year 2017 and Year 2016. The areas are as follows: i Ability to meet maturing obligations. ii, Effectiveness in managing assets and efficiency in handling operations. ii, Profitability and overall operating results. iv. Ability to service debts and degree of financial risk. (8 marks) Prepare and analyze the comprehensive report concerning Aura Corporation's financial performance in 2017 and 2016 based on the calculated ratio. The report must incorporate with the common size financial data given. (12 marks) Analyze and comment the company's ability to provide return on asset and shareholders’ equity investment using DuPont equation. (4 marks) Based on your findings in (a), (b), (c) and (d), recommend and justify whether Aura Corporation can proceed to issue the IPO or not. (4 marks) (© Hak Cipta Universiti Teknologi MARA. CONFIDENTIALCONFIDENTIAL 5 BAJJAN 2018/FING58/665, PARTB. QUESTION 4 Luanda Company's net income for the year is RM 4,000,000 and the number of common shares outstanding is 3,000,000 units. Luanda has options and warrants outstanding to purchase 1 million shares at RM15 per share. a) Compute the basic and diluted earning per share if the average market value of the common shares is RM20, year end price is RM25, interest rate on borrowing is 6% and tax rate is 50% (7 marks) b) Explain the emergence of dilution of earning per share in the company. (3 marks) QUESTION 2 Anthurium Corporation is determining the best method for its inventory management for the year ended 2017. The following information reflect the inventory records of the ‘company in 2017: ____ Quantity _Price per unit 120 units RM30 15 July 140 units RM35 1 August 100 units RM40 15 August 160 units RM45 1 September 200 units RM50 15 September 220 units RM55 Assume that 800 units are sold during the third quarter at RM70 each. The ending inventory in June is 50 units at cost RM25 each. Under LIFO and FIFO methods, you are required to determine: a) The firm's ability to turn every Ringgit of sales into profit after the cost of goods sold has been accounted for. (7 marks) b) The number of times a company's inventory is sold and replaced over a year. (1 mark) ©) During inflationary period, which method of inventory should the division use to maximize the net profit as a percent of sales? (2 marks) (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL 6 BAJJAN 2018/FING58/665, QUESTION 3 Below are selected ratios for two companies which operate in two different industries: Departmental Store and Cosmetics Manufacturer. Firm X CoGs/Sales 75% RaD/Sales 0% ‘Advertising/Sales na Interest/Sales 0.9% Net Income/Sales 2.5% Return on Assets 10% Inventory Turnover 5.5 times Accounts Receivable Tumover | 12 times Long-term DebtEquity 5% "/a=not applicable Determine the industry of Firm X and Firm Y. Elaborate two (2) reasons for your answer. (10 marks) QUESTION 4 As a financial analyst, you are required by your client to consider Hydrangea Berhad's stock. The company is in growth phase and is expected to increase earnings growth by 20% constantly from 2017 to 2021. The following are several information about the ‘company: Total assets for the year ended 2016 is RM250,000. Total liabilities for the year ended 2016 is RM100,000. Preferred shares for the year ended 2016 is RM45,000. ‘Net income in 2016 is RMS50,000 with 20,000 units of shares outstanding. Dividend payout ratio is maintained at 40% annually. Cost of capital is at 12%. a) Using residual income valuation method, determine the intrinsic value of Hydrangea Berhad. (8 marks) ) Explain the reason why the company should buy the Hydrangea Berhad's stock, given that market price of the stock in 2017 is RM11.60. (2 marks) (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL 7 BAIJAN 2018/FING58/665, QUESTION 5 Suria Company trying to determine its financing needs for next year as the company want to expand their business activities. The previous sales recorded was RM36,000,000 and now the company forecasted their business activities for 2018 are as follows: Sales growth will reach until 20 percent Gross Profit margin expected to be 25 percent Earnings before interest and taxes are expected to be 15 percent from sales Tax rate is 25 percent Dividend payout ratio is 30 percent All expenses expected to be 10 percent of sales The working capital is 20 percent from projected sales The fixed assets is 15 percent from projected sales The company issue additional term loan of RM500,000, Total long term debt and notes payable maintain at RM28,000,000 with 15 From the above information, you are required to: a) Construct the pro forma financial statement for Suria company and determine the amount need to be raised (6 marks) b) Determine the earings per share and dividend per share if currently the company's authorized shares are 4,000,000 units and issued shares is 1,000,000 units. (4 marks) QUESTION 6 Rayyan Corporation projected business for 2018 are as follows: Authorized common shares: 4 million shares. Issued common shares: 1 million shares. Long term debt outstanding RM4 million with 6% interest per annum. Tax rate 28%. Cost of goods sold expected to be RM6 million Administrative expenses expected to be 15% of cost of goods sold but only 10% of sales. Selling expenses expected to be 110% of administrative expenses. + The retention ratio for 2017 was 80% and the company intends to maintain the payout ratio for the coming years, + Common shares are expected to trade at RMS per share. Prepare a common size statement of financial performance for year ended 2018. (10 marks) END OF QUESTION PAPER (© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL