BU7504-1

Faculty of Arts Humanities and Social Sciences

Trinity Business School

M.Sc. Finance Degree Examination Michaelmas Term 2015

M.Sc. International Management Degree Examination

BU7504-1 International Financial Statement Analysis

Tuesday 15th of Dec. 2015 SPORTS CENTRE 14:00 – 16:00

Prof. Roman Matousek (External Examiner)

Ms. Caroline Kirrane (Lecturer)

Instructions to Candidates:

This is a closed-book examination.

The examination is TWO hours in duration.
Answer each question in a separate answer book.

Section A (30% or 30 marks) – Answer ALL questions on this exam paper

Section B (40% or 40 marks) – Answer ALL questions on answer booklet
Section C (30% or 30 marks) – Answer TWO questions of five on answer booklet
Return your exam paper with the answer booklets to the invigilator

Materials permitted for this examination:

Non-programmable calculators are permitted for this examination – please indicate the
make and model of your calculator on each exam book used.

You may not start this examination until you are instructed to do so by the invigilator

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 BU7504-1

SECTION A – ANSWER ALL QUESTIONS

Sample answer
A company’s current financial position would best be evaluated using the:

a. Balance sheet
b. Income statement
c. Statement of cash flow

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 BU7504-1

SECTION A – ANSWER ALL 10 QUESTIONS FOR 3 MARKS EACH

1. Joshua Inc recorded €250,000 of depreciation expense in December 2015. The

most likely effect on the company’s accounting equation is:

a. no effect on assets
b. a decrease in assets of €250,000
c. an increase of liabilities of €250,000

2. Which of the following elements of financial statements is most closely

related to measurement of performance, as recorded on the Income
Statement?

a. Assets
b. Expenses
c. Liabilities

3. At the beginning of 2014, Barry Inc. purchased a machine for €100,000. The
machine had an estimated salvage value of €20,000 and an estimated useful
life of 5 years. Under the double declining balance method of depreciation,
how much of an annual depreciation expense will Barry Inc. record for this
machine at the end of December in its second year of operation (annual
depreciation expense for 2015)?
a. €40,000
b. €24,000
c. €20,000

4. Which of the following is a likely effect on the financial statements of a

company that chooses to calculate the depreciation expense on an asset
under the double declining balance method rather than on a straight-line
basis?

a. Taxes will be lower but assets will be higher under the double
declining balance method vs using the straight line method in the early
years of the asset’s life
b. In the early years of its use, assets will be lower and taxes will also be
lower under the double declining balance method
c. In the later years of the asset’s life, depreciation will be lower and
taxes will be higher under the double declining balance method

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 BU7504-1

SECTION A – ANSWER ALL 10 QUESTIONS FOR 3 MARKS EACH

5. Which of the following ratios would help an analyst to form a judgment on the
short-term ability of a company to meet its obligations?

a. short-term-debt-to-equity
b. quick ratio
c. debt-to-assets ratio
6. Which of the following best describes the leverage ratio?

a. Total assets
Total equity

b. Total debt
Total equity

c. Total debt
Total assets

7. Given the following information for three companies, which has the highest
ROE?

A B C
Net profit margin 3.0% 5.0% 8.0%

Total asset turnover

2.4 2.2 1.8
Total assets/equity
2.6 2.4 2.0

a. Company A

b. Company B

c. Company C

8. Using the information in Question 7 above, which of the below best describes
company B’s ROE?

a. It’s not possible to tell exactly given this information

b. Company B’s ROE is 26.4%
c. Company B has a lower ROE than Company A because it has lower
leverage than Company A but it has a higher ROE than Company C
because it has more leverage than Company C

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 BU7504-1

SECTION A – ANSWER ALL 10 QUESTIONS FOR 3 MARKS EACH

9. Francis Corp., a wholesale business, reported cost of goods sold for the year of $80
million. Total assets increased by $55 million, including an increase of $5 million in
inventory. Total liabilities increased by $45 million including an increase of $2 million
in accounts payable. The cash paid by the company to its suppliers is most likely
closest to:

a. $73 million
b. $77 million
c. $83 million

10. Which of the following is an appropriate method of computing free cash flow to the

firm?

a. Add operating cash flows to capital expenditures and deduct after-tax interest
payments
b. Add operating cash flows to after-tax interest payments and deduct capital
expenditures
c. Deduct both after-tax interest payments and capital expenditures from
operating cash flows

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 BU7504-1

SECTION B – ANSWER ALL QUESTIONS

The following information pertains to all questions in SECTION B. Answer all
questions in this section.
Diageo and Pernod Ricard are competitors and are both multinational companies that produce alcoholic beverages. Below is an extract
from their financial statements. [40 marks]

DIAGEO
£ mln
2015 2014 2013
Net Profit 2,467 2,181 2,550
Sales (net of excise duties) 10,813 10,258 11,303
Total Assets 25,804 22,964 25,077
Equity 9,256 7,590 8,107

PERNOD RICARD
€ mln
2015 2014 2013
Net Profit 880 1,027 1,172
Net sales 8,558 7,945 8,575
Total Assets 30,398 27,616 27,537
Equity 11,778 13,288 11,179

ANSWER ALL QUESTIONS for total of 40 marks

1. Calculate the ROE for Diageo and Pernod Ricard using the DuPont method of
analysis. Show all ratios and calculations. [10 marks]

2. Explain two reasons why the ROE may be different for the two firms using the
analysis conducted in Question 1. [10 marks]
3. DuPont is a useful tool with which to begin a financial statement analysis as it can
bring up questions and point an analyst to the most useful next ratios to calculate.
After conducting a DuPont analysis on Diageo and Pernod Ricard, which one ratio
would you calculate next for both Diageo and Pernod Ricard and why? [6 marks]

4. For both companies, sales are reported “net” of excise duties (taxes). Why is this?
[3 marks]
5. What would be the effect of using Gross Sales in the DuPont analysis rather than
the Net Sales used above? [8 marks]

6. Investing in a business is a complex decision-making process involving many

elements including price of the stock considered. However, using just the DuPont
analysis you just conducted, in which business would you rather invest? Support
your decision with one reason as supported by the DuPont analysis. [3 marks]

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 BU7504-1

SECTION C – ANSWER TWO QUESTIONS

The following information pertains to all questions in SECTION C. Answer TWO of the five
questions.

Below are common size balance sheets of Ryanair and EasyJet. The companies are competitors
and operate low fares passenger airlines in Europe.

RYANAIR BALANCE SHEET

2014 2013 2012
Non-current assets
Property, plant and equipment 57% 55% 55%
Other non-current assets 4% 3% 3%
Total non-current assets 61% 58% 57%
Current assets
Cash and cash equivalents 20% 14% 30%
Financial assets: cash>3 months 17% 26% 9%
Other current assets 2% 3% 5%
Total current assets 39% 42% 43%
Total assets 100% 100% 100%

Current liabilities
Trade payables 2% 2% 2%
Accrued expenses and other liabilities 18% 15% 14%
Current maturities of debt 5% 4% 4%
Total current liabilities 26% 21% 20%
Non-current liabilities
Other creditors 7% 7% 7%
Non-current maturities of debt 30% 35% 36%
Total non-current liabilities 37% 42% 43%

Shareholders' equity 37% 37% 37%

Total liabilities and shareholders'
equity 100% 100% 100%

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 BU7504-1

SECTION C – ANSWER TWO QUESTIONS

EASYJET BALANCE SHEET

2014 2013 2012
Non-current assets
Goodwill 11% 11% 13%
Property, plant & equipment 74% 70% 82%
Other long term assets 2% 2% 0%
Total non-current assets 87% 83% 95%
Current assets
Restricted cash 1% 0% 5%
Net cash 12% 17% 0%
Total current assets 13% 17% 5%
Total assets 100% 100% 100%
Liabilities
Derivative financial instruments 1% 2% 4%
Current liabilities 29% 30% 27%
Current and deferred taxation 7% 6% 8%
Total liabilities 37% 38% 39%

Shareholders' equity 63% 62% 61%

TOTAL LIABILITIES + SHAREHOLDERS

EQUITY 100% 100% 100%

ANSWER ANY TWO OF THE BELOW QUESTIONS for 15 MARKS each

Q1. Use the common size statement above to provide three financial analysis insights
on the composition of Ryanair’s balance sheet as of 2014 and explain the
significance of each insight for the business of Ryanair.
Q2. Use the common size statement above to provide three financial analysis insights
on the composition of EasyJet’s balance sheet as of 2014 and explain the
significance of each insight for the business of EasyJet.
Q3. Use the common size statement above to compare and contrast the financial
positions of Ryanair and EasyJet over time. Give three contrasts and the likely
implications of these contrasts for Ryanair and EasyJet.
Q4. Use the common size statements above to discuss three points in relation to the
evolution of Ryanair’s balance sheet over the last three years. For each point, note
the implications of your observation for the business of Ryanair.
Q5. Use the common size statements above to discuss three points in relation to the
evolution of Ryanair’s balance sheet over the last three years. For each point, note
the implications of your observation for the business of Easyjet.

© Trinity College Dublin, The University of Dublin 2015

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