Master in Finance

Exercise 1

Team:
LLINAS, Sergio
OROPEZA, Jesús
Subject: Corporate Finance PACHECO, Andrés
Teacher: Raúl Crespo SMITH, David
Date: February 2023 VERJANO, Andreana
 Subject: Corporate Finance
TEAM

Teacher: Raúl Crespo

Exercise 1
LLINAS, Sergio; OROPEZA, Jesús; PACHECO, Andrés; SMITH, David; VERJANO, Andreana

Exercise 1

You are a Corporate Development manager of a major retailer, and the CEO needs to rapidly
grow the company through acquisitions. Your analyst shared with you the financials of four
companies in very different conditions. Please, assess what company would you prefer and
explain why, based on a quick financial analysis. You can prepare outputs (charts, graphs,
etc.) to base your conclusion and to make it as clear as possible.

Given the benchmark information for the retail sector extracted from the CSI Market web page
(https://csimarket.com/Industry/industry_growth_rates.php?s=1300&hist=8) in the following
table:

Table 1. Benchmark information: Retail sector

And the computed ratios for the four companies below:

Table 2. Ratio’s comparison for the four companies (A, B, C, and D)

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 Subject: Corporate Finance
TEAM

Teacher: Raúl Crespo

Exercise 1
LLINAS, Sergio; OROPEZA, Jesús; PACHECO, Andrés; SMITH, David; VERJANO, Andreana

Graphically:

Figure 1. ROE, Net Sales Growth, Interest Coverage, and Net Profit Growth for the four
companies and the benchmark

Company C is the preferred one for the following reasons:

 EBITDA margin improves. We can tell that the core operations of the business are
becoming more profitable.
 Sales have increased.
 EBITDA’s growth shows that Company C is efficient with respect to costs. This is also a
sign of stable-constant cash flows.
 Company C has the highest ROE over both years. Not only positive but increased from
one year to the other. Shareholders are getting higher rewards from Company C than
from Company D, for example.
 With respect to Interest Coverage, Company C is more capable of paying interest
expenses. It could pay for its expenses 20 times with respect to the others.
 In addition, Company C has a lot of cash reserves. In the third year the net debt is
negative (due to cash offsetting total liabilities). Large cash reserves could be an

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 Subject: Corporate Finance
TEAM

Teacher: Raúl Crespo

Exercise 1
LLINAS, Sergio; OROPEZA, Jesús; PACHECO, Andrés; SMITH, David; VERJANO, Andreana

opportunity for new investments /new projects/more growth. They could take more
leverage, which could lead to an expansion.