Key information

1. The assignment is an individual submission

2. It needs to be submitted by 23:55 pm on Tuesday 27 September 2022
3. Extensions will not be granted except in the case of an approved extension via the university’s centralized
process where documentation of the reasons is to be submitted to the university.
4. The assignment will be assessed out of 30 grade points.
5. You are to submit a Word document that responds to the Tasks set out below to Turnitin via the LMS.
6. You also need to submit an Excel Spreadsheet of your workings to Turnitin as well as email it to the lecturer
(). This spreadsheet needs to be organized in Task order with each tab of the spreadsheet labelled.
7. All statements, estimates and numbers that you come up with need to be justified/substantiated and that is
the purpose of the Spreadsheet.

Overview of the assignment

This assignment is an integral part of the learning conducted in this course. It will harness key capabilities for
successfully extracting, managing, understanding, and analysing financial statement information.

As an external analyst working for an investment bank or a commercial bank, you will be assessing the financial
health and financial reporting quality of a company listed on the ASX. This company will be assigned to you by the
lecturer.

You need to access the last 5 annual financial reports and other pertinent information from the company’s website.
This involves accessing as a minimum the financial statements, the Auditor’s Report and Notes to the Financial
Statements. Do not use Yahoo or other sites that summarize company financial statements as the data that you end
up with will he too high-level and will not permit you to do the level of analysis required. Such sites also do not give
you the company’s opinion around key risks.

To be clear, if you avoid the Notes to the Financial Statements, amongst other things, you will miss out on
accounting policies, the Segmentation Report, details of interest-bearing debt, information of leasing, breakdowns
of trade & other payables, and splits of trade & other receivables.

Please note that a Segmentation Report breaks the business down by divisions or segments of activity and is
invaluable in appreciating trends that evolve in large or diversified companies.

Tasks
1. Introduce your company. As a minimum this would include a very brief description of key activities, when
the company listed and measures of size (revenue, assets, market share) and any reason the company may
have recently been in the news.

2. Conduct Financial Analysis across the 5-year period: This has several sections
a. Profitability Analysis. You can use any measures you believe are appropriate and informative.
Examples may be EPS, ROA and Operating ROA [also called ROIC (Return on Invested Capital]. You
may also want to do some profit margin analysis (e.g. EBIT margin, Net Profit margin or even Gross
Profit margin if the company has a Cost of Sales number)
b. Liquidity Analysis. Use appropriate ratios and explain your results.
c. Solvency Analysis. Use appropriate Debt and Coverage ratios and explain your results.

3. Calculate Measures of Financial Distress and explain the meaning and the implications of your results. The
measures to use are the Altman Z-Score and Ohlson O-Score bankruptcy predictor models. As there could be

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 a good deal of number-crunching, just do the most recent year. If you want to use just one model, that is
fine, but less marks are available that way. Whatever you choose to do, you need to assess where your
findings correspond with the Solvency analysis you did earlier and if not, why not!

4. Evaluate the Financial Reporting Quality of your company.

a. Is the company adequately and clearly explaining its accounting policies and estimates?
b. Is the company, through its financial statements and accompanying notes and schedules and annual
report commentary, permitting you, the external analyst, to adequately assess good or bad
performance as well as the material risks that may be threatening the business? Are there signs of
possible earnings manipulation?
c. Can you think of anything you may want to adjust in the financial statements to permit you, the
external analyst, to analyse the company more fully against other companies in the sector? This
could be to do with the way the company has classified items such as inventory, trade payables or
trade receivables. It may also be connected to discontinued operations, significant items, or “oneoff”
items.
d. You are expected to calculate the Beneish M-Score for detecting earnings manipulation. The most
recent year only needs to be analysed.

5. Conclusions. In this section you need to draw together your findings and communicate how you believe the
company is and was performing as well as current material risks to its liquidity and solvency. In terms of
performance, you may want to look at ROA, Operating ROA, Total Shareholder Returns and other key
measures such as EPS and Dividends per share. Some notes of warning:
a. If you are analysing EPS, it is better to use Diluted EPS rather than EPS.
b. EPS numbers may have been affected by buy-backs (also called share repurchases) so please ensure
you appreciate potential impacts (if buy-back was a lot of shares).
c. DPS (or even dividend yield) on its own is an inadequate measure as it ignores the value to the
investor coming out of capital gains. You may wish to use Total Shareholder Returns (capital gain
yield + dividend yield).

6. Referencing is to be carried out. Standard LTU Referencing guidelines (including APA 6) apply, including
intext referencing and Bibliography.

7. Bonus Marks. These will be awarded to students who expand the Profitability &/or Conclusions sections to
include an assessment of ROIC versus WACC. The idea is to see if the company’s activities are adding value.
The WACC formula we will use is

Where:
w = the weight in the capital structure for the various sources of finance, in this case being Debt [d],
Preference Shares [p] and Ordinary Equity [s] r
= the cost of each source of finance
tc = the corporate tax rate. If you can find the effective corporate tax rate of a company that will be the best
to use, as it is the weight-avg across the taxing jurisdictions of the firm. The effective rate is income tac
expense divided by before tax profit. If the company is a medium or large Australian firm and only does
business in this country, it may be appropriate to alternatively use the 30% statutory tax rate for Australia.
Export activities are part of doing business here. If you are confused about what tax rate to use, contact the
lecturer.

For rs, the cost of ordinary equity (sometimes called the required return to equity), I suggest you use the
CAPM model as at the last day of the financial year you are analyzing. If you have had no experience with
CAPM, contact the lecturer for advice.

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 For rd, the before tax cost of debt, you can take the interest cost (including any lease interest) and simply
divide it by the average amount of interest-bearing debt (IBD). To get this average amount you could take
the IBD at the beginning of the year (including any lease liabilities) and at it to the amount at the end of the
year and simply divide by 2. There are more sophisticated approaches that can be adopted, and you are
welcome to use them, but for the purposes of this assignment, a simple approach will be fine.

In the event your company has preference shares, for rp, the cost of preference share capital, contact the
lecturer for advice.

Scoring
This is only a rough guide as students sometimes introduce relevant material on one point that should have gone
under another heading and marks can still be awarded for those efforts.
1. Introduce your company. 2 marks.

2. Conduct Financial Analysis

✓ Profitability Analysis. 5 marks.
✓ Liquidity Analysis. 2 marks.
✓ Solvency Analysis. 4 marks.

3. Measures of Financial Distress

✓ Altman Z-Score. 2 marks.
✓ Ohlson O-Score. 2 marks.
✓ Implications. 2 marks.

4. Financial Reporting Quality

✓ Beneish M-Score and implications. 3 marks.
✓ Other. 3 marks

5. Conclusions. 4 marks

6. Referencing. 1 mark

7. Maximum Bonus. 3 marks