ASSIGNMENT

Code: 03

Lecturer’s Signature
Program: AC
Course Code: INS 3030
Course Title: Financial Report Analysis
Level: Chu Huy Anh
…………………………………………………. Date:………………………………
Deadline: June 7, 2021 (12:00 pm)
Department’s Signature

Date: ………………………………

Instructions to students:

1. Closed/Opened book: Opened

2. Answers are to be written by hand

This paper contains 04 pages, including the cover page.

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Problem 1 (3.5 marks): Kraft Corporation has the following forecasted net income

Year 2011: $478,246

Management expects net income to grow at a rate of 6% per year from 2011 to 2015. The
company's cost of equity capital is 10%. Management has set a dividend payout ratio equal to
30% of net income and plans to continue this policy. Kraft’s common shareholders' equity at
January 1, 2011 is $2,224,401, and the long-term growth rate after 2015 is 5%.

Requirement:

a. Compute the value of Kraft as of January 1, 2011. Use the residual income valuation
model. The company pays dividend at the end of the year.

b. Assume the current market price is $70, and there are 100,000 shares outstanding. Is
Kraft currently overvalued or undervalued?

c. Assume that after 2012, Kraft stops paying dividend, is the company overvalued or
undervalued?

Question 2 (3.5 marks): Three companies have the following information:

A B C

Total Assets $14,308 $23,211 $7,242

Interest-Bearing Debt 3,500 10,500 4,300

Average Pretax 5.4% 4.5% 6.1%

Borrowing Cost

Common Equity $4,953 $5,176 $1,139

(Book value)

Common Equity $7,490 $14,870 $15,950

(Market value)

Market Equity Beta 1.1 0.35 1.04

Forecasted Net $800 $1,263 $1,010

Income for Year +1

a. Assuming the risk-free rate is 5% and market risk premium is 7%, using CAPM,
compute the required rate of return on equity capital for Firm C. The tax rate is 35%.

b. Compute the Residual Income for Firm C

c. Compute the Weighted Average Cost of Capital (WACC) for Firm C

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 d. Compute the unlevered market beta for Firm C

e. Assume that there is a new investor who wants to buy out the company. The new
investor wants to implement a new capital structure with 50% debt (the pretax
borrowing cost is unchanged) and 50% equity. Calculate the New levered Market
Beta and New WACC for Company C.

f. What can you conclude about the change in capital structure from Part d?

Question 3 (3 marks): Followings are financial data for XYZ Company. Analyze the
changes in liquidity, solvency and profitability of XYZ during the three-year period in
as much depth as permitted by the data provided

XYZ
Risk ratios Year 13 Year 14 Year 15
Current ratio 1.73 1.96 2.49
Quick ratio 0.72 1.02 1.36
Operating CF/Average CL -3.92% 34.39% 50.07%
Receivable turnover 6.63 6.82 6.21
Days account receivable days 55.05 53.51 58.75
Inventory turnover 3.61 4.38 4.45
Days inventory days 101.05 83.35 81.97
Payable turnover 9.40 11.38 14.17
Days account payable days 38.82 32.06 25.76
Cash conversion cycle days 117.29 104.79 114.97
Long term debt ratio 0.86% 0.00% 0.00%
Debt-Equity ratio 105.41% 81.64% 54.84%
Liabilities/Total assets 51.32% 44.94% 35.42%
Operating CF/Average TL -3.83% 33.79% 48.82%
Interest coverage 24.62 38.27 812.23

Profitability ratios Year 13 Year 14 Year 15

Gross profit margin 21.39% 21.95% 21.85%
Net profit margin 4.87% 6.02% 8.43%
ROA 11.40% 15.92% 16.63%
Total asset turnover 2.23 2.58 2.27
ROE 20.49% 29.78% 24.41%
Cost of goods sold/Sales 78.61% 78.05% 78.15%
Selling & Admin expenses/Sales 12.23% 12.29% 8.77%

XYZ
Income Statements
amounts in millions Year 13 Year 14 Year 15
Sales revenue 76,328 109,373 102,699
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Cost of goods sold (60,000) (85,364) (80,260)
Selling and Admin (9,336) (13,447) (12,091)
Interest Expense (284) (276) (13)
Other Income 0 0 211
Income tax expense (tax rate at 35%) (2,992) (3,703) (3,944)
Net Income 3,716 6,583 6,602
XYZ
Balance sheets (amounts in
millions dollar) Year 12 Year 13 Year 14 Year 15
Assets
Cash 865 1,247 1,540 3,857
Marketable securities 2,990
Accounts Receivable 9,718 13,307 18,759 14,303
Inventories 12,797 20,426 18,559 17,492
Prepayments
Total current assets 23,380 34,980 38,858 38,642
PPE (net) 4,568 4,804 5,645 6,173
Other assets 400 299 343 698
Total assets 28,348 40,083 44,846 45,513
Liabilities & Shareholders' Equity
Accounts Payable 6,496 7,889 6,779 4,400
Short term borrowing 870 3,670 170 0
Other current liabilities 3,888 8,624 12,879 11,142
Total current liabilties 11,254 20,183 19,828 15,542
Long term debts 340 170 0 0
Other non-current liabilities 216 328 577
Total liabilities 11,594 20,569 20,156 16,119
Shareholders' Equity
Common stock 2,900.0 5,828.0 7,303.0 9,214.0
Additional Paid-in Capital 5,075 5,075 5,061 5,286
Retained Earnings 8,774 8,599 12,297 14,834
Cumulative other comprehensive
income 5.0 12.0 29.0 60.0
Total equity 16,754 19,514 24,690 29,394
Total liabilities and owners equity 28,348 40,083 44,846 45,513