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End of Semester 1, 2020 FNCE2003 Business Analysis for Investment You are required to complete the assignment and submit to the submission link on Blackboard within this period. PART A: MULTPLE CHOICE QUESTIONS (MCQ) ANSWER SHEET Question number Answer 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Section A – Multiple Choice Questions (20 Marks: 20 MCQs x 1 Mark Each). Choose the correct answer: 1. A useful tool in financial statement analysis is the common-size financial statement. What does this tool enable the financial analyst to do? A. Evaluate financial statements of companies within a given industry of approximately the same value. B. Determine which companies in the same industry are at approximately the same stage of development. C. Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over time or between companies within a given industry without respect to relative size. D. Ascertain the relative potential of companies of similar size in different industries. 2. Synergy’s income statement shows sales of $1,000, cost of goods sold of $400. Pre-interest operating expense $300, and interest expense of $100. Interest coverage ratio of Synergy is close to: A. 2 times. B. 3 times. C. 4 times. D. 5 times. 3. During September, a firm’s inventory account included the following transactions: September 1 Inventory 25 units@$4.00 September 14 Purchased 60 units@$4.20 September 20 Sold 40 units@$6.00 September 21 Purchased 30 units @ $4.25 September 25 Sold 40 units @$6.10 Assuming periodic FIFO inventory costing, gross profit for September was: A. $132 B. $147 C. $153 D. $160 4. Pears PLC adheres to IFRS. It recently imported inventory for $100 million, paid import tax of $ 2milion, carrying in cost of $5 million and spent $5 million for storage prior to selling the goods. The amount it charged to inventory expense ($ millions) was closest to: A. $100 B. $105 C. $107 D. $115 5. In an inflationary environment, a LIFO liquidation will most likely result in an increase in: A. Inventory. B. Accounts payable. C. Operating profit margin. D. None of them. 6. A firm reports net income of $ 40 million. The firm's financial statement disclosure in management discussion and analysis reveal that $ 25 million of net income is attributable to a gain on the sale of assets. Based only on this information, for this period, the firm is best described as having high quality of: A. Financial reporting only. B. Both high quality earnings and financial reporting. C. Neither high quality earnings nor financial reporting. D. None of them. 7. Which of the following is not a potential “red flag” pointing to questionable accounting quality? A. Unexplained transactions that boost profit. B. Poor internal governance mechanisms. C. Volatility in the difference between reported profits and cash-flows. D. All of the above are potential red flags. 8. Earnings that can are less likely to repeat in the future is known as: A. Core earnings. B. Sustainable earnings. C. Comprehensive earnings. D. Transitory earnings. 9. Which of the following statement is not correct? A. Costs of internally developing intangible assets are classified as operating cash outflows. B. Costs of acquiring intangible assets are classified as investing cash outflows. C. Cost of internally developing intangible assets are capitalized in the balance sheet. D. All of the above. 10. The CFO of APEX, S.A. is selecting the depreciation method to use for a new machine. The machine has an expected useful life of six years. Production is expected to be low initially but to increase over time. The method chosen for tax reporting must be the same as the method used for financial reporting. If the CFO wants to maximize tax payments in the first year of the machine’s life, which of the following depreciation methods is the CFO most likely to use? A. Units-of-production method. B. Straight-line method. C. Double-declining balance method. D. None of the above. 11. CROCO S.P.A. sells an intangible asset with a historical acquisition cost of €12 million and an accumulated depreciation of €2 million and reports a gain on the sale of €3.2 million. Which of the following amounts is most likely the sale price of the asset? A. €6.8 million B. €13.2 million C. €8.8 million D. €14.2 million 12. Assume that an analyst forecast about the free cash flow of a firm at the end of 2020 is $5,311 million. The required rate of return is 10% and analyst expects the free cash flow to grow at 4%. What should be the continuing value for this firm? A. $ 53,110 million. B. $132,775 million. C. $ 92,057 million D. $ 88,517 million. 13. Screening stocks based on the number of analysts following a particular stock is known as: A. Price screens. B. Momentum screens. C. Insider trading screens. D. Neglected stocks screens. 14. The most uncertain (speculative) part of a valuation is: A. Free cash flow. B. Continuing value. C. Cash investment. D. None of the above. 15. Which of the following is not a motivation to manipulate earnings? A. Reduce tax obligation. B. Remain in compliance with debt covenants. C. Meet analyst expectation. D. All of the above. 16. Which of the following is wrong? A. Manufacturing companies generate revenues and profits through the sale of inventory. B. Raw materials inventories are normally not for resale. C. Merchandisers do not retain work-in-process inventory. D. All of the above 17. Which is of the following is not a part of fundamental screen? A. Price-to-earning screen. B. Price-to-book value screens. C. Small-stocks screen. D. All of the above. 18. Which of the following statement is not true? A. Earnings can be viewed as being composed of a cash component and an accruals component. B. Earnings with a larger component of accrual would be more persistent and thus of high quality. C. Earnings with a larger component of cash flow would be more persistent. D. All of them. 19. Which of the following is not correct about asset-based valuation technique? A. Asset-based valuation attempts to redo the balance sheet by getting current market values for assets and liabilities listed on balance sheet. B. Asset-based valuation attempts to redo the balance sheet by identifying omitted assets and assigning a market value to them. C. Getting the value of operating assets when there is no market for them is a potential limitation of asset-based valuation technique. D. Asset-based valuation is not suitable for firms such as oil and gas and mineral products. 20. Coroner Corporation had a current ratio of 2.0 at the end of 2017. Current assets and current liabilities increased by equal amounts during 2018. The effects on net working capital and on the current ratio, respectively, were: A. No effect; increase. B. Decrease; decrease. C. No effect; decrease. D. No effect; no effect. Section B – Structured Questions (30 Marks) Answer all the questions 1. The following table presents financial data from 2018 annual reports of six pharmaceuticals companies. The market value of equity for five companies is also given. All numbers are in millions of dollars. Novartis had a book value of $1,349 million in 2017. In addition, Novartis had 4,900 million shares outstanding throughout the year. Company Market value of equity Price/Book Sales revenue R&D Net Income Acme $8,096.71 5.6 $1,571.0 $307.0 $406.0 Aspen Pharma 1,379.00 3.6 152.0 101.0 15.0 Pfizer 2,233.60 4.6 413.0 158.0 28.0 Aus Pharma 925.00 2.5 138.0 109.0 7.0 Sanofi 588.53 4.5 151.0 81.0 34.0 Novartis ? ? 795.4 314.3 124.4 Using these numbers: a) Calculate relevant multiples.[6 marks] b) Estimate a value for Novartis.[2 marks] c) What should be the value per share of Novartis? If the stock of Novartis is now traded at $1.10 (per share), should you buy this stock? [2 marks] [1] 2. At the beginning of its fiscal year 2019, an analyst made the following forecast for GM, Inc. (in millions of dollars): 2019 2020 2021 2022 Cash flow from operation $1,035 $3,180 $3,155 $2,120 Cash investment 425 480 445 820 GM did not have any short-term and long-term debt at the beginning of 2019. Assume that free cash flow will grow at 5 percent per year in 2023 and 2024, after that this will grow at 4 percent per year. GM had 305 million shares outstanding at the beginning of 2019, trading at $73.25 per share. Using a required return of 10 percent, calculate the following for GM at the beginning of 2019: a) The enterprise value.[6 marks] b) Equity value.[1 marks] c) Equity value per share.[2 marks] d) Based on your estimate, should investors buy the share of this company? [1 marks] 3. You have been hired as an analyst for Bank WA and your team is working on an independent assessment of Duck Food Inc. (DF Inc.). DF Inc. is a firm that specializes in the production of freshly imported farm products from New Zealand. Your assistant has provided you with the following data about the company and its industry. Ratio 2018 2017 2016 2018- Industry Average Long-term debt 0.45 0.40 0.35 0.35 Inventory Turnover 62.65 42.42 32.25 53.25 Depreciation/Total Assets 0.25 0.014 0.018 0.015 Days’ sales in receivables 113 98 94 130.25 Debt to Equity 0.75 0.85 0.90 0.88 Profit Margin 0.082 0.07 0.06 0.12 Total Asset Turnover 0.54 0.65 0.70 0.40 Quick Ratio 1.028 1.03 1.029 1.031 Current Ratio 1.33 1.21 1.15 1.25 Interest coverage Ratio 0.9 4.375 4.45 4.65 a) What can you say about the firm's overall management in terms of the following? (Be as complete as possible given the above information, but do not use any irrelevant information). (i) Liquidity [2 marks] (ii) Efficiency (operational efficiency) [2