Financial Statement Analysis course final exam. in the attachments you are gonna find instructions and all the slides from our class you need to answer the questions.

Instructions:
1. This exam is to be completed on your own. Do not work with other students.
2. There should be no external references in your answers. Critical thought questions are specific to
this situation and cannot be answered by referring to the work of others. I am looking for your
thoughts.
3. Show all calculations. Presentation, grammar, and spelling will affect your score.
4. You may submit up to two files: one in Word and one in Excel. You are not required to submit two
files. Clearly label each answer.
5. Completed finals are to be submitted via Moodle NO LATER THAN 7pm, April 23. Exams will have
20% deducted for each hour or part of an hour that they are late. Submissions will not be accepted
after midnight.

1. When completing a valuation, one generally assumes a constant capital structure. How does this
assumption affect shareholders? Is this assumption realistic? What is the alternative to maintaining a
constant capital structure, and what effect would this have on your valuation? (8 marks)
2. In your opinion, are North American capital markets efficient? (8 marks)
3. ABC Company had the following earnings per share:
Fiscal Year
Earnings Per Share

2010
$0.78

2011
$0.80

2012
$0.79

2013
$0.78

2014
$0.82

a. Provide the formula for the random walk model of earnings. Predict the EPS for 2015. (2 marks)
b. Provide the formula for the mean-reverting model of earnings assuming a five year time span
and predict the EPS for 2015. (2 marks)
c. What is the forecasted EPS in 2016 under each model? (2 marks)
d. What are the advantages and disadvantages of each method? (4 marks)
4. Billings Company’s financial leverage is 1.5. Its net income is $1 million and has $5 million in
shareholders’ equity.
a. What is its ROE? (2 marks)
b. Explain your calculation and what the value of each component means. (3 marks)
5. Quindora Company had abnormal earnings of $25,000 in 2014. It is forecasted to have 5% growth in
these earnings for five years, followed by indefinite growth of 3%. Cost of equity is 6%.
a.
b.
c.
d.

What is the terminal value of earnings as of January 1, 2015? (4 marks)
What is the terminal value if there is no growth after the fifth year? (2 marks)
What is the terminal value if growth remains at 5% indefinitely? (2 marks)
Without knowing anything else about Quindora company, which growth amount would you
choose for your forecast. Why? What are the implications of each option? (4 marks)

6. The following table shows financial data for two companies. One is a pharmaceutical company, and
the other is a manufacturer in a mature industry. Identify which is which and explain your decision
using all three measures. (7 marks)
Sales growth rate
NOPAT margin
LT assets to sales

Company X
2.00%
3.00%
60.00%

Company Y
6.00%
15.00%
21.00%

7. You are the auditor of a medium-sized contract manufacturer. While it has not been announced,
you know that a number of managers are considering a leveraged buyout of the company. How
would this affect your audit planning? (8 marks)

8. The market risk premium is 6%, the risk free rate is 3.4%, and XYZ company’s cost of equity is 10.6%.
a. What is XYZ’s common equity beta? (2 marks)
b. You are completing a valuation of XYZ, and it has adjusted its capital structure from a debt to
capital ratio of 30% to 35%. Without providing calculations, explain how this would affect your
forecast. (3 marks)
9. Are private investors that use E*Trade or other online discount brokerages more likely to use
fundamental or technical analysis? Why? (8 marks)
10. PFN Technologies is a successful software developer with an ROE of 22% and a book value of equity
of $12.8 million. Its cost of equity is 9%. Assuming a PE multiple of 3.6:
a. What is the market’s expected growth rate for the company? (2 marks)
b. If the market changes its growth expectations to 3.5%, what would the price per share be if
there are 25.6 million shares outstanding? (1 mark)
11. Huska Company is currently valued at $45 in the market. Agnew Company is considering acquiring
Huska and believes it can add value in two ways: $12 of value can be added through better working
capital management, and an additional $8 of value can added using proprietary technology. In a
competitive bidding contest, how much of this additional value will the acquirer have to pay out to
the target’s shareholders to emerge as the winner? Explain. (8 marks)
12. You are a major shareholder and director of a large oil and gas company with significant cash
reserves. Management has proposed diversifying due to the severe drop in the price of crude and
presented an investment opportunity in a pharmaceutical start-up. Would you approve the
investment? (8 marks)
13. Filimon Manufacturing has an Altman Z-score of 10.0779 for the year 2014. It’s Xn values and some
financial data are as follows:
X1
???

X2
0.1075

X3
0.1780

Net Working Capital
Total Assets
Retained Earnings
EBIT
BV Total Liabilities
Sales
Market Value of Equity

X4
12.0

X5
1.3000

???
$2,000,000
$215,000
$356,000
$410,000
???
$4,920,000.00

a. What were sales for 2014? (2 marks)
b. What was net working capital for 2014? (3 marks)
c. Based on the Altman Z-score alone, credit distress is not predicted for Filimon. Still, the very
large net working capital amount could be cause for concern. What might cause this? In what
scenarios could this large amount be positive for the company? (5 marks)