FINANCIAL STATEMENTS
FINANCIAL ANALYSIS
STOCK MARKET ANALYSIS
Quiz 1 TO 10
QUESTIONS IN BOLD BLUE WILL BE TREATED IN
CLASS
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Quiz 1
Chapter II.1 - Financial statements
FINANCIAL STATEMENTS
Select the correct answer(s).
1) A corporation belongs to
a) its managers.
b) its shareholders.
c) its board directors.
d) its employees.
2) Which financial statement is the first source of answer to the following question: have
we made a profit?
a) The attachment to the accounts (notes)
b) The cash flow statement
c) The directors report
d) The profit and loss statement
e) The balance sheet
f) The statement of changes in equity
2) Why was it necessary to develop financial standards to follow in the preparation of the
annual financial accounts?
a) New anti fraud legislation
b) Need for greater profitability
c) Increasing division between ownership and management of the business
d) Growing and faster computer technology
3) A person who certifies that the books have been prepared following agreed standards
and that the accounts represent a true and fair view of the business is a
a) finance director
b) managing director
c) management accountant
d) statutory auditor
4) Is the following true: Management accountants look at the past as well as at the future
(analyze past periods and prepare budgets and business plans for future periods)?
a) Not true
b) True
5) Financial statements provide
a) Information to a variety of stakeholders about the (past) financial performance
of a company.
b) the current value of the firm on financial markets.
C. SERVEY & Dr. E. PRINZ
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Quiz 2
P&L
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11) Which of the following charges is the most likely to involve some judgment form the
accountants?
a) Labor costs
b) Bad debt
c) Advertising
12) How would you best define depreciation?
a) An allowance from the taxman.
b) The setting aside of cash for replacement.
c) The spreading of the cost over the estimated life of the asset.
d) The assets estimated loss of value since the purchase.
13) EBITDA can be considered as
a) the cash generated by the operating cycle.
b) the cash generated by the operating and investing cycle.
c) the profit generated by the operating cycle.
d) the profit generated by the operating and investing cycle.
14) INDICATE WHERE THE FOLLOWING ITEMS APPEAR IN A BY FUNCTION INCOME STATEMENT
In COGS
Cost of
goods sold
In the EBIT
but below
GROSS
PROFIT
Below the
EBIT
Financial interest
Packaging
costs
C. SERVEY & Dr. E. PRINZ
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Research costs
Distribution
costs
Marketing
costs
Net profit in
equity investments
Administrative
costs
Corporate income taxes
ANSWERS
In COGS
In the EBIT
but below
GROSS
PROFIT
Financial interest
Packaging
costs
Research costs
Distribution
costs
Marketing
costs
X
X depends on
whether these
investments
have a financial or an operating nature
Net profit in
equity investments
Administrative
costs
C. SERVEY & Dr. E. PRINZ
Below the
EBIT
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15) Based on the following amounts, determine the GROSS PROFIT, the OPERATING PROFIT,
the NET PROFIT
in m
SALES
1000
COGS
-600
SG&A
-100
FINANCIAL INTEREST
-100
TAXES
-70
Determine:
GROSS PROFIT
OPERATING PROFIT
NET PROFIT
ANSWERS
Determine:
400
GROSS PROFIT
300
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OPERATING PROFIT
130
NET PROFIT
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Quiz 3
BALANCE SHEET
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7) In a balance sheet total assets equal the sum of __________& ___________. The two
missing terms are:
a) equity and dividends.
b) dividends and current liabilities.
c) Equity and liabilities.
d) cash and liabilities.
10) Fill in the missing word(s): In the financial analysis format of the balance sheet, the
capital employed equals __________.
a) Fixed assets and working capital.
b) Equity + net financial liabilities
c) Working capital.
11) Which of the following terms are the main components of the working capital?
a) Fixed assets + debtors + creditors
b) Share capital + fixed assets and inventories
c) Inventory + accounts receivables and - accounts payables
12) What is the time span on a normal balance sheet?
a) 3 months
b) 3 years
c) One year
d) A period defined by the company
e) None of these
13) Which is true?
a. This is a traditional balance sheet
b. This is a capital employed balance sheet
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Which is true?
c. This is a traditional balance sheet
a. This is a capital employed balance sheet
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FIXED ASSETS
100
SHARE CAPITAL
40
INVENTORIES
20
RETAINED EARNINGS
60
ACCOUNTS RECEIVABLES
20
LT PROVISIONS
33
53
ACCOUNTS PAYABLES
30
LT FINANCIAL DEBT
10
ST FINANCIAL DEBT
20
TOTAL ASSETS
193
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193
ANSWERS
Based on the following balance sheet:
Determine if the business is liquid: yes Current assets current liabilities = 93 -50 = 43m
Determine if the business is solvent: yes assets liabilities = 193 93 = 100m = net equity
Determine the working capital: inventories + accounts receivables A Payables = 10m
Determine the capital employed: 193 (assets) 53 (cash) 33 (LT provisions) -30 (payables) = 77 m
It is also the net operating assets i.e. operating assets operating liabilities = (100 33) net
long term op assets + 10 m of working capital
a.
b.
c.
d.
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ANSWERS
Step 1 distinguish between operating items and financial items
All amounts in millions
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Quiz 4
CASH FLOW STATEMENT
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4) Is the following true or false: The cash generated in one period will always be equal to
the retained profit of that period.
a) True
b) False
5) Turnover, which is still to be collected appears as:
a) Dividends
b) Debtors (accounts receivables)
c) Retained earnings
d) Creditors (accounts payables)
e) Unsold finished goods
6) A feature of a supermarket chain such as Tesco or Ahold is a very fast rotation of food
stocks (six days), cash payments by customers, long supplier credit periods (60 days)
and very low administrative costs. Will the operating cycle generate cash requirements
or a cash surplus?
a) cash requirements
b) cash surplus
7) Fill in the missing term: Operating cash flow = operating income - change in working
capital + _________________.
a) Dividends
b) Depreciation
C. SERVEY & Dr. E. PRINZ
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c) Current assets
d) Cash equivalents
8) Is the following true or false: All other things being equal an increase in working capital
triggers an increase in cash flow.
a) True
b) False
6) Is the following true or false? Cash flow is generated only from profits.
a) False
b) True
17) Determine if each of the following items have an influence on the companys cash position appearing in the cash flow statement.
a) Depreciation and amortization
Yes / No
b) Corporate income tax
yes / No
c) Capital increase through cash contribution
yes / No
d) Cash purchase of fixed assets
Yes / No
e) Recognition and payment of salaries
Yes / No
f) Disposal for cash of an asset at its book value
Yes / No
g) Sale of goods on credit
Yes / No
h) Payment for these goods
C. SERVEY & Dr. E. PRINZ
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Yes / No
i) Repayment of medium-term loan
Yes / No
j) Financial expenses
yes / no
EXERCISE 1
ANSWERS
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ANSWERS
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Quiz 5, 6 and 7
EFFICIENCY
PROFITABILITY ANALYSIS
ROCE & EVA
C. SERVEY & Dr. E. PRINZ
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4) Assume the following: 25,000 items are produced and sold. The unit selling price is 20 . Unit
costs of goods sold is 12.50 . Marketing and administration costs are 87,500 . What will be the
operating margin of the business?
a)
b)
c)
d)
e)
f)
5%
10 %
15 %
20 %
25 %
30 %
True
False
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8) Given the following data, the number of times that the stock has been turned over in year 2
as compared to year 1 has:
a) Increased
b) Decreased
c) Stayed the same
YEAR 1
YEAR 2
TURNOVER
500
550
STOCK
50
50,5
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2) Where do you get the information needed to calculate the ROCE of your business?
a) Balance sheet
b) P&L
c) CF
3) Fill in the missing words: ROCE = operating profit /
a) Equity
b) Capital Employed
c) Sales
d) COGS
4) Is the following true or false: ROCE is the link between profit and the assets used to run the
business
a) True
b) False
6) Is the following true or false: financing charges are excluded from the numerator of the
ROCE ratio because this ratio is designed to measure the operating performance of the business
a) True
b) False
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c) The difference between the ROCE and the WACC, times the Capital Employed
d) The difference between the after tax ROCE and the WACC, times the Capital Employed
e) Answer a and d
f) Answer b and c
g) Answer a and c
h) Answer b and d
2) Is the following true? If A and B are two businesses with the same WACC, then the business
with the higher after tax RoCE will also necessarily be the business delivering the higher
EVA.
a) True
b) False
3) Is the following true? Provided that the capital employed is positive, a business delivering an
after tax ROCE which is higher than the WACC, will generate a positive amount of EVA
a) True
b) False
4) Which of the following is true?
a) ROCE is a pure accounting measure
b) EVA is a pure accounting measure
c) EVA takes the risk into account
d) One of the advantages of the EVA, is that it is not a pure accounting measure
e) Answer c and d
f) Answer a c and d
g) Answer b c and d
h) Answer b and c
5) Is the following true?
In businesses, which have adopted EVA instead of ROCE as the financial performance measure,
managers tend to be less reluctant to invest into new projects, and this is crucial for future business
growth
a) True
b) False
6) Is the following true?
Managers who receive an EVA target can consider it as a target of net profit since EVA is the after
tax operating profit minus a financing charge.
a) True
b) False
7) Is the following true?
CSV (Created Shareholder Value) measures the value creation for a shareholder (dividend
and share price appreciation) and compares it to the expected shareholder return (share
price times cost of equity)
a) True
b) False
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a) True
b) False
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FINANCIAL ANALYSIS
ALL FIGURES IN K
FIXED ASSETS
CURRENT OP ASSETS
Stocks
debtors
tax receivable
CURRENT OP LIABILITIES
creditors
tax owing
Other ST operating liability
NET ASSETS = (FIXED ASSETS + NET
CURRENT OPERATING ASSETS )
Share capital
Retained profits
SHAREHOLDERS FUNDS
Loan
CAPITAL EMPLOYED
YEAR 1
YEAR 2
2 405
2 632
1 447
848
568
31
1 863
1 251
594
18
862
740
74
48
997
862
82
53
2 990
3 498
99
1 821
1 920
1 070
2 990
99
1 963
2 062
1 436
3 498
DETERMINE each of the following amounts/percentages and indicate for each measure whether the
situation is improving or deteriorating (favorable or unfavorable trend) over the period:
1.
2.
3.
4.
5.
6.
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7.
8.
9.
10.
11.
12.
Year 1
Year 2
OPERATING MARGIN
WORKING CAPITAL
ASSET TURNOVER
WORKING CAPITAL
TURNOVER
INVENTORIES (STOCKS)
EXPRESSED IN DAYS OF
SALES
ACCOUNTS PAYABLES
(CREDITORS) EXPRESSED
IN DAYS OF SALES
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ROCE
ROE
EVA
ANSWERS
Year 1
Year 2
OPERATING MARGIN
478/7828= 6.1%
541/9790= 5.5%
WORKING CAPITAL
1447-862= 585 k
1863-997 = 866 k
ASSET TURNOVER
7828/2990 = 2.62
9790/3498 = 2.8
7828/2405 = 3.25
9790/2632 = 3.72
WORKING CAPITAL
TURNOVER
7828/585 = 13.38
9790/866 = 11.3
INVENTORIES (STOCKS)
EXPRESSED IN DAYS OF
SALES
848/7828*360= 39
1251/9790*360= 46
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568/7828*360= 26
594/9790*360= 22
ACCOUNTS PAYABLES
(CREDITORS) EXPRESSED IN DAYS OF
SALES
740/7828*360= 34
862/9790*360= 32
ROCE
478/2990=16%
541/3498 = 15.5%
ROE
263/1920 = 13.7%
291/2062 = 14.1%
EVA
((16%*(1-38%))-9.5%)*2990 =
12.31 k
((15.5%)*(1-38%)9.5%)*3448=3.11 k
1070/1920 = 56%
1436/2062 = 70%
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If the WACC remained at 7% in year 1 and 2 please determine for each calendar year THE ECONOMIC VALUE ADDED (EVA). Assume that the tax rate is 23%
EVA year 1 = __________________
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ANSWERS
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Quiz 8, 9, 10
Risk Analysis, Key Concepts for
Shares, Market Multiples
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That financial interest represents 25% of the operating profit or of the operating cash flow
That the operating cash flow or the operating profit represent 4 years of financial interest
That financial interest represents 4 years of operating profit or of operating cash flow
Answer a and b
3) Is the following true or false: The closer the firm is to its break-even point, the more sensitive its profits to
changes in sales.
a) True
b) False
4) Fill in the missing term: the net debt ratio = (1- the equity ratio) and is computed as:
(________net debt__ / Capital Employed)
5) Is the following true or false: an increase in the relative weight of net financial debt changes the return
on capital employed
a) True
b) False
6) Is the following true or false: low profitability is NOT due to high indebtedness, the causality being the opposite. Why?
a) True
b) False
7) Is the following true or false: if there is no corporate income tax, the leverage effect of debt does not exist?
a) True
b) False
OTHER QUESTIONS
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8) Is the following true or false: the higher the proportion of fixed costs in the total costs, the riskier the business (and
the lower the quality of earnings), since the operating profit is then highly sensitive to any negative change in
sales
a) True
b) False
9) Is the following true or false: the ability of a firm to repay its debts is first of all measured by its ability to
generate free cash flows?
a) True
b) False
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OTHER QUESTIONS
11) Is the following true or false?
The revenue flows of a share are certain: every share generates dividends?
a) True
b) False
12) Fill in the missing word: (SHARE PRICE = _market capitalization___________ / NUMBER OF
SHARES)
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e) Answer a b and c
f) Answer a b and d
3) The PE ratio is equal to:
a) Market capitalization / EBIT
b) Enterprise value / net earnings
c) Enterprise value / net earnings group share
d) Market capitalization / net earnings group share
4) The main drivers of the PER multiple are:
a) The future EPS growth
b) The interest rate (the higher the interest rate, the lower the EBIT multiple)
c) The operational and financial risk (the higher the risk the lower the multiple)
d) The operational risk (the higher the risk the lower the multiple)
e) Answer a b and c
f) Answer a b and d
5) Which of the following is true?
To value a share you can use the EBIT multiple of the main competitor (provided his operational
risk is comparable), apply it to the businesss EBIT and
a) divide it by the number of shares.
b) Once you have determined the Enterprise Value you must deduct the net financial debt to
determine the Market Capitalization. You can then divide it by the number of shares.
6) Which of the following is true? In a valuation exercise you can use the main competitors PER
only provided
a) The EPS growth, the operational risk are comparable
b) The EPS growth, the operational and financial risk are comparable
7) Is the following true or false?
1/PER = earnings group share / market capitalization. If the PER is high then 1/ PER is low and is
usually lower than the required equity rate of return
e) True
f) False
EXERCISES ON SHARES (CHAPTER 27 VERNIMMEN TEXBOOK)
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ROE
ANSWERS
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