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© C. SERVEY & Dr. E. PRINZ Page 1
ESSENTIAL CONCEPTS IN FINANCIAL
ANALYSIS WITH ANSWERS
C SERVEY
FINANCIAL STATEMENTS
FINANCIAL ANALYSIS
STOCK MARKET ANALYSIS
Quiz 1 TO 10
QUESTIONS IN BOLD BLUE WILL BE TREATED IN
CLASS
© C. SERVEY & Dr. E. PRINZ Page 2
Quiz 1
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.
Chapter II.1 - Financial statements
© C. SERVEY & Dr. E. PRINZ Page 3
ESSENTIAL CONCEPTS IN FINANCIAL
ANALYSIS
C SERVEY
Quiz 2
P&L
© C. SERVEY & Dr. E. PRINZ Page 4
Select the correct answer(s).
1) Which is true? The income statement of a firm provides the following information:
a) Revenues and expenses for a given period of time.
b) The amount of cash available at a given date.
c) The amount of tangible assets owned by the firm at a given date.
2) The term “Net profit” corresponds to…
a) Revenues minus cost of goods sold
b) Revenues minus operating expenses.
c) The profit of a firm after interests but before tax.
d) The profit of a firm after tax.
e) The fraction of the profit which is reinvested in the company.
3) Which accounting principle ensures that the treatment of similar events remains the
same from one period to the other?
a) Matching (accruals)
b) Prudence (conservatism)
c) Consistency
d) Going concern
4) Financial analysis identifies four levels of profit in the P&L statement, namely gross
profit, operating profit, ________ and _________. Which two terms are missing?
a) Profit before tax & net profit.
b) Profit after costs of goods sold and net profit.
5) If the 2016 head office’s rent was paid in 2015 which year’s P&L statement will it appear
in?
a) 2014
b) 2015
c) 2016
d) 2017
6) Which one of the following statement is correct? The inclusion of a cost in the P&L
statement depends on whether the resource has been…
a) ordered not whether it has been delivered.
b) paid for not whether it has been delivered.
c) used not whether it has been paid for.
d) paid not whether it has been used.
7) Why is the direct materials costs charge in the P&L statement usually different from
the materials purchases made during the same time period?
a) Because purchases have not yet been paid for.
b) Because the materials costs in the P&L correspond to the stocks consumed
Chapter II.2 –Profit & Loss statement
© C. SERVEY & Dr. E. PRINZ Page 5
8) Cumulated profits not distributed are constitutive of…
a) pre tax profit.
b) retained profits.
c) profit after tax.
d) pre tax pre interest profits.
9) Dividends…
a) are usually reinvested in the company.
b) represent the portion of the net income distributed to shareholders.
c) represent the portion of the net income reinvested into the business.
10) Is the following true or false? Retained profits belong to the owners of the company.
a) True
b) False
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 asset’s 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” IN-
COME STATEMENT
In COGS
Cost of
goods sold
In the EBIT
but below
GROSS
PROFIT
Below the
EBIT
Financial in-
terest
Packaging
costs
© C. SERVEY & Dr. E. PRINZ Page 6
Research costs
Distribution
costs
Marketing
costs
Net profit in
equity invest-
ments
Administrative
costs
Corporate in-
come taxes
ANSWERS
In COGS In the EBIT
but below
GROSS
PROFIT
Below the
EBIT
Financial in-
terest
X
Packaging
costs
X
Research costs X
Distribution
costs
X
Marketing
costs
X
Net profit in
equity invest-
ments
X depends on
whether these
investments
have a finan-
cial or an op-
erating nature
Administrative
costs
X
© C. SERVEY & Dr. E. PRINZ Page 7
Corporate in-
come taxes
X
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 INTE-REST -100
TAXES -70
Determine:
GROSS PROFIT
OPERATING PRO-FIT
NET PROFIT
ANSWERS
Determine:
GROSS PROFIT
400
300
© C. SERVEY & Dr. E. PRINZ Page 8
OPERATING PRO-FIT
NET PROFIT
130
16) If depreciation = 200 m€, what is the EBITDA? ___________________________________
500
© C. SERVEY & Dr. E. PRINZ Page 9
ESSENTIAL CONCEPTS IN FINANCIAL
ANALYSIS
C SERVEY
Quiz 3
BALANCE SHEET
© C. SERVEY & Dr. E. PRINZ Page 10
Select the correct answer(s).
1) Which is NOT true? The balance sheet of a company indicates the following infor-
mation:
a) The book value of the company at a given date.
b) The book value of the assets of the company at a given date.
c) The market value of the company’s shares at a given date.
2) What is the value of a fixed asset in the balance sheet?
a) An estimate of the market value
b) The replacement cost
c) The original cost less depreciation to date
d) In most cases answer c) and sometimes a) (e.g. IFRS balance sheet when the
revaluation model is used in IAS 36, IAS 38 or IAS 40)
3) What is historical cost?
a) Average second hand value
b) Market value
c) Cost of replacement
d) Cost when bought
4) Which ASSETS of the balance sheet do not belong to current assets?
a) Retained earnings
b) Borrowings
c) Accounts payables
d) Inventory
e) Intangible long-term assets
f) Accounts receivables.
g) Cash & cash equivalents
h) Corporate bonds emitted by the firm
5) If a firm looks for long-term financing, which of the following sources can be mobilized?
a) Equity
b) Inventories
c) Non current financial debt
d) Bonds
e) Short-term borrowings
f) Non current assets
6) Where can the accounting value of a company’s payables be found?
a) Within the category “Non current assets”
b) On the right side of the balance sheet.
c) In the profit and loss statement.
d) Within the category “Equity”.
e) Within the category “Current liabilities”.
Chapter II.3 –Balance Sheet
© C. SERVEY & Dr. E. PRINZ Page 11
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.
8) Which of the following is not normally an interest bearing item?
a) Short term loans
b) Long term loans
c) Creditors
d) Debtors
9) Under which category would you record goods finished but not yet sold?
a) Retained earnings
b) Loans
c) Current assets
d) Non current assets
e) Suppliers’ 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
© C. SERVEY & Dr. E. PRINZ Page 12
Which is true?
c. This is a traditional balance sheet
a. This is a capital employed balance sheet
© C. SERVEY & Dr. E. PRINZ Page 13
14) Based on the following balance sheet:
b. Determine if the business is liquid
c. Determine if the business is solvent
d. Determine the working capital
e. Determine the capital employed
FIXED ASSETS 100 SHARE CAPITAL 40
INVENTORIES 20 RETAINED EARNINGS 60
ACCOUNTS RECEIVABLES 20 LT PROVISIONS 33
CASH AND EQUIVALENTS 53 ACCOUNTS PAYABLES 30
LT FINANCIAL DEBT 10
ST FINANCIAL DEBT 20
TOTAL ASSETS 193 EQUITY & LIABILITIES 193
© C. SERVEY & Dr. E. PRINZ Page 14
ANSWERS
Based on the following balance sheet:
a. Determine if the business is liquid: yes Current assets – current liabilities = 93 -50 = 43m€
b. Determine if the business is solvent: yes assets – liabilities = 193 – 93 = 100m€ = net equity
c. Determine the working capital: inventories + accounts receivables – A Payables = 10m€
d. Determine the capital employed: 193 (assets) – 53 (cash) – 33 (LT provisions) -30 (paya-
bles) = 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
EXERCISE ON CAPITAL EMPLOYED BALANCE SHEET
Based on the following balance sheets establish the CAPITAL EMPLOYED BALANCE SHEET
All amounts in € millions
© C. SERVEY & Dr. E. PRINZ Page 15
ANSWERS
Step 1 distinguish between operating items and financial items
All amounts in € millions
Step 2 determine capital employed
Step 3 present the capital employed balance sheet
© C. SERVEY & Dr. E. PRINZ Page 16
© C. SERVEY & Dr. E. PRINZ Page 17
ESSENTIAL CONCEPTS IN FINANCIAL
ANALYSIS
C SERVEY
Quiz 4
CASH FLOW STATEMENT
© C. SERVEY & Dr. E. PRINZ Page 18
Select the correct answer(s).
1) Which is NOT true? The Cash Flow Statement usually indicates…
a. the net cash generated by operating activities.
b. the net cash generated by investing activities.
c. the amount of dividends paid out to shareholders.
d. the gross return of a company.
e. the net cash generated by financing activities.
2) Is the following true or false? A company that is profitable will always generate a posi-
tive cash flow.
a) True
b) False
3) Which of the following economic events generally do not affect a firm’s cash level?
a) A Share issue.
b) Recording of annual depreciation of corporate assets.
c) Sale of inventories against cash.
d) Purchase of raw material on account.
e) Sale of goods and services on account.
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
Chapter II.4 –Cash Flow statement
© C. SERVEY & Dr. E. PRINZ Page 19
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
7) Which of the following will have a favorable impact on cash flow?
a) Delay payments to creditors
b) Reduce the debtor collection period
c) Increase depreciation rates
d) Increase spending on fixed assets
8) Is the following true or false: All other things being equal an increase in fixed assets
triggers an increase in cash flow.
a) True
b) False
16) Should the company be able to spend the operating cash flow surplus as it likes?
a) Yes, this is up to the managers
b) No the stakeholders such as the lenders and shareholders will demand a com-
pensation to keep on financing the business
17) Determine if each of the following items have an influence on the company’s cash position ap-
pearing 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 Page 20
Yes / No
i) Repayment of medium-term loan
Yes / No
j) Financial expenses
yes / no
EXERCISE 1
ANSWERS
EXERCISE 2 Based on the following balance sheets
© C. SERVEY & Dr. E. PRINZ Page 21
And the following P&L
Determine using the following formulas:
The net cash from operating activities
The net cash from investing activities
The net cash from financing activities
The net cash flow
© C. SERVEY & Dr. E. PRINZ Page 22
© C. SERVEY & Dr. E. PRINZ Page 23
ANSWERS
© C. SERVEY & Dr. E. PRINZ Page 24
ESSENTIAL CONCEPTS IN FINANCIAL
ANALYSIS
C SERVEY
Quiz 5, 6 and 7
EFFICIENCY
PROFITABILITY ANALYSIS
ROCE & EVA
© C. SERVEY & Dr. E. PRINZ Page 25
Chapter III.2 - Profitability analysis Select the correct answer(s).
1) Profit margin can be considered…
a) as a projected value of the business’s operating profit.
b) as a measure of a business’s ability to generate operating profit from its sales.
c) as a measure of the business’s profits.
2) Which of the following elements would not concern a manager in charge of the operating side
of the business?
a) The tax liability on the achieved profits
b) Variable costs
c) The interest to be paid to the bank on the a contracted financial liability (loan)
3) Your major competitor has a profit margin of 5 % and you anticipate your profit margin to be
2.5 %. If you expect your absolute profit to be the same as your competitor’s, how much do you
have to sell? (Assumption: no fixed costs)
a) The same quantity than your competitor
b) Half as much
c) Twice as much
d) Five times as much
e) Ten times as much
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) 5 %
b) 10 %
c) 15 %
d) 20 %
e) 25 %
f) 30 %
5) Which is not true? An increase of the operating profit margin of a company…
a) is automatically followed by a higher net profit margin.
b) indicates that a firm’s core business has become more profitable.
c) Is possible even with a decreasing gross profit margin.
6) Is the following true or false: the EBIT margin is always higher than the EBITDA margin
a) True
b) False
© C. SERVEY & Dr. E. PRINZ Page 26
Chapter III.3 - Efficiency analysis Select the correct answer(s). 1) Consider the following data and calculate the asset turnover of the company: Turnover =
100, Net assets = 10
ASSET TO = 100/10 = 10
2) Is the following true: a high Fixed Asset turnover always means that a small amount of
money has been invested in the business in CAPEX
a) True
b) False
3) Assume that the capital employed in one company is 1 m € and that the asset turnover is 6.
Are the sales for this business:
a) Over 4 m€
b) Under 4 m €
4) Is the following true: ASSET TURNOVER = Turnover/Capital employed = Sales/Net assets
a) True
b) False
5) Is the following true: the only way to improve Asset Tturnover is to increase turnover
a) True
b) False
6) Is the following true: if the following business would sell cash rather than on credit, its asset
turnover would increase from 1 to 1,5 (stocks 200 Debtors 100 creditors 100 sales 300)
a) True
b) False
7) Which of these will NOT increase a business’s asset turnover:
a) Increasing production which is then sold
b) Avoiding the purchase of new fixed assets by working existing assets to greater capacity
c) Increasing production which goes into stock
d) Selling off Fixed assets and replacing their production by working existing assets to
greater capacity
e) Depreciating assets quicker and therefore writing them down to smaller values
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
9) Which is false? asset turnover :
YEAR 1 YEAR 2
TURNOVER 500 550
STOCK 50 50,5
© C. SERVEY & Dr. E. PRINZ Page 27
a) Will look good if a company has sold fixed assets
b) Measures efficiency of asset utilization in a company
c) Is not industry sensitive
Chapter III.4 – RoCE & EVA Select the correct answer(s).
1) Calculate ROCE expressed as a %: OP = 10 m Capital Employed = 20 m ROCE = 50%
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
5) ROCE is calculated using which two elements:
a) Gross Profit
b) Operating profit
c) Net assets
d) Asset turnover
e) Capital Employed
f) Sales
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 busi-
ness
a) True
b) False
Chapter III.4 continued– EVA Select the correct answer(s).
1) Which of the following is true? EVA is computed as:
a) The after tax Operating Profit minus a financing charge amounting to Capital Employed
times the after tax cost of debt
b) The after tax Operating Profit minus a financing charge amounting to Capital Employed
times the WACC
© C. SERVEY & Dr. E. PRINZ Page 28
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 Em-
ployed
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
8) Is the following true?
In the long turn, economic indicators such as the EVA are easier to manipulate than ac-
counting indicators such as the ROCE
© C. SERVEY & Dr. E. PRINZ Page 29
a) True
b) False
© C. SERVEY & Dr. E. PRINZ Page 30
FINANCIAL ANALYSIS
ALL FIGURES IN K€
YEAR 1 YEAR 2
FIXED ASSETS 2 405 2 632
CURRENT OP ASSETS 1 447 1 863
Stocks 848 1 251
debtors 568 594
tax receivable 31 18
CURRENT OP LIABILITIES 862 997
creditors 740 862
tax owing 74 82
Other ST operating liability 48 53
NET ASSETS = (FIXED ASSETS + NET
CURRENT OPERATING ASSETS ) 2 990 3 498
Share capital 99 99
Retained profits 1 821 1 963
SHAREHOLDERS FUNDS 1 920 2 062
Loan 1 070 1 436
CAPITAL EMPLOYED 2 990 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. The OPERATING MARGIN
2. The WORKING CAPITAL
3. The ASSET TURNOVER
4. The FIXED ASSET TURNOVER
5. The WORKING CAPITAL TURNOVER
6. INVENTORIES (STOCKS) EXPRESSED IN DAYS OF SALES
© C. SERVEY & Dr. E. PRINZ Page 31
7. ACCOUNTS RECEIVABLES (DEBTORS) EXPRESSED IN DAYS OF SALES
8. ACCOUNTS PAYABLES (CREDITORS) EXPRESSED IN DAYS OF SALES
9. The ROCE
10. The ROE
11. The EVA (WACC = 9.5% and tax rate = 38%)
12. The gearing (NET DEBT/EQUITY)
Year 1 Year 2
OPERATING MARGIN
WORKING CAPITAL
ASSET TURNOVER
FIXED ASSET TURNOVER
WORKING CAPITAL
TURNOVER
INVENTORIES (STOCKS)
EXPRESSED IN DAYS OF
SALES
ACCOUNTS RECEIVA-
BLES (DEBTORS) EX-
PRESSED IN DAYS OF
SALES
ACCOUNTS PAYABLES
(CREDITORS) EXPRESSED
IN DAYS OF SALES
© C. SERVEY & Dr. E. PRINZ Page 32
ROCE
ROE
EVA
gearing: (net debt/equity)
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
FIXED ASSET TURNOVER
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
© C. SERVEY & Dr. E. PRINZ Page 33
ACCOUNTS RECEIVA-
BLES (DEBTORS) EX-
PRESSED IN DAYS OF
SALES
568/7828*360= 26
594/9790*360= 22
ACCOUNTS PAYABLES
(CREDITORS) EX-
PRESSED 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€
gearing: (net debt/equity)
1070/1920 = 56% 1436/2062 = 70%
© C. SERVEY & Dr. E. PRINZ Page 34
FIN ANALYSIS EXERCISE
Given the following figures (page 9), please calculate for each year, the following financial indica-
tors for your business (indicate the numerator & denominator for each ratio and the ratio itself)
Operating Profit Margin Year 1 = __________________
Operating Profit Margin Year 2 = __________________
Is it improving, deteriorating or staying the same?
Please calculate the following WORKING CAPITAL indicators:
Number of days of sales held in inventories, year 1 = _________________
Number of days of sales held in inventories, year 2 = _________________
Is it improving, deteriorating or staying the same?
Number of days of sales outstanding in accounts receivables year 1 = __________________
Number of days of sales outstanding in accounts receivables year 2 = __________________
Is it improving, deteriorating or staying the same?
Number of days of sales in accounts payables year 1 = _________________________
Number of days of sales in accounts payables year 2 = _________________________
Is it improving, deteriorating or staying the same?
Please calculate the:
Net Asset Turnover Year 1 = _____________________
Net Asset Turnover Year 2 = _____________________
Is it improving, deteriorating or staying the same?
Please calculate directly the:
© C. SERVEY & Dr. E. PRINZ Page 35
RoCE Year 1 =______________________
RoCE Year 2 = ______________________
Please calculate indirectly the RoCE using other ratios calculated here above
RoCE Year 1 =______________________
RoCE Year 2 = ______________________
How do you explain the change in RoCE?
If the WACC remained at 7% in year 1 and 2 please determine for each calendar year THE ECO-
NOMIC VALUE ADDED (EVA). Assume that the tax rate is 23%
EVA year 1 = __________________
EVA year 2 = __________________
Please calculate the gearing ratio: NET DEBT/EQUITY
Gearing year 1= __________________
Gearing year 2 = __________________
Please calculate the ROE
ROE year 1 = ________________________
ROE year 2 = ________________________
Is it improving, deteriorating or staying the same?
© C. SERVEY & Dr. E. PRINZ Page 36
ANSWERS
© C. SERVEY & Dr. E. PRINZ Page 37
© C. SERVEY & Dr. E. PRINZ Page 38
ROE = after tax ROCE + D/E *
(after tax ROCE – after tax In-
terest rate)
© C. SERVEY & Dr. E. PRINZ Page 39
ESSENTIAL CONCEPTS IN FINANCIAL
ANALYSIS
C SERVEY
Quiz 8, 9, 10
Risk Analysis, Key Concepts for
Shares, Market Multiples
© C. SERVEY & Dr. E. PRINZ Page 40
Chapter III.5 – Risk Analysis Select the correct answer(s).
1) Fill in the missing word: the quick ratio is computed as follows:
[ (CURRENT ASSETS - _inventories_________________) / CURRENT LIABILITIES ]
and needs to be higher than one to ensure liquidity
2) The interest cover ratio expresses either the operating profit or the operating cash flow in years of financial
interest. An interest cover of 4 means
a) That financial interest represents 25% of the operating profit or of the operating cash flow
b) That the operating cash flow or the operating profit represent 4 years of financial interest
c) That financial interest represents 4 years of operating profit or of operating cash flow
d) 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 op-
posite. 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
Chapter IV.1 – Key Concepts for Shares Select the correct answer(s).
1) Is the following true or false?
A share is a security that will be necessarily redeemed at a certain point
a) True
b) False
2) Is the following true or false?
The market value of equity = (ENTERPRISE VALUE – MARKET VALUE OF DEBT)
c) True
d) False
3) Is the following true or false?
A share is a riskier security than a bond
a) True
b) False
4) Which statement is true? Earnings Per Share (EPS) is equal to
a) Net earnings / number of shares
b) Net earnings group share / number of shares
5) Which statement is true?
Dividend yield =
a) DISTRIBUTED DIVIDEND / MARKET CAPITALIZATION
b) DIVIDEND PER SHARE / SHARE PRICE
c) DIVIDEND / NET EARNINGS GROUP SHARE
d) Answer a and c
e) Answer a and b
6) Which statement is true? The dividend payout ratio is equal to
a) DISTRIBUTED DIVIDEND / MARKET CAPITALIZATION
b) DISTRIBUTED DIVIDEND / NET EARNINGS TOTAL
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c) DISTRIBUTED DIVIDEND / NET EARNINGSS GROUP SHARE (previous year)
7) Is the following true or false?
The higher the dividend payout ratio, the lower future business growth is going to be
a) True
b) False
8) Is the following true or false?
A stock is deemed to be liquid when you can buy or sell a large number of shares without too
great an influence on the price.
a) True
b) False
9) Is the following true or false?
If the price to Book Ratio (PBR) > 1 then RoE > Cost of Equity Ke
a) True
b) False
10) Which is true?
a) A business with a high payout ratio (close to 100%) is a growth stock since a high distri-
bution indicates that managers are confident about the future growth potential of the
business.
b) A growth stock is a business where only a small portion of the earnings is distributed, the
rest being re invested in the business in order to foster sales growth.
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)
13) Is the following true or false?
A share usually gives a voting right to the shareholder
a) True
b) False
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14) Is the following true or false?
It is possible for a share to give no voting right
a) True
b) False
15) Is the following true or false: EPS measures the value created per share in a given year
a) True
b) False
16) Which is true
a) Gross dividend = dividend received by the shareholder whereas net dividend = dividend –
taxes on dividend paid by the shareholder
b) Gross dividend = dividend received by the shareholder plus tax credit (such as withholding tax
levied abroad)
17) Which statement is true? The dividend yield is based on
a) Market values
b) Accounting values
18) Is the following true or false?
The book equity per share = net equity / number of shares and is equal to the amount invested by
the current shareholders to acquire one share in the company
a) True
b) False
19) Is the following true or false?
If a stock is publicly traded then the free float necessarily represents 100% of the shares
a) True
b) False
Chapter IV.2 – Market Multiples Select the correct answer(s). 1) Which of the following is true?
The EBIT multiple is equal to
a) Enterprise value / EBIT
b) Market capitalization / EBIT
c) Answer a and b
2) The main drivers of the EBIT multiple are:
a) The future EBIT 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)
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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 business’s 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 competitor’s 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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ANSWERS
ROE
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