Written Assignment

Exercise 1
You have been given the financial statements of company ABC December 31/12/20XX:

Balance Sheet
ABC
December 31/12/20X1(euros in thousands)
Non current Assets
Net fixed assets

2,400

Current Assets
Inventories
Receivables
Cash
Total current assets

1,250
490
400
2,140

Total assets

4,540

Total shareholders equity

2,210

Long term Liabilities

Long term debt

840

Current Liabilities
Accounts payable
Other current liabilities

1,260
230

Total current liabilities

Total liabilities and equity

1,490
4,540

Income Statement for year Ended December 31/20X1

ABC(euros in thousands)
Sales
Cost of goods sold:
Gross profit
General and administrative expenses
Selling expenses
Earnings before interest and taxes
Less interest expense
Earnings before taxes
Less taxes ( at 40%)
Net Income

4,800
(3,668)
1,132
(432)
(350)
350
(70)
280
(112)
168

Required:
1.

Calculate the liquidity ratios, that is, the current ratio and the quick ratio.

2.

Calculate the inventory turnover ratio, receivables turnover ratio, payable turnover ratio, total
assets turnover and days outstanding.

3.

Calculate the debt/equity ratio and the interest coverage ratio.

4.

Calculate the profit margin on sales, return on total assets, return on equity

5.

Calculate the market value ratios, that is, the price /earnings ratio and the market/ book value
ratio. ABC had an average of 20,000 shares outstanding during 20XX and the stock price on
December 31 20XX was 40 Euros

6.

Use the extended Du Pont equation to determine ABCs return on equity.

7.

Discuss which the main drivers of profitability are (also comment on question 6).

8.

Increasing assets turnover requires some combination of increasing sales and/or decreasing
operating assets. For the latter many companies consider ways to reduce their investment in
working capital (current assets less current liabilities). This can be accomplished by reducing
the level of accounts receivable and inventories, or increasing the level of accounts payable.
a.

Develop a list of suggested actions that you, as a manager, could undertake to

archive the above mentioned objectives.

b.

Describe the marketing implications of reducing receivables and inventories, and the
suppliers implications of delaying payments. How can a company reduce working
capital without negatively impacting its performance?

9. Comment on what would be different in your previous analysis, if you have had available more than
one years of accounting information.
Exercise 2

You have been given the financial statements of company KLM December 31/12/20XX:

Non current Assets

Property Plant
&Equipment
Other assets
Current Assets
Inventories
Receivables
Cash
Prepaid expenses
Total current assets

Total assets

Balance Sheet
KLM
December 31/12/20XX(euros in thousands)
Share capital
Retained Earnings
------

370
6,930

4,200
1,524
-----170
----------

14,600

Long term Liabilities

Long term debt
0ther long term liabilities

---1,440

Total current liabilities

3,800

Total liabilities and equity

----

Income Statement for year Ended December 31/20XX

KLM
(euros in thousands)
Sales
Cost of goods sold:
Gross profit
General and administrative expenses
Selling expenses
Net Income

----(540)
7,460
(235)
(295)
-----

Required:
1.

Use the following ratio data to complete the KLMs balance sheet
a. debt ratio
0.50
b. current ratio 1.30
c. quick ratio
0.40
d. return on sales 0.87

Exercise 3
At the close of trading on Wednesday, September 24, 2014 the shares of Microsoft traded at 45 per
share. Analysts were forecasting a consensus 2.99 in earnings per share for fiscal year 2014 and 3.12
for fiscal year 2015. The firms book value of equity at the end of 2013 was 15,576 million with 2,222
million shares outstanding. A dividend per share of 1.52 is indicated for 2014, with a payout ratio at
the 2014 rate continuing subsequently. Use a 10 percent required return on equity in the calculation for
answering the following questions below:
a.

Forecast residual earnings implied by analysts forecasts for 2014 and 2015.

b.

Suppose a growth rate of 4% for residual earnings after 2015. Then, calculate the intrinsic per
share value implied by the analysts forecasts and this growth rate. Based on your calculations
do you think that the stock was reasonable priced at 45 per share.

c.

What target price would you forecast for the end of 2015.

d.

On September 30, the stock price of Microsoft drops at 34 per share due some bad news
about some products sold by the firm. In reaction to the news, an analyst revised his earnings
per share forecasts downward from the earlier consensus forecast estimates to 2.91 for fiscal
year 2014 and 3.04 for fiscal year 2015. While, this analyst forecasts that net profit margins
and sales to book value ratios are likely to be maintained in the future, he also forecasts a
reduction of 0.3% in the sales growth rate from the earlier growth rate of 4%. Based on these
revised estimates, do you think that the 25% percent drop in price was warranted.

e.

Based on the revised estimates, forecast a target price for the end of 2015. Based on this target
price, what rate of return would an investor expect to earn on the stock by buying it at the 34
per share and holding it until the end of 2015.

f.

Calculate the trade price to book ratio of Microsoft at the closing of the trading on September
30 and the forecast of return on equity (ROCE) implied by the revised earnings forecasts for
2014 and 2015. Why does this firm have such a high P/B and ROCE? Would you expect the
ROCE to eventually equal the required rate of return of 10% in the long run?