Financial Statement Analysis

FINANCIAL STATEMENT
ANALYSIS

Table of Contents
INTRPODUCTION...............................................................................................................................3
Question 1.............................................................................................................................................3
Recommended income statement......................................................................................................3
Balance sheet.....................................................................................................................................3
Free cash flow...................................................................................................................................4
Potential benchmark for analysing company performance................................................................4
QUESTION 2........................................................................................................................................5
a) Calculation of the value of the firm at the end of 2020..................................................................5
b) Calculation of the value of bond and equity..................................................................................6
c) Advantage and disadvantage of dividend discount analysis..........................................................7
QUESTION 3........................................................................................................................................8
a) Way through which financial leverage can influence firms ROCE................................................8
b) Comparison between initiative investors, passive investors and fundamental investors................9
Difference between residual earning and discounted cash flow approach.......................................10
CONCLUSION...................................................................................................................................11
REFERENCES....................................................................................................................................11
INTRPODUCTION
Investment appraisal is a technique that is defined as taking the investment decision
that can favour the overall growth of the business unit. This report will discuss about the

modified income statement and balance sheet of the organisation. This report will also
discuss about valuation about the company. This project will also understand the significance
of liverage and the ways it influence the ROCE. Furthermore, comparison will be done in
between the initiative investors, passive investors and fundamental investors.
Question 1
Recommended income statement
Sales 8750
Less: Cost of goods sold (3250)
Gross margin 5500
Selling and general expenses (3500)
Operating income 2000
Interest income 250
2250
Interest expenses (375)
Restructuring charge (550)
Income before tax 1325
Income tax (477)
Net income 848
Balance sheet
Asset 2020 2019 Liabilities and
Equity
2020 2019
Operating assets 2590 1725 Operating liability 308 325
Debt securities 302 400 Debt 650 425
Proffered stock 250
Common stock 1880 1125
2838 2125 2838 2125
Free cash flow
Operating profit after tax – Investment during period

Operating profit:
= 5500 – 3500
= 2000
Free cash flow:
2000 – 0
= 2000
Potential benchmark for analysing company performance
Analysing the financial position and performance of business entity is a very
significant practice. This is all about interpreting and analysing the overall performance of the
business unit that can empower the organisation to understand the financial position of the
business entity. Every time company analysis the financial position and performance the
entity and organisation analysis the business performance of company. Ratio analysis is a
correct form or technique that is explored to evaluate the overall financial performance of the
business unit (Nadler and Nadler, 2018). This is significant for the company to identify the
overall performance that can certainly indicate about the financial performance of tge
business unit. This is important for the business unit to significantly understand the overall
performance of the organisation and to compare it with other competitors in the business unit.
Ratio analysis clearly indicate in statistical manner the different areas regarding profitability,
liquidity, stability and all other aspects that can indicate or demonstrate about the overall
performance of the business unit.
The role of financial performance assessment is very significant in nature. This is
essential for the business unit to precisely understand about the overall performance of the
business under respective market. The ratios clearly indicate the actual performance of
organisation over all areas associated with the business performance (Glodzinski, 2018).
With support of ratios company can evaluate the profitability, liquidity, financial stability,
performance of company and all other areas that can demonstrate about the overall
performance of the business unit.