Financial Statement Analysis

This document provides a comprehensive guide to financial statement analysis. It covers topics such as stock performance, CAGR, quality of earnings, missing data computation, goodwill calculation, dividend payout ratio, earnings per share, cost of capital, and more. The document also includes examples and calculations to help understand the concepts better.

FINANCIAL STATEMENT ANALYSIS
STUDENT iD:
[Pick the date]

Question 1
The given data has been shown under Item 5 (PART II) which corresponds to stock performance
graph. The relevant screenshot is indicated as follows.
Question 2
Activision Blizzard (Inc) CAGR = (271.51/100)1/5 = 22.11% p.a.
Nasdaq Composite CAGR =(165.84/100)1/5 = 10.65% p.a.
S&P 500 CAGR = (150.33/100)1/5 = 8.49% p.a.
RDG Technology Composite CAGR = (190.13/100)1/5 = 13.71% p.a.

Question 3
a) Topline growth in 2018 = [(7500-7017)/7017]*100 = 6.88% p.a.
b) Dividend Payout ratio (2018) = (0.34/2.38)*100 = 14.29%
c) Quality of earnings ratio = Operating cash flows/Net Income
High quality earnings are observed for 2014, 2015, 2016 & 2017 since the quality of earnings
ratio exceeds 1. However, low quality earnings are observed for 2018 since the quality of
earnings ratio is lesser than 1.
d) Trailing PE = 44/Earnings per share for 2018 = 44/2.38 = 18.49
e) The given data would be found under selected financial data of PART II (Item 6).
Question 4
The following equation can be used to compute the missing data for the two companies as on
January 1, 2018.
Assets = Liabilities + common stock + additional paid-in capital + retained earnings
The following computation is for LifeZone Corp.
2900 = 1275 + 150 + additional paid-in capital + 1,150
Solving the above, additional paid-in capital for LifeZone as on January 1, 2018 = $ 325 million
The following computation is for BridgeLine LTD
2850 = 950 + 200 + 225 + Retained earnings
Solving the above, additional paid-in capital for BridgeLIne as on January 1, 2018 = $1,475
million

Market value of shares issued to acquire BridgeLIne = $ 4.8 billion
Total asset value for BridgeLIne = $ 2.85 billion
Goodwill = ($4.8 -$2.85) billion = $ 1.95 billion
Question 5
It is noteworthy that the book values for the Target Company is equal to the fair value.
Amount paid for a 60% stake in Target company = $ 180 million
Net assets of the company = $ 18 million
60% of the net assets would equal (60/100)*18 million = $ 10.8 million
Hence, goodwill = $ 180 million - $ 10.8 million = $169.2 million
Also, minority interest = (60/100)*18 million = $ 10.8 million
Question 6
Basic earnings per share = (Net income – Dividends to preferred shareholders)/weighted average
common shares outstanding
Basic earnings per share for Federal Corporation (2018) = (27908-3888)/4,200 = $5.72
Diluted earnings per share = (Net income – Dividends to preferred shareholders)/weighted
average dilutive shares
Diluted earnings per share for Federal Corporation (2018) = (27908-3888)/4,620 = $5.20
Question 7
a) GMB’s average borrowing rate = 5%/(1-0.33)= 7.46% p.a.

b) Market value of equity shares = 4.8 million *42 = $201.6 million
Market value of debt = $ 350 million
Weight of equity = (201.6/(201.6+350)) = 0.3655
Weight of debt = (350/(201.6+350)) = 0.6345
Cost of equity = 9.5% p.a.
Cost of debt (post tax) = 5% p.a.
Hence, weighted average cost of capital for the company = 0.3655* 9.5% + 0.6345*5% = 6.64%
p.a.
c) Cost of equity inferred = (2.8/42) *100 = 6.67% p.a.
d) Let the growth rate in dividend be g. The appropriate approach to be deployed is Gordon
Dividend Model.
Current Stock Price = Next year dividend/ (Cost of equity – Dividend growth rate)
Hence, 42 = 3.2/ (0.095-g)
Solving the above, we get g = 1.88% p.a.
Question 8
The effective tax rate for the company is given as 18%. Let the income before income tax
expense in 2016 be $ X
Then, income tax expense = 0.18X
Hence, $2,388 million = 0.18X
Solving the above, X = 13,266.67 million

Question 9
Dividends payable annually to preferred stockholders = 0.09*32*21000 = $ 60,480
Since the preferred shares are cumulative in nature, hence the dividends pending for a given year
would be paid in the future. Till the time this payment is not made, no dividend can be given to
common shareholders.
For 2010, no dividend is paid to either the preferred shareholders or the common shareholders.
For 2011, the entire amount of $ 23,000 would be paid to the preferred shareholders as there is
accrued payment of $ 60,480 to be made besides the current year dividend to preferred
shareholders.
Dividend per preferred share in 2011 = (23000/21000) = $ 1.1
No dividend would be paid to common shareholders.
For 2012 also, the entire amount of $ 19,000 would be paid to the preferred shareholders as there
is accrued payment of (60,480+60,480-23,000) or $ 97,960 payable to the preferred
shareholders.
Dividend per preferred share in 2012 = (19000/21000) = $ 1.1
No dividend would be paid to common shareholders.
For 2013 also, the entire amount of $ 88,000 would be paid to the preferred shareholders as there
is accrued payment of (60,480+60,480 +60,480-23,000-19,000) or $ 139,440 payable to the
preferred shareholders.
Dividend per preferred share in 2013 = (88000/21000) = $ 4.19
No dividend would be paid to common shareholders.
Pending dividend payable from previous years to preferred shareholders in 2014 = ($139,440+
$60,480- $88,000) =$ 111,920

Preferred dividends payable for 2014 = $ 60,480
Total amount payable to preferred dividend holders in 2014 = $ 111,920 + $ 60,480 = $ 172,400
Dividends actually paid in 2014 = $163,000
Dividend per preferred share in 2014 = (163000/21000) = $ 7.76
No dividend would be paid to common shareholders.
Question 10
The requisite table is shown below.
Explanation
 The current value of bond at t = 0 is $ 35,762,394 computed using the 14% return.
 Discount at t=0 is $40,000,000 - $35,762,394 = $4,237,606
 Bond payable for year 1 = Bond Payable for Year 0 + Discount Amortisation for Year 1
 Discount Amortisation = Interest expense – Cash Interest Paid
 Cash interest paid = 6% of $ 40 million = $ 2,400,000
 Interest exoense for year n = 7%*Bond payable at the beginning of year n
Question 11
Total outstanding common shares = 22,000
Dividend to be paid on each share = $ 4.20

Hence, total dividend size required = 22,000*4.20 = $ 92,400
Question 12
Income reported by the company for 2018 = Basic earnings per share * weighted average basic
shares outstanding = 2.84*5,098 million = $14,478.32 million
Question 13
a) Number of shares issued at May 31, 2018 = 175,000 – 15,000 = 160,000
b) Average issue price of shares = (85,500+680,000)/175,000 = $4.37
c) Average cost of purchase of treasury shares = (160,000/15000) = $10.67
Question 14
a) A 4 for 1 stock split would indicate that 1 stock would be split into 4 stocks and hence for
each stock that the current shareholder has, the shareholder would get this split into 4 shares.
b) Companies such as North Forest would opt for stock split so as to increase bettr price
realization and higher liquidity in trading of shares. As evident, the price before split is $ 412
which is very large owing to which only limited share trading would be done. Through
splitting of the stock, the price of each stock would become significantly lower and would
result in greater participation from shareholders.
c) Shares outstanding when split was announced = (26.6million/4) = 6.65 million
Question 15
Beginning balance of equity investment = $ 12 million
Net amount for the shareholders of Glasgow = Net income- Dividends = $1,800,000 - $400,000
= $ 1.4 million

Since the stake in Glasgow is 42%, hence amount attributed to Hopkins Corporation =
(42/100)*1.4 million = $ 0.59 million
Hence, closing balance of equity investment = $ 12 million + $ 0.59 million = $ 12.59 million
Question 16
Amount of interest accrued = 200,000*(8/36500)*15 = $ 657.53
Question 17
Periodic interest payment = $300,000*(8%/2) = $ 12,000 every six months
Question 18
Let the retained earnings for Ranbaxy as on December 31, 2013 be $ X
Retained earnings change during 2014 = Net income for 2014 – Cash dividends for 2014 =
$90,050 - $39,600 = $ 50,450
Retained earnings for Ranbaxy as on December 31, 2014 is $308,002
X + $50,450 = $308,002
Solving the above, X = $257,552
Question 19
Total units bought = 6,400
Total units sold = 6,000
Ending inventory = 6,400 – 6,000 = 400 units

LIFO Method
Total sales = 6000*60 = $ 360,000
Ending inventory = 400*38 = $ 15,200
Cost of goods sold =$260,800 - $ 15,200 = $ 245,600
Gross profit = Total sales – Cost ofgoods sold = $360,000 - $245,600 = $ 114,400
Gross margin = (Gross profit/Total Sales)*100 = (114400/360000)*100 = 31.78%
FIFO Method
Total sales = 6000*60 = $ 360,000
Ending inventory = 400*44 = $ 17,600
Cost of goods sold =$260,800 - $ 17,600 = $ 243,200
Gross profit = Total sales – Cost ofgoods sold = $360,000 - $243,200 = $ 116,800
Gross margin = (Gross profit/Total Sales)*100 = (116800/360000)*100 = 32.44%
Weighted Average Method
Total sales = 6000*60 = $ 360,000
Ending inventory = 400*(260,800/6,400) = $ 16,300
Cost of goods sold =$260,800 - $ 16,300 = $ 244,500
Gross profit = Total sales – Cost ofgoods sold = $360,000 - $244,500 = $ 115,500
Gross margin = (Gross profit/Total Sales)*100 = (115500/360000)*100 = 32.08%
Question 20

Terminal value refers to the cumulative value of the cash flows associated with the firm orproject
considering a particular growth rate and given cost of capital. Typically, some form of Gordon
dividend model is used for the computation of terminal value which is then discounted to convert
into present value terms. The terminal value of the business is determined for all the years after a
given year n and reflects the value of the future cash flows associated with the business or
project at time period n only.
Question 21
The topline growth assumptions for the next 10 years can be worked out as follows.
 Assumed growth rate of the industry in which the company operates
 Assumed growth rate of economy in the primary market of operation for the company
 Determine whether the company would have topline growth in excess of the peers or not.
 Determine if the company is planning to pursue any opportunities for any acquisition and
the tentative size of the same.
 Determine if the company plans to diversify geographically or through product lines
Question 22
The requisite cash flow statement for the company is shown below.