Business Valuation and Analysis Assignment Solution T2 2019

This document presents a comprehensive solution to a business valuation and analysis assignment, addressing a range of financial concepts and calculations. The assignment covers key areas such as identifying economic characteristics of businesses, analyzing financial statements, and understanding cash flow patterns. It includes calculations for retained earnings, application of the Capital Asset Pricing Model (CAPM), and the interpretation of financial ratios. The solution provides detailed explanations for each question, covering topics such as industry analysis, competitive strategies, and the impact of accounting choices on financial reporting. The assignment also delves into concepts like free cash flow, operating asset turnover, and the implications of various financial transactions on a company's valuation. The solution provides a complete and in-depth analysis of the assignment questions, providing clear and accurate responses to each question.

Business Valuation and Analysis

Table of Contents
Q1...............................................................................................................................................3
Q2...............................................................................................................................................3
Q3...............................................................................................................................................3
Q4...............................................................................................................................................3
Q5...............................................................................................................................................3
Q6...............................................................................................................................................3
Q7...............................................................................................................................................3
Q8...............................................................................................................................................4
Q9...............................................................................................................................................4
Q10.............................................................................................................................................4
Q11.............................................................................................................................................4
Q12.............................................................................................................................................4
Q13.............................................................................................................................................4
Q14.............................................................................................................................................4
Q15.............................................................................................................................................5
Q16.............................................................................................................................................5
Q17.............................................................................................................................................5
Q18.............................................................................................................................................5
Q19.............................................................................................................................................5
Q20.............................................................................................................................................5
Q21.............................................................................................................................................5
Q22.............................................................................................................................................5
Q23.............................................................................................................................................6
Q24.............................................................................................................................................6
Q25.............................................................................................................................................6
Q26.............................................................................................................................................6
Q27.............................................................................................................................................6
Q28.............................................................................................................................................6
Q29.............................................................................................................................................6

Q1
(b.) extensive competition as there is competition in extreme amount which is involved with
the grocery store chains.
Q2
(c.) D,A,E,B,F,C
This is the sequence which is followed for the analysis as firstly the competition dynamics
will be identified and after that the strategies of the company will be considered. Once this is
done the financial statements will be analysed and then the adjustments will be made to make
the comparison. Then the calculation will be made for the profitability and risk so that they
can be evaluated. With the help of the identified trends there will be making of the forecasted
financial statements and thy will be used to value the firm.
Q3
(a.) Retained earnings is equal to $210000
Retained earnings = Total assets – contributed capital – other liabilities
= (180000+325000+600000+30000)-(100000+75000)-750000
= 1135000 -175000-750000
= $210000
Q4
(d.) i – (B), ii – (C), iii – (A), and iv – (D)
Q5
(b.) Negative or positive cash flows from operations, negative cash flows from investing and
positive cash flows from financing. This is because the project which starts to generate the
funds from the operations and the negative flows will start to decline which will make them
at positive with the increase in growth. The funds are managed with the financing which
makes it to be positive.
Q6
(c.) Maturity as at that time the operations would have been carried with the highest rate and
all the risk is resolved.
Q7
(c.) $1,255,000

Collection = Sales – increase in accounts receivables
= 1300000-45000
=$1255000
Q8
(a.) Growth in accounts receivable or inventories that is less the growth rate in sales.
This will not create the cash problem as there will be no liability which will be created and
accounts receivable growth can be less if more cash sales is made by the business.
Q9
(a.) A company signs a new contract with a customer.
The financial statements will not be adjusted as there will be no financial impact which will
be made with the contract.
Q10
(d.) A memorandum entry only to note that the number of share outstanding triples for each
ordinary shareholder so that the change in the number of shares in the company can be noted.
Q11
(a.) An increase in Land of $250,000 and an increase in Share Capital of $250,000 as the land
is valued at acquisition cost and with the acquisition the land will increase and also shares are
issues so share capital will rise.
Q12
(a.) The Liabilities to Assets ratio increases and the Long-term Debt to Long-term Capital
ratio increases as the total liabilities and long term liabilities will be rising.
Q13
(a.) accounts receivable as if the credit sales will change then the balance of accounts
receivable will also vary.
Q14
(c.) 12.3%
CAPM = Rf + b * risk premium
= 6 + 0.9*7

= 12.3%
Q15
(c.) $536,000
The returns to shareholders are paid in two forms which are cash dividend and share
repurchase which makes the total dividend to be (412000+124000) which is $536000.
Q16
(a.) free cash flow from operations; required return to equity
The value of the business will be calculated by the cash generated from operations and in that
payment to debt holders is not considered so return on equity is taken into account.
Q17
(b.) earnings as a periodic measure of shareholder wealth creation as by the residual income
valuation the excessive income which is earned over the equity is calculated.
Q18
(b.) The lower average tax rate in FY16 offset the deterioration in activity as the tax rate has
declined which increases Net income/EBT ratio and sales is reducing in comparison to assets
from 1.5 to 1.4.
Q19
(b.) An unusually large number of bad debts had to be written off as with this the accounts
receivable will reduce which will increase the turnover ratio.
Q20
(a.) £13.2 million because as per IFRS the intangible asset will be measured at cost less
amortization expense which will be 12-2 that is 10 million and adding gain on this of 3.2
million will make the sale price to be 13.2 million.
Q21
(b.) A material reduction in expected useful life of a PPE asset as by this the amount of the
depreciation will increase which will overstate the expense and income will be increasing.
Q22
(a.) Pharmaceutical industry as there is less amount of the debt which is involved and high
level of equity is maintained in them.

Q23
(e.) None of the above as the accrual accounting is followed in which the recognition is made
at all the time which is before, after and during the transaction.
Q24
(c.) The prospective analysis follows the financial analysis as after the determination of the
financial aspects there is the preparation of prospective statements.
Q25
(c.) A firm’s industry and competitive strategy affect which accounting choices are
appropriate as the accounting will be made on the basis of the strategies which have been
adopted to be in lieu with the same.
Q26
(b.) After reviewing sales forecasts and income statements, Angela determines that the
company has enough capacity to hire a new employee
as by the sales forecast the requirement will be identified and the profit will inform about the
position of the company to pay them in appropriate manner.
Q27
(b.) Operating asset turnover as by this the efficiency of the management of assets in the
company is identified.
Q28
(a.) Tends to move in line with economy-wide growth
This is because in cyclical industries the changes takes place in accordance with the change
in the economy in direct manner.
Q29
(c.) 11.0 per cent
Cost of equity= Rf + b * risk premium
= 4 + 1.4*5
= 11.0%