1. You need to answer all questions.

2. You are required to type your responses.

3.  For  numeric  questions,  do  not  include  dollar/cents  symbols  (e.g.  $/c),  comma  (,)  or percentage (%) in your answers.

4. Unless otherwise stated, answer questions based on the methods/theories taught in lectures.

Question 1. Price-to-book ratio (P/B) for Coles (ASX: COL) was 7.95 on February 4, 2022. Use this information and select the most appropriate answer.  (1 mark)

[   ] A. The market believes that Coles will not earn any residual income in the future. [   ] B. The market believes that Coles will earn positive residual income in the future.

[   ] C. The market believes that the terminal growth rate (TGR) of residual income for Coles

will be higher than the nominal GDP growth rate in Australia.

[   ] D. Cannot say without further information.

Question 2. What is a disadvantage of fundamental analysis?  (1 mark)

[   ] A. It ignores information about future payoff.

[   ] B. It accepts the market price as intrinsic value of the company.

[   ] C. It requires some work.

[   ] D. None of the options.

Question 3. A firm has a P/E ratio of 50 and a price-to-sales (P/Sales) ratio of 5. What should be the profit margin?  (1 mark)

[   ] A. 10%

[   ] B. 1%

[   ] C. 100%

[   ] D. 25%

Question 4. What is the ADVANTAGE of unlevered valuation models?  (1 mark)

[   ] A. There is no need to estimate the cost of equity.

[   ] B. There is no need to estimate the cost of debt.

[   ] C. There is no need to forecast capital structure.

[   ] D. None of the options.

Question 5. If someone believes that markets are always efficient then what is the best investment strategy for them if they want to invest in the stock market?  (1 mark)

[   ] A. Fundamental analysis

[   ] B. Technical analysis

[   ] C. Index investing

[   ] D. None of the options

Question 6. In which of the following cases, would we expect industry rivalry to be HIGHER? (1 mark)

[   ] A. Industry is growing very fast.

[   ] B. There is one firm dominating the industry.

[   ] C. Firms offer similar products.

[   ] D. There are no exit barriers.

Question 7. What is the appropriate classification of preference shares on the reformulated statement of financial position?  (1 mark)

[   ] A. Equity

[   ] B. Financial obligation

[   ] C. Financial assets

[   ] D. Operating liability

Question 8. Which of the following is an unlevered figure?  (1 mark)

[   ] A. Comprehensive income

[   ] B. Common stockholder’s equity

[   ] C. Free cash flows (FCF)

[   ] D. None of the options

Question 9. Use the following information:

Net operating assets (FY2021) = $ 300m

Common stockholders’ equity (FY2021) = $ 150m

Weighted average cost of capital (WACC) = 8 %

Cost of equity = 10 %

Operating income after tax (FY2022) = $ 25m

Comprehensive income after tax (FY2022) = $ 24m

What was the Residual Operating Income (ReOI) during FY2022? (1 mark)

[   ] A. $ 1m

[   ] B. $ 9m

[   ] C. - $ 1m

[   ] D. - $ 9m

Question 10. Which of the following statements is TRUE? (1 mark)

[   ] A. Earnings management is always income increasing.

[   ] B. Under the Consolidation method, the share of profits/losses of associates is recognised in the statement of profit and loss.

[   ] C. Lease obligations are usually classified as financial obligation in the reformulated

statement of financial position.

[   ] D. None of the options.

Question 11. Which of the following is NOT an advantage of using comparable company multiples for valuation? (1 mark)

[   ] A. It does not require forecasting.

[   ] B. Choice of multiple can make a large difference in valuation.

[   ] C. It allows quick calculation of intrinsic value.

[   ] D. None of the options.

Question 12. In the reformulated statement of cash flows, investment in financial assets should be classified as? (1 mark)

[   ] A. Cash flow from operations (C)

[   ] B. Cash flow from investing (I)

[   ] C. Debt financing cash flows (F)

[   ] D. Equity financing cash flows (d)

Question 13. In notes to the financial statements, Business Corp reported that held-to-maturity debt securities with an amortized cost of $1,500 had an estimated fair value of $1,600. What will be the amount that will be reported on the balance sheet by Business Corp? (1 mark)

[   ] A. Held-to-maturity assets of $1,500

[   ] B. Held-to-maturity assets of $1,600

[   ] C. Held-to-maturity assets of $1,550

[   ] D. None of the options

Question 14. In the forecasts for JB Hi-Fi discussed in the class, which of the following items was used as a “plug”?  (1 mark)

[   ] A. Net financial obligation

[   ] B. Net dividend

[   ] C. Net operating assets

[   ] D. Operating income (after tax)

Question 15. How is the share of profits from equity-accounted investments usually classified on the reformulated statement of profit and loss?  (1 mark)

[   ] A. Core operating income from sales

[   ] B. Core other operating income

[   ] C. Unusual operating income

[   ] D. Financial income

Question 16. Which of the following are DISADVANTAGES of Discounted Cash Flow (DCF) Model? (2 marks)                                                                                                                         There can be more than one correct answer. Please select all the correct answers.

[   ] A. Earnings is generally more predictable and less volatile than free cash flows. [   ] B. Analysts’ forecasts for free cash flows are not easily available.

[   ] C. It is difficult to value a company that is currently not making positive free cash flows. [   ] D. It requires forecasting capital structure of the company.

Question 17. Which of the following items are usually classified as operating assets on the reformulated statement of financial position? (2 marks)                                                             There can be more than one correct answer. Please select all the correct answers.

[   ] A. Trade receivables

[   ] B. Right-of-use assets

[   ] C. Short-term investments

[   ] D. Goodwill

Question 18. Which of the following items are usually classified as operating liabilities on the reformulated statement of financial position? (2 marks)                                                             There can be more than one correct answer. Please select all the correct answers.

[   ] A. Accounts payable

[   ] B. Deferred revenue

[   ] C. Borrowings

[   ] D. Bank overdrafts

Question 19. Which of the following items are usually considered in calculating core operating income from sales?  (2 marks)

There can be more than one correct answer. Please select all the correct answers.

[   ] A. Depreciation expenses

[   ] B. Impairment losses

[   ] C. Advertising expenses

[   ] D. Interest expenses

Question 20. Which of the following relations are INCORRECT?  (2 marks)

There can be more than one correct answer. Please select all the correct answers.

[   ] A. NOA = CSE - NFA

[   ] B. NOA = OA - OL

[   ] C. C – I = F + d

[   ] D. F = NFE (after tax) + Change in NFO 

Part II – Written questions

Question 21. Below is the summary of reformulated financial statements. Some items are missing and they are indicated by capital letters from A to K. Answer the following questions. (12 marks)

Taringa Retailers Ltd

Reformulated Statement of Profit and Loss

For the year ending on June 30, 2022

42,500

(700)

7,800

Taringa Retailers Ltd

Reformulated Statement of Cash Flows

For the year ending on June 30, 2022

Cash flow from operations (C)                                               H

Cash investment (I)                                                            (5,800)

Free Cash Flow (FCF)                                                             I

Net transactions with the shareholders (d)

Total financing flows (F)

Round-off your answers up to one place of decimal (For example, 1.56 should be rounded

off as 1.6;1.55 should be rounded off as 1.6; 1.54 should be rounded off as 1.5; 10% should

be written as 0.1). Do not use dollar sign ($), comma (,), or percentage (%) in your

answers.

A. What should be the value of G?

B. What should be the value of H?

C. What should be the value of I?

D. What should be the value of J?

E. What should be the value of K?

F. What is the return on net operating assets (RNOA) for the year ending on June 30, 2022?

G. What is the return on common stockholders’ equity (ROCE) for the year ending on June 30, 2022?

H. What is the spread (SPREAD) for the year ending on June 30, 2022?

I. What is the financial leverage (FLEV) for the year ending on June 30, 2022?

J. What is the net borrowing cost (NBC) for the year ending on June 30, 2022?

K. What is the asset turnover ratio (AT) for the year ending on June 30, 2022?

L. What is the profit margin (PM) for the year ending on June 30, 2022?

Question 22. In the previous question (Question 21), show that the following relationship holds for Taringa Retailers Ltd:

ROCE = RNOA + FLEVx SPREAD

Also, explain why ROCE is higher or equal to or lower than RNOA. (2 marks)

Question 23. The following information is available for a company, Colin Clark Ltd. (5 marks)

Beta = 0.9

Market Risk Premium (MRP) = 9%

Risk free rate = 1.9%

Weighted average cost of capital (WACC) = 9%

Terminal growth rate = 5%

Common stockholders’ equity at the beginning of FY2023 = $ 720m

Stock price at the beginning of FY2023 = $ 42

Number of shares outstanding = 80m

You have also obtained the following analyst consensus forecasts for dividends and earnings for Colin Clark Ltd.

Assuming the company will achieve the steady state after FY2024, answer the following questions.

Round-off your answers up to one place of decimal (For example, 1.56 should be rounded

off as 1.6;1.55 should be rounded off as 1.6; 1.54 should be rounded off as 1.5; 10% should

be written as 0.1). Do not use dollar sign ($), comma (,), or percentage (%) in your

answers.

A. What is the cost of equity for Colin Clark Ltd from CAPM?

B. What is the price-to-book (P/B) ratio for Colin Clark Ltd at the beginning of FY2023?

C. What is the value per share (in dollars) of Colin Clark Ltd from the Dividend Discount Model (DDM)?

D. What is the value per share (in dollars) of Colin Clark Ltd from the Residual Income Model (RIM)?

Question  24.  Using  your  valuation  in  the  previous  question  (Question  23),  answer  the following questions. Clearly label your answers. (7 marks)

A. Provide a buy or sell recommendation for Colin Clark Ltd.

B. Do you obtain the same valuation or different valuation from the Dividend Discount Model (DDM) and the Residual Income Model (RIM)? Clearly explain why valuations are exactly same or different.

C.  State two possible reasons why P/B ratio is not equal to 1 for Colin Clark Ltd.

D. Which valuation model is preferred when working with analyst consensus forecasts of EPS and DPS. Clearly explain your answer.

E. State one advantage and one disadvantage of the Residual Income Model (RIM).

Question 25. Your friend, Peter, is analysing the financial statements of Towong Ltd. He reformulated the financial statements and calculated the enterprise value of Towong Ltd using Residual Operating Income Model (ReOI). He showed his valuation model to you. After looking at his spreadsheet, you told him that his classification of non-trade receivables was not appropriate as Toowong Ltd was earning some interest on these non-trade receivables and these receivables did not arise from the operating activities. Describe how Peter’s misclassification of an asset on the reformulated balance sheet may affect various valuation parameters and ultimately his valuation of enterprise value. Clearly explain your answer. (6 marks)

Question 26. The following information is available for a company, Indooroopilly Ltd.

Cost of equity = 12%

Weighted average cost of capital (WACC) = 10%

Terminal growth rate = 5%

Market Capitalisation = $ 96m

Number of shares outstanding = 6 m

Net financial obligation (NFO) at the beginning of FY2023 = $ 15m