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    King's College London: 6Ssmn352 Financial Statement Analysis

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    King's College London: 6Ssmn352 Financial Statement Analysis

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    6SSMN352.1Exam

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    King's College London: 6Ssmn352 Financial Statement Analysis

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    King’s College London

    This paper is part of an examination of the College counting towards


    the award of a degree. Examinations are governed by the College
    Regulations under the authority of the Academic Board.

    6SSMN352 FINANCIAL STATEMENT ANALYSIS

    EXAMINATION PERIOD 2 (MAY 2019)

    TIME ALLOWED: TWO HOURS

    INSTRUCTIONS TO CANDIDATES:
    1. Answer SIX questions in total.
    2. Candidates must answer :
    - THREE questions from SECTION A
    - TWO questions from SECTION B
    - ONE question from SECTION C
    3. Please number the questions answered in the booklet provided.

    CASE STUDY INCLUDED SEPARATELY

    CALCULATORS MAY BE USED. ONLY THE FOLLOWING MODELS ARE


    PERMITTED:
    Casio fx83
    Casio fx85.

    DO NOT REMOVE THIS EXAM PAPER FROM THE EXAMINATION ROOM

    TURN OVER WHEN INSTRUCTED


    2019 © King’s College London
    6SSMN352

    Answer SIX questions in total.

    SECTION A

    Answer any THREE questions from Section A.

    Do you agree or disagree with the following statements? Explain your


    choice with reasons.

    1. Groupon sold a spa coupon at $60. Customers can use the coupon in
    exchange of $110 service in the spa. Groupon pays the spa vendor
    $30 for this transaction. Groupon should record a net revenue of
    $60.
    (5 marks)

    2. The Altman Z score is an objective model to determine a company’s


    probability of bankruptcy since it is based on objective financial
    ratios.
    (5 marks)

    3. Uniform accounting standards would eliminate all distortions from


    accounting statements, lead to uniform numbers across companies
    and promote comparability.
    (5 marks)

    4. Dell Computer trades at a Market to book (M/B) ratio of 13.8. The


    industry M/B ratio is 10.5. Even though Dell’s M/B ratio is high
    relative to its industry, this ratio may tell us nothing about whether
    Dell’s stock will outperform or underperform its industry peers.
    (5 marks)

    5. There would be no difference in the credit extended to an Italy-


    based biotech or a UK-based car manufacturer as they have similar
    credit ratings, debt-equity ratios and firm size.
    (5
    marks)

    TOTAL MARKS FOR SECTION A (15 MARKS)


    6SSMN352

    2 See Next Page

    SECTION B

    Answer any TWO questions from Section B (there are multiple parts to
    each question, you must attempt all parts).

    6. a) List 3 disadvantages of using the dividends discounted approach


    when valuing a firm.
    (3 marks)

    b) A firm currently has a debt-to-equity ratio of 80%. The interest


    rate on the firm’s debt is 8.5% (net of tax), the 10-year
    government bond rate is 3.65% and the historical market returns
    are 7.92%. If the β of the company is 3.29, calculate the
    weighted average cost of capital (WACC).
    (6 marks)

    c) The SanBo Company reported “net cash provided by operating


    activities” of $8,230 million in its 2018 cash flow statement. It
    also reported interest paid of $1,705 million and interest income
    of $836 million. The SanBo Company also reported “net cash used
    in investing activities” of $6,345 million, as part of this number it
    reported purchases of investments (in interest bearing securities)
    of $919 million and proceeds from disposal of such investments of
    $1,148 million. SanBo has a 35% tax rate.

    What are free cash flows? What is SanBo’s free cash flow for
    2018?
    (16 marks)

    Total marks for question 6 (25 marks)


    6SSMN352

    3 See Next Page


    7. Genesis is a software firm that invests heavily in research and
    development. Genesis currently has 45 million ordinary shares
    outstanding and a net debt of £315 million. Currently, Genesis re-
    invests all of its cash flows to help fund the development of new
    software.

    a) As an analyst you forecast Genesis to produce zero net cashflows


    for the next 4 years. From the 5 th year, Genesis is expected to
    have cashflows of £112 million forever. If investors (debt and
    equity) require a 13% rate of return, what is the value of the
    entity as a whole? What is the value of one ordinary share
    (equity) of the firm?
    (7 marks)

    b) Genesis announces that it has just discovered a new app, which is


    patented for 3 years. Analysts, now expect Genesis to produce
    cashflows of £310, £250, and £210 million for the next 3 years. In
    the 4th year, Genesis is expected to have cashflows of £110
    million which will grow at 3% forever. If investors (both debt and
    equity) now require a 10% rate of return, what is the new value
    of the firm as a whole (entity) after the announcement? What is
    the value of one ordinary share (equity) of the firm after the
    announcement?

    (13 marks)

    c) Suppose the current market price after the announcement of the


    the new app (Question 7b) is £45. Explain why your estimated
    value of the equity is different to that of the market?
    (5 marks)

    Total marks for question 7 (25 marks)


    6SSMN352

    4 See Next Page

    8.
    a) ‘Bond ratings communicate important information to capital
    markets about a firm’s creditworthiness.’ Critically evaluate this
    statement discussing the usefulness and shortcomings of bond
    ratings.

    (7 marks)

    b) Calculate 3 ratios to comment on the credit worthiness of Fiat, a


    large Italian car manufacturer, in 2008. Discuss 3 non-financial
    factors you would consider when assigning a credit rating for Fiat
    in 2008.
    6SSMN352

    5 See Next Page

    (18 marks)
    Total marks for question 8 (25 marks)

    TOTAL MARKS FOR SECTION B (50 MARKS)

    6 See Next Page


    6SSMN352

    SECTION C

    Note: Please refer to the CASE STUDY: ACCOR and NH Hoteles


    before answering this section.

    Answer ONE question from Section C (there are multiple parts to each
    question, you must attempt all parts).

    9.
    a) Are the financial statements for Accor and NH Hoteles comparable?
    Discuss main differences in 3 accounting policies of the two Hotel
    Groups.
    (20 marks)
    b) Discuss how the differences in accounting treatment of the above
    policies may impact analysis of their profitability and
    creditworthiness.
    (15 marks)

    Total marks for question 9 (35 marks)

    10.
    a) The net change in cash and cash equivalent for the fiscal year
    2005 for Accor and NH Hoteles are €707 million and € (5.712
    million) respectively. Conduct a cash flow statement analysis and
    comment on possible reasons for the increase or decrease in net
    cash over the year for the two hotel groups.

    (20 marks)
    b) Decompose return on equity (ROE) using the traditional approach
    and evaluate the key drivers of Accor’s performance in 2005.
    (15 marks)

    Total marks for question 10 (35 marks)

    TOTAL MARKS FOR SECTION C (35 MARKS)

    7 Final Page

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