Name of subject

: Financial Statement Analysis

Subject code

: 323059

Date of examination

: June 23, 2011

Length of examination : 3 hours

Lecturer

: Prof.dr. J.P.M. Suijs

ANR: 539333

Telephone number of departmental secretariat: 4668288

Students are expected to conduct themselves properly during
examinations and to obey any instructions given to them by
examiners and invigilators. Firm action will be taken in the
event that academic fraud is discovered.

Notes:
You should answer each question in the designated space on this form. Always provide
a clear overview of any calculations in your answer. On the final page of this exam you
will find an overview of the most important formulas.
Use of a graphic calculator is allowed.
Use of a dictionary is not allowed.

Question 1

(25 points)

For each of the statements below, indicate whether the statement is true or false.
True

False

Residual operating income is equal to residual income.

Firms with higher P/E ratios are better investments than firms with

lower P/E ratios.

C

Information gained from a profit and growth analysis is not used in a

simple type SF2 forecast.

The free cash flow model for valuing firms considers investments in
operating assets as value destroying.

Fade diagrams provide useful information for full information forecasting.

The market to book ratio of a firm that reports negative retained

earnings on its equity statement is less than one (i.e., market value of
equity is less than book value of equity)

A simple forecast type SF3 depends on the firms future investments

in net operating assets.

The exercise of stock options results in a hidden dirty surplus loss

on the reformulated equity statement and reformulated income statement.

The required rate of return rF on the firms net operating assets does
not depend on the degree of financial leverage.

The valuation method based on multiples assumes that comparable

firms are correctly priced by the market.

Question 2

(25 points)

Omega Pharma is active in the field of health and personal care products and carries brands
like Davitamon, Silence, and Predictor. Shares of Omega Pharma are traded at Euronext
Brussels. On December 31st, 2010, Omega Pharma shares traded at e35.90 per shares corresponding to a forward price earnings ratio of 10.47. With approximately 23.3 million shares
outstanding, total market value of Omega Pharma equaled e838.2 million.
Over 2010, Omega Pharma recorded e74.2 million in earnings and paid e18.6 million in
dividends. End of year book value of equity for 2010 equaled e718.3 million.
For the future, Omega Pharma expects 3.3% growth per year for the next 5 years (20112015) and 2.1% growth per year for 2016 and beyond. Dividends will remain constant at the
2010 level. The cost of equity capital equals 10.4%.
A Calculate Omega Pharmas normal trailing P/E ratio.
B What earnings does the market expect for Omega Pharma for the year 2011?
C Using the growth rate forecasts given above, calculate the value of Omega Pharma using
the residual income valuation model.
D Which growth rate in residual earnings of 2010 is implicit in Omega Pharmas 2010
market value of e838.2 million.
E A financial analyst expects that for the year 2011 and beyond residual earnings will grow
at 3.0% a year. How much is the corresponding forecasted growth in Omega Pharmas
earnings for the years 2011 and 2012?

Anwer 2A:

Anwer 2B:

Anwer 2C:

Anwer 2D:

Anwer 2E:

Question 3

(25 points)

British Sky Broadcasting Group operates the leading pay television service in the UK and
Ireland as well as broadband and telephony services. For the bookyear 2010, the income
statement, statement of comprehenisve income, balance sheet, and cash flow statement are
provided below. Skys marginal tax rate is 28.0%.
Consolidated Income Statement (2010)
Revenue

5,912

Operating expenses

(5,085)

Litigation settlement income

269

Operating profit

1,096

Share of results of joint ventures and associates

32

Investment income on litigation settlement

49

Investment income

Finance costs

(122)

Profit on disposal of available for sale investment

Profit before tax

115
1,173

Taxation

(295)

Profit for the year

878

Consolidated statement of comprehenisve income (2010)

Profit for the year

878

Exchange differences on translation of foreign operations

Gain on revaluation of available for sale investments

Gain on cash flow hedge

51

Other comprehensive incoem for the year

61

Total comprehensive income for the year

939

Consolidated balance sheet (June 30, 2010)

Non-current assets
Goodwill

852

Intangible assets

336

Property, plant and equipment

899

Investments in joint ventures and associates

149

Available-for-sale investments

182

Trade and other receivables

Derivative financial assets

18
382

Current assets
Inventories

343

Trade and other receivables

538

Short-term deposits

400

Cash and cash equivalents

649

Derivative financial assets

56

Total assets

4,804

Current liabilities
Trade and other payables

1,526

Current tax liabilities

136

Provisions

27

Derivative financial liabilities

10

Non-current liabilities
Borrowings

2,458

Trade and other payables

52

Provisions

11

Derivative financial liabilities

17

Deferred tax liability

Total liabilities

4,244

Share capital

876

Share premium

1,437

Retained earnings

(2,243)

Reserves

490

Total equity

560

Cash flow statement (2010)

Cash flows from operating activities
Cash generated from operations

1,634

Interest received

57

Taxation paid

(320)

Net cash from operating activities

1,371

Cash flows from investing activities:

Dividends received from joint ventures and associates

30

Net funding to joint ventures and associates

(1)

Proceeds on disposal of an investment

196

Purchase of property, plant and equipment

(261)

Purchase of intangible assets

(183)

Proceeds on disposal of property, plant and equipment

(Increase) decrease in short-term deposits

(310)

Net cash used in investing activities

(528)

Cash flows from financing activities

Repayment of borrowings

(495)

Proceeds from disposal of shares in ESOP

16

Purchase of own shares for ESOP

(56)

Interest paid

(156)

Dividends paid to shareholders

(314)

Net cash used in financing activities

(1,005)

Net (decrease) increase in cash and cash equivalents

(162)

Additional footnote information to consolidated income statement:

On 8 February 2010 the Group placed a shareholding of 10.4% in ITV in accordance with
the final undertakings given by the Group to the Secretary of State for Business, Innovation
and Skills relating to the Groups investment in ITV. The placing by the Group of 404,362,095
ITV shares at 48.5 pence per share resulted in aggregate consideration of 196 million. A profit
of 115 million was realised on disposal being the excess of the consideration above the impaired
value of the shares. The Group continues to hold just under 7.5% of ITV.

A Reformulate the consolidated income statement.

B Reformulate the consolidated balance sheet.
C Calculate the free cash flow for 2010 using information from the (reformulated) cash
flow statement.

10

Anwer 3A:

11

Anwer 3B:

12

Anwer 3C:

13

Question 4

(25 points)

Radioshack Corporation primarily engages in the retail sale of consumer electronics goods
and services through their RadioShack store chain. Below you will find restated financial
statement information for the years 2009 and 2010.
2010

2009

2,175.4

2,429.3

Operating liabilities

693.1

753.2

Net operating assets

1,482.3

1,676.1

Financial obligations

639.8

627.8

Net financial obligations

639.8

627.8

Common shareholders equity

842.5

1,048.3

Reformulated balance sheet

Operating assets

Financial assets

Reformulated income statement

Sales

4,472.7

Operating income from sales (after tax)

Other operating income (after tax)

234.2
(2.6)

Net financial expense (after tax)

(25.5)

Comprehensive income (after tax)

206.1

A For the year 2010, show the relation between ROCE, RNOA and financial leverage. Use
average balance sheet values in your calculations.
B For the year 2010, calculate profit margin from sales, profit margin from other operating
income, and asset turnover. Use average balance sheet values in your calculations.
C Which additional information do you require to make a type SF3 earnings forecast for
the year 2011 for Radioshack Corporation?
D Below you find balance sheet information from Radioshack Corporations 10-K form.
From a financial analysis perspective, what valuable information regarding the short
term future of Radioshack Corporation do these numbers reveal? Explain your answer.

14

Consolidated balance sheet

2010

2009

Assets
Current assets:
Cash and cash equivalents

569.4

908.2

Accounts and notes receivables, net

377.5

322.5

Inventories

723.7

670.6

Other current assets

108.1

114.4

1,778.7

2,015.7

274.3

282.3

Goodwill, net

41.2

38.9

Other assets, net

81.2

92.4

2,175.4

2,429.3

Current maturities of long-term debt

308.0

Accounts payable

272.4

262.9

Accrued expenses and other current liabilities

318.0

360.7

9.7

30.9

908.1

654.5

331.8

627.8

93.0

98.7

1,332.9

1,381.0

Common stock

146.0

191.0

Additional paid-in capital

147.3

161.8

1,502.5

2,323.9

Total current assets

Property, plant and equipment

Total assets
Liabilities and stockholders equity
Current liabilites:

Income taxes payable

Total current liabilities
Long-term debt, excluding current maturities
Other non-current liabilities
Total liabilities
Stockholders equity:

Retained earnings
Treasury stock
Accumulated other comprehensive loss
Total stockholders equity

(949.0)

(1,621.9)

(4.3)

(6.5)

842.5

15

1,048.3

Anwer 4A:

Anwer 4B:

16

Anwer 4C:

Anwer 4D:

17

Summary of formulas
VtE = BVt +
VtE =

1
rE

RIt+1
1+rE

Et+1 +

RIt+2
(1+rE )2

AEGt+2
1+rE

+ ... +
AEGt+3
(1+rE )2

RIt+T
(1+rE )T

+ ... +

CV
(1+rE )T

AEGt+T
(1+rE )T 1

CV
(1+rE )T 1

RIt = Et rE BVt1
AEGt = Et + rE dt1 (1 + rE ) Et1
VtF = N OAt +
VtF =

1
rF

ReOIt+1
1+rF

OIt+1 +

ReOIt+2
(1+rF )2

AOIGt+2
1+rF

+ ... +

AOIGt+3
(1+rF )2

ReOIt+T
(1+rF )T

+ ... +

CV
(1+rF )T

AOIGt+T
(1+rF )T 1

CV
(1+rF )T 1

ReOIt = OIt rF N OAt1

AOIGt = OIt + rF F CFt1 (1 + rF ) OIt1
CSE = N OA N F O
ROCE =

E
average CSE

RN OA =

OI
average N OA

ROOA =

OI+implicit interest on OL
average OA

F LEV =

average N F O
average CSE

OLLEV =
N BC =

average OL
average N OA

NF E
average N F O

ROCE = RN OA + F LEV (RN OA N BC)

RN OA = ROOA + OLLEV (ROOA implicit interest on OL)
PM =

OI
sales

AT O =

sales
average N OA

RN OA = P M AT O
N OA = sales

1
AT O

18