I. DLH case 1: Profitability

Assignment 1

Discuss which items from the income statement and balance sheet can be classified as an operating and a financing activity, respectively. Assets held for sale and liabilities relating from assets held for sale should be treated as financial assets and financial liabilities, respectively. The income statement and balance sheet can be found the provided Excel worksheet (with which you should be familiar by now).

Please notice that pension liabilities are measured as the net present value of future contributions, and therefore there is an implicit interest rate on this liability. Tax receivables and tax payable are assumed to be interest bearing. It is further recommended to regard discontinuing operations as part of financial assets and interest-bearing debt, respectively (i.e. financing items).

Calculate invested capital and net interest bearing debt for the period Year 3Year 9.

Assignment 2

Calculate the following financial ratios (both before and after tax) for the DLH Group for the time period Year 4Year 9 based on the adjusted financial numbers cf. Assignment 1. Financial ratios related to operating profitability:

a) Return on invested capital (ROIC)

b) EBIT-margin (profit margin)

c) Turnover ratio, invested capital (ATO)

Financial ratios related to total profitability (owners perspective):

d) Net borrowing cost in percent (Net financial expenses/Net financial liabilities) e) Spread between ROIC and net borrowing cost

f) Financial leverage (Net financial liabilities/common shareholders equity)

g) Return on equity (ROE)

Please use average balance sheet numbers.

Further, please calculate all financial ratios using both before-tax and after-tax accounting numbers.

Assignment 3A

a. Describe the level and trend of the profitability in the DLH Group.

b. What has been the effect of the fact that the DLH group in Year 9 had restructuring costs of DKK 450 million?

c. Which additional analyses can be performed in order to obtain a better understanding of the development of the profitability in the DLH Group?

Assignment 3B

DLH divested its building material division in Year 8 and obtained a gain of DKK 580 million. Elaborate on the challenges that it gives you as an analyst.

Assignment 3C

In footnote (3) in the annual account for Year 7 the following information about the divested building material division is provided:

Based on the financial information from the building division (as well as the ratio analysis in Assignment 2), please answer the following questions:

a. Compare the profitability of the building division to the rest of the DLH group.

b. What is the likely impact of the divestment of the building material division on DLHs future profitability?

Assignment 4

Do you believe that the DLH Group is able to obtain a return on invested capital (ROIC) equal to approximately 8% in the long run?

Assignment 5

Calculate economic value added (EVA) for DLH Group for Year 4Year 9. It is assumed that DLHs cost of capital (WACC) equals 8% for all years.

In addition account for

a. How a firms cost of capital can be estimated.

b. Do you believe that there is a connection between the EVA and the stock price?