I do not know how to do qn 3 (d), could you show me the workings and formulas you used? I have attached the answers below too, so I need the workings to understand how to get the numbers.
Thanks!
Here are the answers:
Question 3 You have reformulated the Imber Aedax Company's most recent financial statements and extracted the following information: Year ended 31 December 2019 Sales Interest expense minus interest income Earnings before tax Tax expense Comprehensive income (CE) $ million 35,200 291 13,168 2,384 11,809 As at 31 December 2019 Net operating working capital (OWC) Net non-current operating assets (NNCOA) Net financial obligations (NFO) 8 million 936 42,287 11,906 (a) Calculate NOA (net operating assets) and CSE (common shareholders' equity) at theend of 2019. (2 marks) (b) Using the 2019 effective tax rate, calculate NFE (net financial expense) and OI (operating income or NOPAT) for the year 2019. (5 marks) You now have the following forecast assumptions: 2020 10% 30% Sales growth Ol / sales Previous year OWC / this year's sales Previous year NNCOA / this year's sales NFO / NOA 2021 2022 7% 4% 25% 20% 2.2% 2.0% 105% 100% 27.5% 27.5% thereafter 3% 18% 2.0% 98% 27.5% 27.5% (e) Predict sales and Ol for the years 2020 to 2022. Predict NOA, NFO and CSE for the years 2020 to 2022. (6 marks) (a) Assuming th the 2019 tax rate continues to apply in future and that the cost of debt before tax shield benefit is 2%, find the after-tax cost of debt. Assuming that the cost of equity is 4.9% and using information given in the forecast table above, calculate the WACC (weighted average cost of capital). Round it to the SO 4/AC3143_Commentary_2020.pdf?ti... Q m . OP 0 90% + 10 Dalles grown OI/ sales Previous year OWC / this year's sales Previous year NNCOA / this year's sales NFO / NOA 1070 10 770 30% 25% 20% 2.2% 2.0% 105% 100% 27.5% 27.5% 27.5% 70 18% 2.0% 98% 27.5% (c) Predict sales and Ol for the years 2020 to 2022. Predict NOA, NFO and CSE for the years 2020 to 2022. (6 marks) (d) Assuming that the 2019 tax rate continues to apply in future and that the cost of debt before tax shield benefit is 2%, find the after-tax cost of debt. Assuming that the cost of equity is 4.9% and using information given in the forecast table above, calculate the WACC (weighted average cost of capital). Round it to the nearest one tenth of a percent. Assuming that NFE equals previous year NFO times the after-tax cost of debt, calculate NFE and CE for the years 2020 to 2022. (6 marks) Examiners' commentaries 2020 (e) Calculate predicted AE (abnormal earnings), AOI (abnormal operating income or abnormal NOPAT) and FCF (free cash flow) for the years 2020 to 2022. (6 marks) Approaching the question This question tested candidates on some important calculations required for analysis and (especially) valuation. It was the most popular and the highest scoring question, probably because of the lack of a qualitative element. (a) End-2019 NOA and CSE Year ended 31 December 2019 Sales Interest expense minus interest income Earnings before tax Tax expense Comprehensive income (CE) S million 35,200 291 13,168 2,384 11,809 $ million 936 As at 31 December 2019 Net operating working capital (OWC) Net non-current operating assets (NNCOA) Net financial obligations (NFO) 42,287 11,906 NOANNCOA +OWC CSENOA - NFO 2019 book values 43,223 31,317 (6) 2019 effective tax rate (t), NFE & OI (NOPAT). We have: Tax expense 2,384 18.1% Earnings before tax 13,168 NFE - Interest expense minus interest income(1 - 1) 291(1 - 18.1%) - 238 OICE+NFE = 11,809 +238 = 12,047 (c) 2020-2022 predictions for sales & OI; NOA, NFO & CSE. You now have the following forecast assumptions: Sales growth OI (NOPAT) / sales Previous year OWC / this year's sales Previous year NNCOA / this year's sales NFO / NOA 2020 2021 2022 Thereafter 10% 7% 4% 3% 30% 25% 20% 18% 2.2% 2.0% 2.0% 105% 100% 98% 27.5% 27.5% 27.5% 27.5% 13 143 Valuation and securities analysis 911 2019 2020 2021 2022 Thereafter Sales 35,200 38,720 41,430 43,088 44,380 OI 12,047 11,616 10,358 8,618 OWC 862 888 NNCOA 43,502 43,088 43,493 NFO 12,214 12,086 12,205 NOA 43,223 44,413 43,949 44,380 CSE 31,317 32,200 31,863 32,176 Candidates found this easy. They needed to complete: the sales predictions using the growth rates given OI on the basis of the Ol to sales ratio OWC & NNCOA as the given percentage of the next year's sales NFO as 27.5% of NOA NOA OWC+ NNCOA CSE=NOA - NFO. (d) After-tax cost of debt rp(1 t), and WACC; NFE & CE for 2020-2022. To is given in the question and t was calculated in part (b). Effective tax rate 18.1% 2.0% TD(1 -t) 1.64% Te is given in the question, the share of debt sp = NFO/NOA was given in part (b) and SE=1 - SD 4.9% WACC 4.0% NFE = D(1 -t) times end of previous period NFO. CE = OI - NFE. 2020 2021 2022 NFO 11,906 12,214 12,086 12,205 NFE 195 200 198 OI 11,616 10,358 8,618 CE 11,421 10,158 8,420 (e) AE, AOI & FCF for 2020-2022. AE = CE - Te times end of previous period CSE-for example, in 2020: 11,421 - 4.9% x 31,317 = 9,886. AOI = OI - WACC times end of previous period NOA - for example, in 2020: 11,616 - 4.0% x 43,223 =9,886. FCF = OI - ANOA - for example, in 2020: 11,616 -(44,413 - 43,223) = 10,426. 2019 2020 2021 2022 CSE 31,317 32,200 31,863 32,176 NOA 43,223 44,413 43,949 44,380 X W 19
