Question 3. (20 marks)

With COVID-19 causing havoc in countries all over Europe and the Americas, there had been a dramatic slow down in manufacturer orders from these countries in China. Many factories in the Dongguan corridor have been closed since Chinese New Year. Even factories that were opened were laying idle with minimum workers. With no income from their factory jobs, many female workers resorted to sell cosmetics in person and on Douyin.

An investment fund noticed this trend, did further research, and found that Revlon, a U.S. based cosmetic brand, is the preferred brand for these workers turned KOL (Key Opinion Leader). Upon further analysis, this fund is considering buying shares of Revlon.

These are selected financial information as collected by the analyst of this investment fund:

Share price USD 12.75

Beta 1.08

2019:

Net income -157.7 million

Total asset 2,981 million

Total Liabilities 3,245 million

Total Equity -1,221 million

Shares outstanding 53.3 million shares

1. Discuss and explain how the analyst can deal with Revlons negative earnings when performing valuation.
2. Discuss and explain how the analyst can deal with Revlons negative book value of equity when performing valuation.
3. Given the higher systematic risk of the market, do you expect Revlon shares to fluctuation more or less than the over market?
4. Calculate and interpret the following ratios for Revlon: ROE, ROE, debt to invested capital, debt to equity, EPS, and PE ratio.