Section A - Answer all questions 100 marks) Question ! HW is a listed entity that operates in a hila v e mucket. A new to this market which miered on June 2016 has created pressure within the market by developing a marginally lower quality product and selling it at a lower price. The result has been a shift in market share to this new entrant. You have been asked to review the financial performance and position of HW for a large institutional investor who has identified HW is a potential investment HW's share price fell signifikanth wine or interim results. The share price was $5.29 on 31 March 2016 and $1.94 31 March 2012 HW announced any final dividend was likely to be in the form of a scrip dividend. Extracts from HW's financial statements are provided below: 2017 Consolidated statement of financial position at 31 March ASSETS Non-current assets Property, plant and equipment Goodwill (Note 3) Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital (51 shares) Share premium Retained earings Non-controlling interest Total Equity Non-current liabilities Long-term borrowings (Nocel) Current liabilities Trade and other payables Short-term borrowings (Note 2) Scanned by CamScanner Total Liabilities Total equity and liabilities 1. The long-term borrowings are repayable in 2002 2. HW has a facility in place permitting short-term borrowings up to a maximum million 3. Goodwill was impaired this year and this has been chared to operating expenses. No further investments were acquired in the year. Required: a. Calculate the P/E ratio for HW March 2017 and 31 March 2016 16 marks) b. Explain what conclusions can be drawn from HW's PE ratios and the movement in the share price in the year (6 marks) c. "A high earning per share may not always maximize the share price. Explain your answer. (7 marks) d. Analyse the financial performance and financial position of HW and discuss whether or not you would recommend that HW be considered further for investment (10 marks are available for the calculation of relevant ratios (21 mark) Total: 40 marks Question 2 When performing an analytical review of financial statements of listed entities, the following key indicators are often used: Gross margin Profit margin (profit for the year revenue) PE ratio Gearing (long term borrowings/equity) Required: Discuss, with specific reference to the four ratios above, the extent to which entities within the same business sector can be validly compared with each other. Include in your discussion the limitations of both same sector and international comparisons (20 marks) [Total: 20 marks Scanned by CamScanner Question A tential invester Investor has approached you for wamebelp in analysing the inancial mora Al in Tin AF haren my and his timnem pects of the business. The itement of cash flows for the AF up t he ended hember 2017 is hele Cash flows from operating activities Pratit before taxation Depreciation Less gain on sale of investments Add back loss on sale or property, plant and equipment Investment income Interest costs (210) 320 1.440 7470) Decrease in trade receivables Increase in inventories Increase in payables Cash generated from operations Interest paid Income taxes paid Ner cash from Nerving a s 1,500 (140) 1000) 350 (1 250) Cash flows from investing activities Disposal of subsidiary (net of cash) Acquisition of property, plant and equipment Proceeds from sale of equipment Proceeds from sale of investments Investment income received Nel cash from investing activities 120 Cash flows from financing activities Proceeds from share issue 600 Proceeds from long term borrowings 280 Dividend paid to equity holders of the parent 1.200) Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period (320) 530 239 Scanned by CamScanner Required: Analyse the ove statement of highlights the key features of each potential investor AF and that we report of 15 mars) Total: 15 marks Question + Extreme Co is a large manufacturing company socialising in the manufacture of a wide range of sports clothing and equipment The company has two divisions Clothing (Division C) and Equipment (Division E). Each division operates with little nervention from Head Office and divisional managers have autonomy to make decisions about long- term investments Extreme Co measures the performance of its divisions using return on investment (ROI). calculated using controllable profit and were divisional assets. The target ROI for each of the divisions is 18% If the divisions meet or exceed this target the divisional managers receive a bonus. Last year, an investment which was expected to meet the target ROI was rejected by one of the divisional managers because it would have reduced the division's overall ROL Consequently. Extreme Co is considering the introduction of a new performance measure, residual income (RI), in order to discourage this dysfunctional behaviour in the future. Like ROI, this would be calculated using controllable profit and average divisional net assets. The draft extract of comprehensive income statement for the year, prepared by the company's trainee accountant, is shown below Division C Division E S'000 S'000 Sales revenue 3.800 8.400 Less variable costs (1.400) 3.030) Gross Profit 2.400 5,370 Less fixed costs (945) (1.420 Net profit 1.455 3.950 13.000 24,000 Opening divisional controllable net assets 9,000 30,000 Closing divisional controllable net assets Scanned by CamScanner Notes: included in the li s tene 16 and Dhondria canolled but and machinery at the beginning of the year, which is included in the new s bove and uses the reducing balance method to depreciate assets Division which UN the right-line methodna sionin dians to non-current MELY of hoch divisions Bachreeful year's depreciat e acquisition 2. Head Office recharges all of its costs to the two divisions. These have been included the fixed costs and amount to $620,000 for Division and $700,000 for Division 3. Extreme Co has a cost of capital of 12% Required: Calculate the return on investment (ROD) for each of the two divisions of Extreme Co (6 marks) Discuss the performance of the two divisions for the year, including the main reasons why their ROI results differ from each other. Explain the impact the difference in ROI could have on the behaviour of the manager of the worst performing division (6 marks) (5 marks) c. Calculate the residual income (RI) for each of the two divisions of Extreme Co and briefly comment on the results of this performance measure d. Explain the advantages and disadvantages of using residual income (RI) to measure divisional performance. (8 marks) [Total: 25 marks] Scanned by CamScanner Section A - Answer all questions 100 marks) Question ! HW is a listed entity that operates in a hila v e mucket. A new to this market which miered on June 2016 has created pressure within the market by developing a marginally lower quality product and selling it at a lower price. The result has been a shift in market share to this new entrant. You have been asked to review the financial performance and position of HW for a large institutional investor who has identified HW is a potential investment HW's share price fell signifikanth wine or interim results. The share price was $5.29 on 31 March 2016 and $1.94 31 March 2012 HW announced any final dividend was likely to be in the form of a scrip dividend. Extracts from HW's financial statements are provided below: 2017 Consolidated statement of financial position at 31 March ASSETS Non-current assets Property, plant and equipment Goodwill (Note 3) Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital (51 shares) Share premium Retained earings Non-controlling interest Total Equity Non-current liabilities Long-term borrowings (Nocel) Current liabilities Trade and other payables Short-term borrowings (Note 2) Scanned by CamScanner Total Liabilities Total equity and liabilities 1. The long-term borrowings are repayable in 2002 2. HW has a facility in place permitting short-term borrowings up to a maximum million 3. Goodwill was impaired this year and this has been chared to operating expenses. No further investments were acquired in the year. Required: a. Calculate the P/E ratio for HW March 2017 and 31 March 2016 16 marks) b. Explain what conclusions can be drawn from HW's PE ratios and the movement in the share price in the year (6 marks) c. "A high earning per share may not always maximize the share price. Explain your answer. (7 marks) d. Analyse the financial performance and financial position of HW and discuss whether or not you would recommend that HW be considered further for investment (10 marks are available for the calculation of relevant ratios (21 mark) Total: 40 marks Question 2 When performing an analytical review of financial statements of listed entities, the following key indicators are often used: Gross margin Profit margin (profit for the year revenue) PE ratio Gearing (long term borrowings/equity) Required: Discuss, with specific reference to the four ratios above, the extent to which entities within the same business sector can be validly compared with each other. Include in your discussion the limitations of both same sector and international comparisons (20 marks) [Total: 20 marks Scanned by CamScanner Question A tential invester Investor has approached you for wamebelp in analysing the inancial mora Al in Tin AF haren my and his timnem pects of the business. The itement of cash flows for the AF up t he ended hember 2017 is hele Cash flows from operating activities Pratit before taxation Depreciation Less gain on sale of investments Add back loss on sale or property, plant and equipment Investment income Interest costs (210) 320 1.440 7470) Decrease in trade receivables Increase in inventories Increase in payables Cash generated from operations Interest paid Income taxes paid Ner cash from Nerving a s 1,500 (140) 1000) 350 (1 250) Cash flows from investing activities Disposal of subsidiary (net of cash) Acquisition of property, plant and equipment Proceeds from sale of equipment Proceeds from sale of investments Investment income received Nel cash from investing activities 120 Cash flows from financing activities Proceeds from share issue 600 Proceeds from long term borrowings 280 Dividend paid to equity holders of the parent 1.200) Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period (320) 530 239 Scanned by CamScanner Required: Analyse the ove statement of highlights the key features of each potential investor AF and that we report of 15 mars) Total: 15 marks Question + Extreme Co is a large manufacturing company socialising in the manufacture of a wide range of sports clothing and equipment The company has two divisions Clothing (Division C) and Equipment (Division E). Each division operates with little nervention from Head Office and divisional managers have autonomy to make decisions about long- term investments Extreme Co measures the performance of its divisions using return on investment (ROI). calculated using controllable profit and were divisional assets. The target ROI for each of the divisions is 18% If the divisions meet or exceed this target the divisional managers receive a bonus. Last year, an investment which was expected to meet the target ROI was rejected by one of the divisional managers because it would have reduced the division's overall ROL Consequently. Extreme Co is considering the introduction of a new performance measure, residual income (RI), in order to discourage this dysfunctional behaviour in the future. Like ROI, this would be calculated using controllable profit and average divisional net assets. The draft extract of comprehensive income statement for the year, prepared by the company's trainee accountant, is shown below Division C Division E S'000 S'000 Sales revenue 3.800 8.400 Less variable costs (1.400) 3.030) Gross Profit 2.400 5,370 Less fixed costs (945) (1.420 Net profit 1.455 3.950 13.000 24,000 Opening divisional controllable net assets 9,000 30,000 Closing divisional controllable net assets Scanned by CamScanner Notes: included in the li s tene 16 and Dhondria canolled but and machinery at the beginning of the year, which is included in the new s bove and uses the reducing balance method to depreciate assets Division which UN the right-line methodna sionin dians to non-current MELY of hoch divisions Bachreeful year's depreciat e acquisition 2. Head Office recharges all of its costs to the two divisions. These have been included the fixed costs and amount to $620,000 for Division and $700,000 for Division 3. Extreme Co has a cost of capital of 12% Required: Calculate the return on investment (ROD) for each of the two divisions of Extreme Co (6 marks) Discuss the performance of the two divisions for the year, including the main reasons why their ROI results differ from each other. Explain the impact the difference in ROI could have on the behaviour of the manager of the worst performing division (6 marks) (5 marks) c. Calculate the residual income (RI) for each of the two divisions of Extreme Co and briefly comment on the results of this performance measure d. Explain the advantages and disadvantages of using residual income (RI) to measure divisional performance. (8 marks) [Total: 25 marks] Scanned by CamScanner