Use the reformulated financial statements for Qantas Airways Limited to answer Questions 1, 2, 3 and 4.

1) Free Cash Flow Analysis

2) Profitability Analysis

3) Systematic Growth Valuation

4) Residual Earnings Growth Valuation

Question 1

Calculate Free Cash flow using Method 1 and Method 2 for 2018 and 2019

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Question 2

a. Provide first and second level breakdown of the company's return on common equity (ROCE) for 2017, 2018 and 2019

b. Discuss the drivers of profitability for 2017, 2018 and 2019.

Question 3

Provide a systematic analysis of growth for 2017, 2018 and 2019

a. Calculate the following:

i. Revenue Growth

ii. Growth in Common Shareholder's Equity (CSE)

iii. Growth in Comprehensive Income

b. Calculate the components of the change in Return on Net Operating Assets (RNOA.)

i. Change in core sales PM at previous asset turnover level

ii. Change due to change in asset turnover

iii. Change due to change in unusual items

iv. Discuss the drivers of change in RNOA

c. Calculate the components of the change in Return on Common Equity (ROCE).

i. Change in RNOA

ii. Change due to change in spread at previous level of financial leverage

iii. Change due to change in financial leverage

iv. Discuss drivers of change in ROCE

d. Calculate the components of the change in Common Shareholder's Equity (CSE) as follow:

a. Change due to change in sales at previous level of asset turnover

b. Change due to change in asset turnover

c. Change in financial assets

Question 4:

Below are earnings per share for Qantas Airways Limited. The required rate of return is 5.87%. The growth rate is forecasted at a constant rate of 2%. Number of share outstanding is 1,491.00.

Required:

a) Calculate the value per share using the pro forma provided

b) In your opinion, how did the recent pandemic affect the valuation of the company?

c) Calculate the implied growth rate in RE, if the current market price of the stock is $8.12.

d) In the context of investment decision-making, what are the advantages of using the reverse-engineering approach instead of computing the intrinsic value?

Reformulated Balance Sheet Reformulated Balance Sheet 2014 2015 2016 2017 2018 2019 206 253 311 312 264 318 1,093 929 890 950 1,178 1,354 317 322 351 364 Net operating assets (NOA): Operating assets Cash and equivalents Accounts receivable, less allowance for doubtful accounts Inventories Other current and non-current assets Property, plant and equipment, net Investments in operating subsidiaries Identifiable intangible assets Deferred income taxes and other assets 336 353 351 583 374 424 762 685 10,500 10,715 11,670 12,253 12,977 12,851 222 143 134 197 210 272 741 803 909 1,025 1,113 1,225 548 333 39 0 0 0 Total operating assets 14,183 14,077 14,744 15,624 16,513 17,019 (1,881) Operating liabilities Accounts payable - non-interest bearing Income taxes payable Provisions o (1,851) 0 (1,281) (4,589) (1,986) 0 (1,287) (5,046) (1,984) (365) (1,189) (5,178) (2,220) (917) (1,220) (5,464) (2,470) (960) (1,369) (5,781) (1,213) (4,943) Revenues received in advance Total operating liabilities (7,721) (8,037) (8,319) (8,716) (9,821) (10,580) 6,462 6,040 6,425 6,908 6,692 6,439 Net operating assets (NOA): Net financial assets (obligations) (NFA/NFO): Financial assets Cash equivalent Accounts Receivables - interest bearing Short-term investments 1,839 2,795 0 2,655 0 1,669 0 1,463 0 1,430 0 0 340 798 155 704 519 Total financial assets 3.135 3,453 1,961 1,618 2,134 2,358 Financial liabilities Financial liabilities (6,731) (6,046) (5,126) (4,963) (4,871) (5,361) Total financial liabilities (6.731) (6.046) (5.126) (4,963) (4,871) (5,361) Net financial obligations (3,596) (2,593) (3,165) (3,345) (2.737) (3,003) Non controlling interests 4 5 5 3 3 3 Common Shareholders' Equity (CSE). 2,862 3,442 3,255 3,560 3,952 3,433 Reformulated Income Statement REFORMULATED INCOME STATEMENT 2014 2015 2016 2017 2018 2019 15,286 15,776 16,200 16,050 17,143 17,988 Operating revenues Cost of sales (11,534) (10,747) (10,461) (10,508) (11,176) (12,109) Gross margin 3,752 5,029 5,739 5,542 5,967 5,879 24.55% 31.88% 35.43% 34.53% 34.81% 32.68% (272) Operating expenses Non-cancellable aircraft operating Lease rentals Depreciation and amortisation Other expense, net (520) (1,422) (2,218) (495) (1,096) (1,858) (461) (1,224) (1,702) (356) (1,382) (1,898) (1,528) (2,214) (264) (1,665) (1,874) Total operating expenses (4,160) (3,449) (3,387) (3,636) (4,014) (3,803) Core operating income (before tax) (408) 1,580 2,352 1,906 1,953 2,076 (374) Tax on operating income Tax as reported Tax on other operating income Tax benefit from net interest expenses Total tax on operating income 1,133 (1,009) (61) (229) (160) (78) (395) (213) (66) (328) (161) (57) (399) (126) (188) (56) (55) 63 (466) (673) (546) (579) (617) Core operating income (after tax) (345) 1,114 1,679 1,361 1,374 1,459 (28) 0 0 0 0 (2,947) (417) 1,009 (419) (626) (504) 160 (709) 213 (536) 161 126 188 Other operating expense (before tax) Impairment Other Tax on other operating income Other operating income (expense) (after tax) Currency translation gains (loss) Net hedging gain (loss) Adjustment for Accounting Changes Defined Benefit Actuarial Gains, net of tax Share of Other Comprehensive Income of Investments Accounted for under the equity method 3 9 26 0 18 (13) 16 (195) 45 6 396 (258) 23 113 (57) (209) 175 84 (121) (2) 2 5 (2) Total other operating income (expense) (79) (3) (179) 203 485 (363) Operating income after tax (2.779) 738 1,003 1,188 1,565 658 Financial expenses Interest expense (286) (349) (284) (235) (230) (232) Interest income 82 90 65 46 48 47 (204) (259) (219) (189) Net interest expense (before tax) Tax benefit of debt (182) 55 (185) 56 61 78 66 57 Net financial expense (143) (181) (153) (132) (127) (130) 0 (3) 0 (1) Non controlling interests Comprehensive income (available to common) Marginal Tax Rate from 2014 to 2019 is 30% (2.922) 554 850 1.055 1.438 528 Residual Earnings (RE) Valuation 2020 2021 2022 2023 2024 158 816 1,499 1,627 Comprehensive income to common Beginning of period CSE (1,141) 3,591 3,433 2,450 3,266 3,717 Reformulated Balance Sheet Reformulated Balance Sheet 2014 2015 2016 2017 2018 2019 206 253 311 312 264 318 1,093 929 890 950 1,178 1,354 317 322 351 364 Net operating assets (NOA): Operating assets Cash and equivalents Accounts receivable, less allowance for doubtful accounts Inventories Other current and non-current assets Property, plant and equipment, net Investments in operating subsidiaries Identifiable intangible assets Deferred income taxes and other assets 336 353 351 583 374 424 762 685 10,500 10,715 11,670 12,253 12,977 12,851 222 143 134 197 210 272 741 803 909 1,025 1,113 1,225 548 333 39 0 0 0 Total operating assets 14,183 14,077 14,744 15,624 16,513 17,019 (1,881) Operating liabilities Accounts payable - non-interest bearing Income taxes payable Provisions o (1,851) 0 (1,281) (4,589) (1,986) 0 (1,287) (5,046) (1,984) (365) (1,189) (5,178) (2,220) (917) (1,220) (5,464) (2,470) (960) (1,369) (5,781) (1,213) (4,943) Revenues received in advance Total operating liabilities (7,721) (8,037) (8,319) (8,716) (9,821) (10,580) 6,462 6,040 6,425 6,908 6,692 6,439 Net operating assets (NOA): Net financial assets (obligations) (NFA/NFO): Financial assets Cash equivalent Accounts Receivables - interest bearing Short-term investments 1,839 2,795 0 2,655 0 1,669 0 1,463 0 1,430 0 0 340 798 155 704 519 Total financial assets 3.135 3,453 1,961 1,618 2,134 2,358 Financial liabilities Financial liabilities (6,731) (6,046) (5,126) (4,963) (4,871) (5,361) Total financial liabilities (6.731) (6.046) (5.126) (4,963) (4,871) (5,361) Net financial obligations (3,596) (2,593) (3,165) (3,345) (2.737) (3,003) Non controlling interests 4 5 5 3 3 3 Common Shareholders' Equity (CSE). 2,862 3,442 3,255 3,560 3,952 3,433 Reformulated Income Statement REFORMULATED INCOME STATEMENT 2014 2015 2016 2017 2018 2019 15,286 15,776 16,200 16,050 17,143 17,988 Operating revenues Cost of sales (11,534) (10,747) (10,461) (10,508) (11,176) (12,109) Gross margin 3,752 5,029 5,739 5,542 5,967 5,879 24.55% 31.88% 35.43% 34.53% 34.81% 32.68% (272) Operating expenses Non-cancellable aircraft operating Lease rentals Depreciation and amortisation Other expense, net (520) (1,422) (2,218) (495) (1,096) (1,858) (461) (1,224) (1,702) (356) (1,382) (1,898) (1,528) (2,214) (264) (1,665) (1,874) Total operating expenses (4,160) (3,449) (3,387) (3,636) (4,014) (3,803) Core operating income (before tax) (408) 1,580 2,352 1,906 1,953 2,076 (374) Tax on operating income Tax as reported Tax on other operating income Tax benefit from net interest expenses Total tax on operating income 1,133 (1,009) (61) (229) (160) (78) (395) (213) (66) (328) (161) (57) (399) (126) (188) (56) (55) 63 (466) (673) (546) (579) (617) Core operating income (after tax) (345) 1,114 1,679 1,361 1,374 1,459 (28) 0 0 0 0 (2,947) (417) 1,009 (419) (626) (504) 160 (709) 213 (536) 161 126 188 Other operating expense (before tax) Impairment Other Tax on other operating income Other operating income (expense) (after tax) Currency translation gains (loss) Net hedging gain (loss) Adjustment for Accounting Changes Defined Benefit Actuarial Gains, net of tax Share of Other Comprehensive Income of Investments Accounted for under the equity method 3 9 26 0 18 (13) 16 (195) 45 6 396 (258) 23 113 (57) (209) 175 84 (121) (2) 2 5 (2) Total other operating income (expense) (79) (3) (179) 203 485 (363) Operating income after tax (2.779) 738 1,003 1,188 1,565 658 Financial expenses Interest expense (286) (349) (284) (235) (230) (232) Interest income 82 90 65 46 48 47 (204) (259) (219) (189) Net interest expense (before tax) Tax benefit of debt (182) 55 (185) 56 61 78 66 57 Net financial expense (143) (181) (153) (132) (127) (130) 0 (3) 0 (1) Non controlling interests Comprehensive income (available to common) Marginal Tax Rate from 2014 to 2019 is 30% (2.922) 554 850 1.055 1.438 528 Residual Earnings (RE) Valuation 2020 2021 2022 2023 2024 158 816 1,499 1,627 Comprehensive income to common Beginning of period CSE (1,141) 3,591 3,433 2,450 3,266 3,717