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Working as a junior analyst for a mutual fund, you wonder if your fund should consider adding FSA Food, a large food chain, to your

Working as a junior analyst for a mutual fund, you wonder if your fund should consider adding FSA Food, a large food chain, to your share portfolio. You obtain the following information from the companys latest financial statements and other sources:

Year ended

($ thousands)

31 Dec

2020

31 Dec

2019

Cash

$ 8,640

$ 8,480

Operating assets

$14,800

$15,040

Operating liabilities

$11,280

$11,840

Shareholders equity

$ 3,250

$ 2,980

Comprehensive net operating profit after tax (NOPAT)

$ 8,160

$ 8,240

Weighted average cost of capital (WACC)

9.0%

9.0%

You forecast that FSA Foods sales, Comprehensive NOPAT, and net operating assets (NOA) will grow by 10% next year and then by 5% per year indefinitely. You also expect its WACC will remain unchanged in the future.

Required:

  1. Compute the companys residual operating income (ROPI) for 2020. Show your workings.

(2 marks)

  1. Forecast the companys residual operating income (ROPI) for 2021 and 2022. Show your workings.

(4 marks)

  1. Use the residual operating income (ROPI) model to estimate the intrinsic value of FSA Foods equity at year-end 2020. Show your workings.

(5 marks)

  1. At the beginning of 2021, FSA Food issued a restatement of its 2020 financial statement that reveals an accounting error of overestimating the allowance of doubtful accounts in 2020. Briefly explain if this accounting error alters your estimation of the intrinsic value of FSA Foods equity at year-end 2020 in part (c). (Maximum words: 150)

(4 marks)

(Total for Question 5: 15 marks)

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