ACC3155 Final Formative Test 1718.doc

ACC3155 Final Formative Test 1718.doc - ACC3155 Second...

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ACC3155 Second Formative Test and revision questions 1718 Question 1 (a) Assume that A plc has the following assets and liabilities (at book value): Operating assets 100 Operating liabilities 30 Financial assets (cash) 15 Financial liabilities (debt) 40 Q. What is the book value of equity? Now assume that the market value of the operating assets is 110 and that the market value of debt is 38. The market value of operating liabilities and cash is the same as the book value. Q. What is the market value of equity? Q. What is the Enterprise Value of Windward plc? Explain using two approaches. (b) Explain the formula EV/EDITDA and critically evaluate the use of EBITDA. 1
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Question 2 Firm A and Firm B have $1,000,000 invested in net operating assets in the same line of business. Firm A has $25,000 in net financial obligations while Firm B has $600,000 in net financial obligations. Both firms have a statutory tax rate of 36%. The income statements of both firms for 2017 are as follows $’000 $’000 $’000 $’000 Sales 2,140 2,140 Fixed costs (643) (1,240) Variable costs (1,240 ) (1,883 ) (643 ) (1,883 ) Operating profit 257 257 Interest expense (2 ) (48 ) Income before tax 255 209 Tax (91 ) (75 ) Net income 164 134 Required: (a) Prepare a statement of financial position and calculate ROCE for both companies. (b) Reformulate the income statement to show operating profit after tax and interest expense net of tax. (c) Show the make-up of ROCE by reference to RNOA, financial leverage and operating spread. (d) Explain how fundamental risk is a combination of operating risk and financial risk and how each of these is further broken down. (e) Re-state the income statement to show the contribution to fixed costs and calculate the operating leverage of both companies. (f) Calculate the interest cover of both companies. (g) Which company is riskier? Illustrate by showing the impact of a fall in sales by 10%. 2
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Question 3 A firm reports the following results for 2015: £’000 Sales 667.3 Gain on sale of non-current asset 3.9 Restructuring charge (17.7) Other operating expenses (580 .1 ) Operating profit 73.4 Interest expense (20 .5 ) Earnings before tax 52.9 Tax (18 .3 ) 34.6 Discontinued operations, net of tax 8 .9 Net income 43 .5 The statutory rate of tax is 39%. Required: (a) Reformulate the income statement to show total operating profit after tax, including discontinued operations. Compute the operating profit margin.
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