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RMIT Classification: Trusted
Financial Statement Analysis_BAFI1070_Final individual Assignment (2021 Semester XXXXXXXXXXMarks)
Please analyse each Case in a report in Word or PDF format (on the first page of word file, please
clarify your course code, name and student ID). You could add a sperate Excel spreadsheet to
support calculations in related questions if needed. Ru
ics has already been provided to you on
Canvas.
Case 1(24 Marks):
Wonderplayer develops video game products for consumers. In June 2012, a team of analysts issued
a research report that valued Wonderplayer’s stock at $11.6 per share, compared to the then-
cu
ent market price of $13. The research report’s discounted cash flow valuation table is
eproduced below. The 2012 figures are as reported by Wonderplayer, but the 2013 through 2020
figures are analysts’ forecasts. Key assumptions include a weighted average cost of capital of 10%
and a perpetual growth rate of 2%. All dollar amounts are in millions except share value.
Required:
1, Comment on how the analyst of Wonderplayer calculate free cash flow compares with how the
professional CFA might compute free cash flow directly from the company’s financial statements. (4
marks)
2, What role does the 10% WACC play in the discounted cash flow valuation analysis? How about the
ole of WACC in the abnormal earnings valuation analysis? (2 mark)
3, Explain in detail to someone unfamiliar with present value calculations about how the Present
value 2013–2020(i.e. $ XXXXXXXXXXis computed. (4 marks)
4, Explain in detail how the figure $468.7 for Present value beyond 2020 is computed. (5 marks)
5, Why does the analyst team subtract an amount for net debt in a
iving at Equity value? (Note: The
term net debt is defined for spreadsheet purposes as financial liabilities (e.g., loans) minus any
financial assets (e.g., money market investments)) (2 marks)
6, What share value estimate would the Wonderplayer have calculated if they had used an abnormal
earnings value approach rather than a discounted cash flow approach and had developed forecasts
Actual XXXXXXXXXX XXXXXXXXXX 2020
Total Revenues: XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
EBITDA XXXXXXXXXX XXXXXXXXXX 134.4
Capital expenditures XXXXXXXXXX XXXXXXXXXX3.5
Cash taxes XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Free cash flow XXXXXXXXXX XXXXXXXXXX
Discount factor: XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Present value XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Present value beyond XXXXXXXXXX
Present value XXXXXXXXXX
XXXXXXXXXX
Less net debt 54.1
Equity value XXXXXXXXXX
Shares ourstanding 50.35
Share value XXXXXXXXXX
Analyst Forecast
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RMIT Classification: Trusted
of abnormal earnings and book values that were consistent with the cash flow forecast in the above
worksheet? Why? (3 marks)
7, Sometimes analysts’ research reports contain inadvertent computational e
ors. What would the
estimated value of Wonderplayer’s stock have been if the analysts mistakenly used 60 million shares
outstanding rather than the co
ect 50.35 million share count? (2 marks)
8, If you were the analyst of Wonderplayer in June 2012, what would be your investment
ecommendation advice to the investors of Wonderplayer based on your discounted cash flow
valuation analysis? (2 marks)
Case 2(7 Marks):
Siemens AG: Identifying differences and similarities between IFRS and GAAP
Presented below are excerpts from the 2018 annual report of Siemens AG, a German company that
operates in numerous industries, including technology, power generation, and medical diagnostics.
NOTE 1 Basis of presentation
Inventories—Inventories are valued at the lower of acquisition or production costs and net realizable
value, costs being generally determined on the basis of an average or first-in, first-out method.
NOTE 11 Inventories
Cost of sales includes inventories recognized as expense amounting to €57,029 million and €57,176
million, respectively, in fiscal 2018 and 2017. Compared to prior year, write-downs increased
(decreased) by €(19) million and €15 million as of September 30, 2018 and 2017.
Source: Siemens AG 2018 annual report.
Required:
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RMIT Classification: Trusted
Using the Siemens AG note as an example, identify the similarities and differences between U.S.
GAAP and IFRS regarding inventory financial accounting and reporting.
Case 3(9 Marks):
Walla Corporation’s International Division consists of two of Walla’s subsidiaries. One of the
subsidiaries operates in the United Kingdom and the other on the European continent. The U.K.
subsidiary had identical sales revenue amounts, as measured in British pounds, in 20X1 and 20X2
and reported a 25% gross profit margin in both years. Similarly, the European subsidiary’s sales
evenue was the same in 20X1 and 20X2 when measured in euros. It reported a 33.33% gross profit
margin in both years. Both subsidiaries account for their inventories under FIFO.
Assume the British pound was rising steadily in value versus the U.S. dollar throughout 20X1 and
20X2. Assume the euro was declining steadily in value versus the U.S. dollar throughout 20X1 and
20X2.
Required:
1, If Walla uses the cu
ent rate method to translate the British subsidiary’s financial statements into
U.S. dollars, how is the British subsidiary’s 20X2 gross margin percentage, based on its U.S. dollar
financial statements, most likely to compare to its gross margin percentage based on the 20X2
British pound financial statements? Explain. (3 Marks)
2, If Walla uses the temporal method to translate the British subsidiary’s financial statements into
U.S. dollars, how is the British subsidiary’s 20X2 gross margin percentage, based on its U.S. dollar
financial statements, most likely to compare to its gross margin percentage based on the 20X2
British pound financial statements? Explain. (3 Marks)
3, If Walla uses the cu
ent rate method to translate both subsidiaries’ financial statements into U.S.
dollars, how is the gross margin percentage for the International Division in 20X2 most likely to
compare to the gross margin percentage of the International Division in 20X1? Explain. (3 Marks)