Financial Analysis and Valuation - Midterm exam - Mock paper

Questions

A
B

B
C
D

3
A
B
C
D

A
B
C
D

5
A

C
D

6
A

C
D

7
A
B
C
D

A
B

9
A
B
C
D

10
A
B
C

11

A
B
C
D

12
A
B
C

13

A
B
C
D
14

A
B

15
A
B

16

A
B
C
D

17
A
B
C
D

18

B
C
D

19

A
B
C
D

20
A
B

D
Financial Analysis and Valuation - Midterm exam - Mock paper

Questions

A owns 30% of the common equity of B. A has been unsuccessful in its attempts to obtain representation on B's board of directors.
For financial reporting purposes, A's ownership interest is most likely considered a(n):
Associate, consolidated with the equity method
Subsidiary, consolidated with the acquisition method

Financial asset, unconsolidated

None of the above

Which class of corporations cannot be exempted from consolidation in the EU under IFRS?

Listed holding companies without a controlling shareholder

Listed holding companies with a controlling shareholder

Listed holding companies with wholly owned subsidiaries
Listed state-owned corporations

Free cash flows from operations (FCFO), other things being equal, increase if:
Shareholders underwrite a capital increase
Dividends decrease
Accounts receivables decrease
Trade liabilities decrease

A company ends 2018 with 100 in fixed assets, which are already fully depreciated. In the next few years it will invest 5 in CAPEX
with 5 years of useful life each, including the year of the investment. EBITDA is expected constant at 30 in perpetuity. Ignore taxes.
How much is ROCE at the end of 2020 (using end of period assets)? Assume noncash WC = 0.
26.2%
30.0%
26.1%
28.0%

The net debt to EBITDA ratio expresses:

Earnings generation before D&A, in relative terms

How long it takes to pay back debt at current performance

The time it takes to turn EBITDA into cash flows

A proxy of an effective interest rate on debt

Noncash working capital:

It is equal to the difference between current assets and current liabilities

If positive, it means the company has a financing need

It is equal to the difference between short term assets and short term liabilities
It is equal to the difference between revenues and monetary costs

A company's 2019 annual report shows: EBITDA = 430; EBIT = 400; personnel expenses = 70; effective tax rate = 50%. Meanwhile,
the book value of short term loans and of intangibles decreased by 20 each. How much is FCFO 2019?
190
250
220
200

Pinnacle Inc. is a publicly traded company. You are trying to estimate how much debt it has outstanding, to compute a cost of
capital. Which of the following items would you not include in debt?
Commercial paper
Corporate bonds

Income tax payable

None of the above

Which of the following items could be classified into the extraordinary items" category because it can be considered infrequent?
Restructuring charges
Allowance expenses for doubtful receivables
Gains/losses from PPE disposals
Provisions for litigation risks

When the depreciated historical cost of a tangible or intangible (non-current) asset is lower than its recoverable amount:
An impairment loss should be recognised as expense in the income statement immediately
An impairment loss should be recognised only if the fair value is higher than the value in use
The tangible asset must be reported at its fair value

None of the others

Cox Corporation recently reported an EBITDA of $22.5 million and 5.4 million of net income. The company has $6 million interest
expense and the corporate tax rate is 35 percent. What was the company’s depreciation and amortization expense, assuming no
exceptional P&L?
4.3
8.2
9.4
11.6

Net debt changes if a company:

Borrows a short-term loan from a bank
Borrows a long-term loan from a bank
Sells short-term liquid financial assets

Sells long-term financial assets

Selzer Inc. sells all its merchandise on credit. It has a profit margin of 4 percent, days sales outstanding equal to 60 days (based on
a 365-day year and excluding VAT), receivables of $148, total assets of $3000, and a debt-to-assets ratio of 0,64. What is the firm's
return on equity (ROE)?
7.1%
33.3%
3.3%
8.1%
A company currently has net income equal to € 10m and equity equal to € 100m. Which of the following events generate an increase
of ROE?
A decrease of sales
Stock dividends

An increase of net income

Additional share capital (contributions in cash)

A firm has a higher asset turnover ratio than the industry average, which implies
the firm is more likely to avoid insolvency in the short run than other firms in the industry
the firm is more profitable than other firms in the industry

the firm is utilizing assets more efficiently than other firms in the industry

the firm has higher spending on new fixed assets than other firms in the industry

Apex Industries expects to earn $25 million in EBITDA next year. The company pays an operating tax rate of 30 percent. If the value
of leased asset and of the residual debt is $125 (5 years residual life, straight line D&A) and the cost of debt is 10 percent (5-year
lease) and the lease yearly payment is 35, what is the approximate after-tax operating profit, adjusted for capitalized operating
leases (choose the closest value)?
24.0
25.0
17.5
27.0

Consider the attached balance sheet. How much is noncash working capital?
-870
-950
-1,120
-620

How will an increase in invested capital (IC) in a given year affect free cash flow (FCFO) and ROCE if all other things are kept
equal?

It will decrease both FCFO and ROCE.

It will increase both FCFO and ROCE.

It will increase FCFO but decrease ROCE.
It will decrease FCFO but increase ROCE.

In calculating free cash flows from operations, which of the following is/are not NOT an investment that should be subtracted from
gross cash flows?
Change in operating working capital
Change in debt outstanding
Net capital expenditures
Investment in goodwill and acquired intangibles

Which of the following is the best estimate of retained earnings in year T?

Retained earningsT+1 + Net incomeT–1 – DividendsT–1
Retained earningsT + Net incomeT+1 – DividendsT–1

Retained earningsT–1 + Net incomeT – DividendsT

Retained earningsT + Net incomeT + DividendsT

Comments to the right answer

The investment in B is neither under control, nor under significant influence, therefore it
won't be measured with neither the acquisition method nor the equity method.

Listed corporations must apply IAS/IFRS in the EU, unless their controlling shareholder
consolidates.

A decrease in an item within noncash WC is a cash inflow, included into FCFO.

FA at the end of 2018 100.0

Useful live of new investments 5.0

CAPEX in 2019 5.0

Its D&A in 2019 (1.0)
Its D&A in 2020 (1.0)

CAPEX 2020 5.0

Its D&A in 2020 (1.0)

FA at the end of 2020 107.0

EBITDA in 2020 30.0
EBIT in 2020 28.0
ROCE 2020 26.2%

EBITDA is a proxy of a future CF available for debt service, assuming unchanged

performance. Therefore the ND / EBITDA ratio expresses the "number of years" to pay
back such net debt

A positive noncash nondebt WC means the company has more current operating assets
than current operating liability, i.e. it is delaying some cash flows. Therefore it represents
capital needed to stay invested in the business.

EBITDA 430.0
EBIT 400.0
D&A 50.0%
Decrease in intangibles 20.0
Tax rate 50.0%
Operating taxes 200.0
D&A 30.0
CAPEX (10.0)
FCFO 220.0

Tax payables are operational BS items, i.e. part of working capital. They are not included
into net debt.

They are typical one-off items that won't recur in future years.

If book value < recoverable amount, there is no need to impair the asset, hence it stays
recorded at its net book value at the time of the test.

EBITDA 22.5
Net income 5.4
Interests 6.0
Tax rate 35.0%
EBT 8.3
EBIT 14.3
Depreciation and amortization 8.2

LT financial assets are not into net debt in the first place, as the items in the other options
are. Therefore in options A, B and C ND would increase and decrease by the same
amount.

Net income margin 4.0%

Days sales outstanding 60

Trade receivables 148
Total assets 3000
Debt / total assets 0.64

Sales 900.3
Net income 36.0
Debt 1920
Equity 1080
ROE 3.3%

Higher net income would increase both numerator and denominator by the same amount,
but with a higher effect on the numerator since the numerator is smaller, therefore ROE
increases

Asset turnover expresses how much sales are generated for each 1€ in assets. A higher
ratio expresses higher efficiency. Since the companies are in the same industry, there are
(generally speaking) no other factors affecting the asset turnover level

EBITDA 50

Tax rate 30.0%

Leased assets 125.0
Cost of debt 10.0%
Operating lease expense 35.0
Useful life 5.0
D&A 25.0
EBIT adjusted for lease expense (only the interest component would be below EBIT) 25.0
NOPAT = After tax operating income 17.5

Cash & Cash Equivalents 1,250

Accounts Receivable 300
Inventory 600
Prepaid expenses 50
Tax receivable (VAT) 80
Property Plant and Equipment 2,500
Intangibles 1,200
Long-term Financial Assets 4,500
Assets 10,480
Accounts Payable 1,500
Provisions for warranties 250
Employee Benefits 600
Accrued expenses 100
Deferred Revenues 50
Short term line of credit 250
Long-term financial debts 3,200
Equity 4,530
Liabilities + equity 10,480

Noncash working capital (870.0)

Higher IC means either more CAPEX or a higher investment in noncash WC, either way
more cash outflows, so lower FCFO. ROCE will have a higher denominator, hence a lower
value.
Change in debt appears below FCFO and above FCFE in cash flows for valuation

Starting from the previous year's retained earnings, its balance is increased for net income
but decreased for dividends
EDHEC Business School Financial Analysis and Valuation
Academic Year 2021 - 2022 Alberto Ghezzi

Problem Set 1
Review of Key Accounting Transactions

Enter a cell with F2 to see its calculation

Blue figures: given inputs
Black figures: calculations
l Analysis and Valuation
Alberto Ghezzi
Problem 1.1 - Infra-annual financial statements

($b) 12/19 3/20 6/20 9/20 12/20

Fixed assets 67 69 72 81 84
Trade payables 2 2 2 2 2
Sales 21 18 19 21 28
Net income 7 5 5 8 11

2020 sales 86
2020 fixed assets 84
3/21 6/21
86 90 305 84 288 372
2 2
26 29 86 28 79 107
9 10
 Problem 1.2 - Financial lease

Interest rate 7.0%

Useful life of leasing = asset 3.0
Acquisition at year 3 20.0
Lease payments 100.0

PV lease payments 262.4 262.4

PV final acquisition 16.3
Total PV lease payments 278.8

Period Debt BOP Interests Principal Payment IS total Debt EOP D&A Asset
278.8 278.8
1 278.8 19.5 80.5 (100.0) (105.8) 198.3 (86.3) 192.5
2 198.3 13.9 86.1 (100.0) (100.1) 112.1 (86.3) 106.3
3 112.1 7.9 92.1 (100.0) (94.1) 20.0 (86.3) 20.0
(300.0) (300.0)

Problem 1.3 - Financial lease

Payment 50.0
Maturity 5.0
Useful life 10.0
FV plant 200.0
PV payments 170.0
IRR at FV 7.9%
Incremental borrowing rate 5.0%

Finance lease
PPE initial 170.0
Debt initial 170.0

D&A Y1 17.0
CA Y1 153.0
Interest payment Y1 8.5
Principal repayment BS 41.5
Debt outstanding Y1 end 128.5

Financial lease

Event Item Statement Debit Credit

Recognize asset and debt PPE A 170
Leasing debt L 170
Cash A 50
Payment Interests C 9
Leasing debt L 42
Depreciation C 17
Depreciation
Acc. depreciation A- 17

Operating lease

Event Item Statement Debit Credit

Leasing expense C 50
Payment
Cash A- 50
Problem 1.4 - Recognizing intangibles

Advertising 50.0
Research 50.0
R&D 250.0
Patent 80.0
Drugs useful life 30.0
Legal patents 10.0
Useful life acquired patent 5.0

Development 200.0
Amortization (20.0)
CA development 180.0

Patent 80.0
Amortization (16.0)
CA patent 64.0

Intangibles 244.0
Problem 1.6 - Impairment test

Recoverable amount 1,000

PP&E disposal market value 600

3. Determine
1. Impairment 2. Allocate to 4. Allocate 5. Carrying
other assets Max reduction Check
loss goodwill residuals amount
quotas
Customer list 500 33.3% 167 333
Store PP&E 1,000 66.7% 400 333 1 667
Goodwill 300 300 -
CA CGU 1,800 800 1,500.0 1,000 800

Recoverable amount 1,000

PP&E disposal market value 700

3. Determine
1. Impairment 2. Allocate to 4. Allocate 5. Carrying
other assets Max reduction Check
loss goodwill residuals amount
quotas
Customer list 500 33.3% 200 300
Store PP&E 1,000 66.7% 300 333 - 700
Goodwill 300 300 -
CA CGU 1,800 800 1,500.0 1,000 800
Problem 1.7 - The life cycle of provisions 1 2

Y1 allowance to legal claims 50.0

Y4 legal claims costs 70.0
Yearly balance of product defect provision 10.0%

Income statement
Gross profit 1,000.0 1,200.0
Nonrecurring costs (10.0)
Allowance to legal claims provision (50.0)
Allowance to product defects provision (40.0) (20.0)
EBIT 910.0 1,170.0

Balance sheet

Plant 800.0 800.0 800.0

Cash - 1,000.0 2,130.0
Assets 800.0 1,800.0 2,930.0

Legal claims provision 10.0 60.0 -

Product defects provision 60.0 100.0 120.0
Equity 730.0 1,640.0 2,810.0
Liabilities 800.0 1,800.0 2,930.0

Use of legal claims provision 60.0

CF statement
EBIT 910.0 1,170.0
Allowance to legal claims provision 50.0 -
Allowance to product defects provision 40.0 20.0
Payment related to legal claims - (60.0)
Payment related to product defects - -
Cash flow 1,000.0 1,130.0
Problem 1.9 - Income taxes

Other profits and losses 100.0 100.0 100.0

Bad debt provision (30.0)
Non-taxable subsidy 10.0
Dividend income 20.0
Earnings before tax 100.0 100.0 100.0

Increasing temporary differences 30.0 (30.0)

Decreasing temporary differences (20.0) 20.0
Decreasing permanent differences (10.0)

Taxable income 100.0 120.0 70.0

Tax rate 40.0%
Income taxes, current IS (40.0) (48.0) (28.0)
Deferred taxes IS 4.0 8.0 (12.0)

Total income taxes in the IS (36.0) (40.0) (40.0)

Addition to deferred tax asset 12.0 - (12.0)

Balance BS 12.0 12.0 -

Addition to deferred tax liability 8.0 (8.0) -

Balance BS 8.0 - -

Income tax payable BS 40.0 48.0 28.0

Cash payment (40.0) (48.0)
Balance BS 40.0 48.0 28.0

Problem 1.10 - Tax loss carryforwards

Deferred tax asset for losses 3.5

Income tax rate 35.0%

EBT (100.0) 100.0 100.0

Income statement tax 35.0 (35.0) (35.0)

BOP NOL 10.0 45.0 10.0

New 35.0 - -
Used - (35.0) (10.0)
EOP 10.0 45.0 10.0 -
Cash taxes - - (25.0)
Problem 1.11 - Diluted EPS with warrants

Net income 150.0

Net income from minorities 50.0
Ordinary shares 50.0
Preferred shares 10.0
DPS preferred € 5.0
Treasury share purchase 1.0

Warrants 2.0
Conversion ratio: 1 share per X warrants 5.0
Strike price € 50.0
FV ordinary shares 60.0

Basic EPS
Net income to the Group 100.0
Cancel preferred dividend (50.0)
Net income to the ordinary shareholders 50.0

NOSH Jan - Mar 50.0 4.0 0.3

NOSH Apr - Dec 49.0 8.0 0.7
49.3 12.0

Earnings per share 1.0

Potential share from conversion 0.4

Cash inflow 20.0
Purchase with proceeds 0.3
Diluted NOSH 49.4

Diluted EPS 1.01

EDHEC Business School Financial Analysis and Valuation
Academic Year 2021 - 2022 Alberto Ghezzi

Problem Set 2
Consolidation and M&A Accounting

Enter a cell with F2 to see its calculation

Blue figures: given inputs
Black figures: calculations
l Analysis and Valuation
Alberto Ghezzi
A buys stake in B 80% 20%
Purchase price 400
New intangible 50
Tax rate 40%

Differences among consolidation theories Mod. parent (IAS Partial)

A B Aggregated Eliminations
Stake in B 400 400 (400)
Goodwill 136
New intangibles 50
Assets 1,000 400 1,400
Total assets 1,400 400 1,800 (214)
Equity 900 300 1,200 (300)
Minorities 66
Deferred taxes 20
Liabilities 500 100 600
Total liabilities 1,400 400 1,800 (214)
- - - -

Deferred taxes 20

Modified parent (IAS Partial)

Stake in B 400
- Book value B's equity * stake (240)
- New intangibles * stake (40)
+ Deferred taxes on step-up 16
= Goodwill 136
Minorities = FV B's equity * (1 - Stake) 66

Entity (IAS Full)

Grossed up cost of the acquisition 500
- Book value B's equity (300)
- New intangibles (50)
+ Deferred taxes on step-up 20
= Goodwill 170
Minorities = Grossed-up price * (1 - Stake) 100

Parent (Some national European GAAPs)

Stake in B 400
- Book value B's equity * Stake (240)
- New intangibles * Stake (40)
+ Deferred taxes on step-up 16
= Goodwill 136
Minorities = BV B's equity * (1 - Stake) 60

Classical
Stake in B 400
- Book value B's equity * stake (240)
- New intangibles * stake (40)
+ Deferred taxes on step-up 16
= Goodwill 136
Mod. parent (IAS Partial) Entity (IAS Full) Parent (Nat. EU GAAPs) Classical

Consolidated Eliminations Consolidated Eliminations Consolidated Beta Min. Eliminations

- (400) - (400) - - (400)
136 170 170 136 136 - 136
50 50 50 40 40 40
1,400 1,400 1,400 80
1,586 (180) 1,620 (224) 1,576 80 (224)
900 (300) 900 (300) 900 60 (240)
66 100 100 60 60 -
20 20 20 16 16 16
600 600 600 20
1,586 (180) 1,620 (224) 1,576 80 (224)
- - - - - - -
Consolidated
-
136
40
1,320
1,496
900
-
16
580
1,496
-
 Problem 2.1 - Consolidation

Acquisition 1,000 Balance sheet (€m) A

Stake 90.0%
Patents 500 Patents
Useful life Goodwill
Tax rate 30.0% Investments 1,000
Trade receivables 4,000
Assets 5,000

Share capital 3,000

Retained earnings 520
Net income of the year 80
Minorities - Reserves
Deferred tax liabilities
Trade payables 1,400
Liabilities 5,000

1. Aggregate A and B's financials,

2. Cancel the investment and B's equity, enter goodwill and minorities, add extra PPE value

Extra PPE value 300.0

Deferred taxes on extra PPE value 90.0
Minorities' stake 10.0%
B's equity at the consolidation date 610.0

Goodwill calculation
Investment 1,000
Cancel portion of B's equity (549)
Allocate to PPE (270)
Allocate to PPE - Tax effect 81
Partial goodwill 262
Minorities 82
 1 2 3

B Acquisition 1,000
Stake 90%
200 200 300 500 Patents 500
- 262 262 Useful life
1,000 (1,000) - Tax rate 30%
1,910 5,910 5,910
2,110 (438) 6,672

500 3,500 (500) 3,000

100 620 (100) 520
10 90 (10) 80
- 82 82
- 90 90
1,500 2,900 2,900
2,110 (438) 6,672
-
Aggregate A and B's financials,
Cancel the investment and B's equity, enter goodwill and minorities, add extra PPE value

Extra PPE value 300

Deferred taxes on extra PPE value 90
Minorities' stake 10%
B's equity at the consolidation date 610

Goodwill calculation
Investment 1000
Cancel portion of B's equity 549
Allocate to PPE 270
Allocate to PPE - Tax effect 189
Partial goodwill 262
Minorities 82
 Balance sheet (€m) A B A+B

Patents 200 200

Goodwill 262
Investments 1,000 1,000
Trade receivables 4,000 1,910 5,910
Assets 5,000 2,110 7,372

Share capital 3,000 500 3,500

Retained earnings 520 100 620
Net income of the year 80 10 90
Minorities - Reserves 82
Deferred tax liabilities 90
Trade payables 1,400 1,500 2,900
Liabilities 5,000 2,110 7,282
-

er goodwill and minorities, add extra PPE value

 Problem 2.2 - Consolidation 1 2 3 4 5 6 7 8 9
B cancels the Cancel A's gain on disposal =
Acquisition 2,000 Income Statement (€m) A B revenue difference between price and net
Stake 75.0% Sales 1,400 1,100 2,500 (200) (300) (100) book value of PPE
1,900
FV of B's PPE 3,000 COGS (800) (700) (1,500) (100) 200 170 10 (1,220)
Useful life 10 EBIT 600 400
A cancels the COGS Depreciation goes
Tax rate 40.0% Interest income 200 60 260 (50) 210
recorded for the sale, as it back to its old value
Interest expense (400) (80) (480) will re-record inventory in 50
in A (430)
A sells to B 200.0 EBT 400 380 the BS at the original value
A lends to B 500.0 Taxes (70) (100) (170) 40 52 36 (42)
Interests from B to A 50.0 Net income 330 280 (60) - - (78) (54) 418
B sells goods to a for 300.0 Minorities' NI 36 36
COGS for B was 170.0 Group NI 382.5
A sells PPE to B for 300.0
PPE sold CA was 200.0 Balance sheet (€m) A B Inventory goes to
Old depreciation by A 10.0% back to the original
balance PPE in its original A
New depreciation by B 20.0% PPE 9,000 2,000 11,000 1,000 (100) (90) 11,810
ownership would have
Historical cost 500.0 Goodwill - 335 been lower (B's "new"
335
Investments 2,000 200 2,200 (2,000) historical cost)
200 but also less
Financial receivables 800 700 1,500 (500) depreciated
1,000
Deferred tax assets - -
Inventories 500 800 1,300 (130) 1,170
Trade receivables 1,000 500 1,500 (200) 1,300
Assets 13,300 4,200 (665) (100) (200) (500) (130) (90) - 15,815

Share capital 5,000 800 5,800 (800) 5,000

Retained earnings 4,170 820 4,990 (820) 4,170
Net income of the year 330 280 610 (60) - - (78) (54) (36) 383
Minorities - Reserves - 555 555
Minorities - NI - 36 36
Financial payables 1,800 500 2,300 (500) 1,800
Deferred tax liabilities - 400 (40) (52) (36) 272
Trade payables 2,000 1,800 3,800 (200) 3,600
Liabilities 13,300 4,200 (665) (100) (200) (500) (130) (90) - 15,815
- - - - - - -
1. Aggregate A and B's financials,
2. Cancel the investment and B's equity, enter goodwill and minorities, add extra PPE value

Extra PPE value 1,000.0

Deferred taxes on extra PPE value 400.0
Minorities' stake 25.0%
B's equity at the consolidation date 1,620.0

Goodwill calculation
Investment 2,000
Cancel portion of B's equity (1,215)
Allocate to PPE (750)
Allocate to PPE - Tax effect 300
Partial goodwill 335
Minorities 555
Problem 2.3 - Consolidation in the following periods

A - Separated Dec 2020 Dec 2021 Dec 2022 Dec 2023

Assets 40 55 75 100
Investment in B 10 10 10 10
Assets 50 65 85 110

Share capital 40 40 40 40
Retained earnings - 10 25 45
Net income 10 15 20 25
Equity and liabilities 50 65 85 110

Net income 10 15 20 25

B - Separated Dec 2014 Dec 2015 Dec 2016 Dec 2017

Assets 2 3 4 5
Assets 2 3 4 5

Share capital 1 1 1 1
Retained earnings - 1 2 3
Net income 1 1 1 1
Equity and liabilities 2 3 4 5

Net income 1 1 1 1

1st cons.
A - Consolidated Dec 2014 Dec 2015 Dec 2016 Dec 2017

Goodwill 5 5 5 5 Consolidation in the following years carr

Intangibles 3 2 1 -
Assets 42 58 79 105
Attivo 50 65 85 110

Share capital 40 40 40 40
Retained earnings - 10 25 45
Net income 10 15 20 25
Equity and liabilities 50 65 85 110

Intangibles D&A 1 1 1
Useful life 3

Consolidation Dec 2014 Dec 2015 Dec 2016 Dec 2017

Acquisition and consolidation on 31/12

B's equity 2 5 If consolidation is reperformed on 31/12
Intangibles 3 3
Goodwill 5 2
Investment 10 10
(Backup for Word file:)
Balance sheet (€m) A B
Assets 40 2
Investment in B 10
Assets 50 2
Share capital 40 1
Retained earnings - -
Net income 10 1
Equity and liabilities 50 2
Consolidation in the following years carries the same goodwill, it does not reperform the whole consolidation entry.

If consolidation is reperformed on 31/12/2017 rather than carried forward, goodwill would have been 2
Problem 2.4 - Equity method

Acquisition price 1,000.0

Stake 25.0%
Equity 3,000.0
Brand 200.0
Useful life 4.0
Tax rate 40.0%
Net income 2020 100.0
Share issue (capital increase) 2020 1,000.0
Dividend 2020 70.0

Acquisition 1,000.0
Cancel equity (750.0)
Extra fair values (50.0)
Tax effect 20.0
Goodwill 220.0

Associate value FY 2019 1,000.0

2020 FY end value

Opening 1,000.0
Net income for A 25.0
D&A extra assets (total) 50.0
D&A extra assets for A (7.5)
Capital increase 250.0
Dividends (17.5)
Associate value FY 2020 1,250.0

At investment (end of 2019): Debt Credit

Associate A 1,000.0
Cash A- 1,000.0

End of 2020: Debt Credit

Associate A 25.0
P&L from associates R 25.0

At rights issue: Debt Credit

Associate A 250.0
Cash 250.0

At dividend: Debt Credit

Associate A 17.5
Cash 17.5

Reconciling the initial historical cost. It includes:

Owned portion of B's assets and liabilities 750
Owned portion of newly recognised brand 50
Deferred tax liability on asset step-ups (20)
Goodwill 220
Total historical cost 1,000
Check -
Acquisition price 1,000.0
Stake 25.0%
Equity 3,000.0
Brand 200.0
Useful life 4.0
Tax rate 40.0%
Net income 2020 100.0
Share issue (capital increase) 2020 1,000.0
Dividend 2020 70.0

Acquisition 1,000.0
Cancel equity 750.0
Extra fair values 50.0
Tax effect 20.0
Goodwill 220.0

Associate value FY 2019 1,000.0

2020 FY end value

Opening 1,000.0
Net income for A 25.0
D&A extra assets (total) 50.0
D&A extra assets for A 7.5
Capital increase 250.0
Dividends 17.5
Associate value FY 2020 1,250.0

At investment (end of 2019): Debt Credit

Associate A 1,000.0
Cash A- 1,000.0

End of 2020:
Associate A 25.0
P&L from associates R 25.0

At rights issue:
Associate A 250.0
Cash 250.0

At dividend:
Associate A 17.5
Cash 17.5

Reconciling the initial historical cost. It includes:

Owned portion of B's assets and liabilities
Owned portion of newly recognised brand
Deferred tax liability on asset step-ups
Goodwill
Total historical cost
Check
Problem 2.5 - Accounting for a partial acquisition with advisory fees

B equity value 100% 525.0

Acquired stake 80.0%
Residual stake (minorities) 20.0%
M&A fees 30.0
Acquisition financing 300.0
Tax rate 30.0%

Solution

Uses 450.0
Price 420.0
M&A fees 30.0
Sources 450.0
Debt 300.0
Equity 150.0

Tax carryforward on M&A fees 9.0

Goodwill
Minorities

Balance sheet (€m) Company A Company B Acquisition Consolidation A ending

Original assets 2,550.0 550.0
Tax assets 9.0
Stake in target 420.0
Goodwill
Total assets

Gross debt
Equity
Reserves
Minorities
Liabilities
Problem 2.5 - Accounting for a partial acquisition with advisory fees

B equity value 100% 525.0

Acquired stake 80.0%
Residual stake (minorities) 20.0%
M&A fees 30.0
Acquisition financing 300.0
Tax rate 30.0%

Solution

Uses 450.0
Price 420.0
M&A fees 30.0
Sources 450.0
Debt 300.0
Equity 150.0

Tax carryforward on M&A fees 9.0

Goodwill 100.0
Minorities 80.0

Balance sheet (€m) Company A Company B Acquisition Consolidation A ending

Original assets 2,550.0 550.0 3,100.0
Tax assets 9.0 9.0
Stake in target 420.0 (420.0) -
Goodwill 100.0 100.0
Total assets 2,550.0 550.0 429.0 (320.0) 3,209.0

Gross debt 50.0 150.0 300.0 500.0

Equity 2,100.0 335.0 150.0 (335.0) 2,250.0
Reserves 400.0 65.0 (21.0) (65.0) 379.0
Minorities 80.0 80.0
Liabilities 2,550.0 550.0 429.0 (320.0) 3,209.0
- -
Problem 2.6 - Structuring an acquisition paid in cash

Balance sheets (€m) Bidder SpA Target SpA

Fixed assets 120.0 263.0
Noncash working capital 50.0 55.0
Capital employed 170.0 318.0
Share capital 60.0 60.0
Reserves 360.0 58.0
Equity 420.0 118.0
Debt 400.0
(Cash) (250.0) (200.0)
Net debt (250.0) 200.0
Total sources 170.0 318.0

Other metrics
Number of shares (NOSH) (m) 60.0 25.0
Net income 2019 35.0 28.0
Equity value 900.0 500.0
Shareholders
Seller A 66.7%
Seller B 33.3%
Mister C 100.0%

Deal information (€m) 2019

Interest on M&A debt 5.0%
PPA software 15.0
Useful life 5.0
PPA Brand 200.0
Restructuring costs 3.0
Synergies 6.0
Tax rate 30.0%
Stake acquired in Target 70.0%

Solution

Cash acquisition
Price 350.0

Bidder SpA - Resulting balance sheet (Separated)

Fixed assets 120.0
Investment in T 350.0
Noncash working capital 50.0
Capital employed 520.0
Share capital 60.0
Reserves 360.0
Equity 420.0
Debt 350.0
(Cash) (250.0)
Net debt 100.0
Sources 520.0

Goodwill
(Investment in Target in Bidder's B/S) 500.0
BV equity Target (118.0)
FV emerged in PPA (215.0)
Deferred tax liability 64.5
Full goodwill 231.5
Minorities at FV 150.0

Bidder SpA - Resulting balance sheet (Consolidated)

Fixed assets 383.0
PPA Intangibles 215.0
Investment in T
Goodwill 231.5
(Deferred tax liability) (64.5)
Noncash working capital 105.0
Capital employed 870.0
Share capital 60.0
Reserves 360.0
Minorities 150.0
Equity 570.0
Debt 750.0
(Cash) (450.0)
Net debt 300.0
Sources 870.0

Extra analyses (non mandatory)

Valuations
Value per share 15.0 20.0
EPS 0.58 1.12

Bidder - Net income analysis

Bidder NI 35.0
Targer NI 28.0
Interests (12.3)
Intangibles D&A (3.0) Not deductible
Restructuring costs (2.1)
Synergies 4.2
Combined NI 49.8
Of which NI to minorities 8.4

EPS after 0.831

Accretion (dilution) 42.4%

Accretion if 1/PE > kD after tax in a cash deal

Balance sheets (€m) Bidder SpA Target SpA
Fixed assets 120.0 263.0
Noncash working capital 50.0 55.0
Capital employed 170.0 318.0
Share capital 60.0 60.0
Reserves 360.0 58.0
Equity 420.0 118.0
Debt 400.0
(Cash) 250.0 200.0
Net debt 250.0 200.0
Total sources 170.0 318.0

Other metrics
Number of shares (NOSH) (m) 60.0 25.0
Net income 2019 35.0 28.0
Equity value 900.0 500.0
Shareholders
Seller A 66.7%
Seller B 33.3%
Mister C 100.0%

Deal information (€m) 2019

Interest on M&A debt 5.0%
PPA software 15.0
Useful life 5.0
PPA Brand 200.0
Restructuring costs 3.0
Synergies 6.0
Tax rate 30.0%
Stake acquired in Target 70.0%

Solution

Cash acquisition
Price 350.0

Bidder SpA - Resulting balance sheet (Separated)

Fixed assets 120.0
Investment in T 350.0
Noncash working capital 50.0
Capital employed 520.0
Share capital 60.0
Reserves 360.0
Equity 420.0
Debt 350.0
(Cash) 250.0
Net debt 100.0
Sources 520.0

Goodwill
(Investment in Target in Bidder's B/S) at 100% 500.0
BV equity Target 118.0
FV emerged in PPA 215.0
Deferred tax liability 64.5
Full goodwill 231.5
Minorities at FV 150.0

Bidder SpA - Resulting balance sheet (Consolidated)

Fixed assets
PPA Intangibles
Investment in T
Goodwill
(Deferred tax liability)
Noncash working capital
Capital employed
Share capital
Reserves
Minorities
Equity
Debt
(Cash)
Net debt
Sources
EDHEC Business School Financial Analysis and Valuation
Academic Year 2021 - 2022 Alberto Ghezzi

Problem Set 3
Reorganizing Financials for Valuation

Enter a cell with F2 to see its calculation

Blue figures: given inputs
Black figures: calculations
l Analysis and Valuation
Alberto Ghezzi
#VALUE!

Radiator Inc. - Balance sheet (€m) 2019 2019

Intanbigle assets 25.0 Trade payables 10.0
Tangible assets 40.0 Income tax payable 70.0
Trade receivables 110.0 Line of credit 115.0
Inventory 5.0 Dividends payable 10.0
Tax VAT receivables 55.0 Bonds 25.0
Cash 10.0 Equity 30.0
Financial assets 15.0
Assets 260.0 Liabilities and equity 260.0

Solution

Noncash working capital 90.0

Core capital employed 155.0
Net capital employed 170.0
Net debt 140.0 Assuming that dividends will be paid very shortly
Radiator Inc. - Balance sheet (€m) 2019 2019
Intanbigle assets 25.0 Trade payables 10.0
Tangible assets 40.0 Income tax payable 70.0
Trade receivables 110.0 Line of credit 115.0
Inventory 5.0 Dividends payable 10.0
Tax VAT receivables 55.0 Bonds 25.0
Cash 10.0 Equity 30.0
Financial assets 15.0
Assets 260.0 Liabilities and equity 260.0

Solution

Noncash working capital 90.0

Core capital employed 155.0
Net capital employed 170.0
Net debt 140.0 Assuming that dividends will be paid very shortly
#VALUE!

Sahara SA - Key financials (€m) 2019

Accounts receivables 60.0
Cash 5.0
Patent (net book value) 20.0
Property, plant and equipment 150.0
Inventory 40.0
Suppliers 30.0
Loans 100.0
Bonds 60.0

Solution

Noncash working capital 70.0

Core capital employed 240.0
Net debt 155.0
#VALUE!

Omega Inc. - Balance sheet (€m) 2019 Liabilities and equity 2019
Operating cash 185.0 Short-term debt 1,113.0
Excess cash 2,324.0 Account payables 745.0
Account receivable 1,205.0 Tax payable 392.0
Inventory 834.0 Dividend payable 16.0
Other current assets 174.0 Other current liabilities 644.0
Total current Assets 4,722.0 Total current liabilities 2,910.0
Net tangible fixed assets 5,053.0 Long-term debt 3,540.0
Non-operating financial fixed assets 707.0 Other provisions 133.0
Shareholder equity 3,167.0
Minority interest 732.0
Total Assets 10,482.0 Total liabilities and equity 10,482.0

Solution

Restated B/S 2019

Operating cash 185.0
Account receivable 1,205.0
Inventory 834.0
Other current assets 174.0
Account payables (745.0) With a minus because they move across sides while reorganizing
Tax payable (392.0) With a minus because they move across sides while reorganizing
Other current liabilities (644.0) With a minus because they move across sides while reorganizing
Noncash WC 617.0
Fixex assets 5,053.0
Core invested capital 5,670.0 IC excludes non-operational items
Surplus assets 707.0
(Provisions) (133.0)
Net invested capital 6,244.0

Short-term debt 1,113.0

Dividend payable 16.0
Long-term debt 3,540.0
(Excess cash) (2,324.0)
Net debt 2,345.0
Shareholder equity 3,167.0
Minority interest 732.0
Equity 3,899.0
Total sources 6,244.0
ve across sides while reorganizing
ve across sides while reorganizing
ve across sides while reorganizing
EDHEC Business School Financial Analysis and Valuation
Academic Year 2021 - 2022 Alberto Ghezzi

Problem Set 4
Cash Flows for Valuation

Enter a cell with F2 to see its calculation

Blue figures: given inputs
Black figures: calculations
l Analysis and Valuation
Alberto Ghezzi
 #VALUE!

Moondance AG (€m) 2019

EBITDA 430.0
EBIT 400.0
Personnel expenses (70.0)
Tax rate 50.0%
Short term loans - Change 18/19 (20.0)
Brands - Change 18/19 (20.0)

Solution

a) D&A (30.0)
EBIT 400.0
Operating taxes (200.0)
D&A 30.0
Decrease in noncash working capital -
Capital expenditures (10.0)
Free cash flows from operations 220.0

b) Moondance is investing: it spent 10 in CAPEX in 2019

Moondance AG (€m) 2019
EBITDA 430.0
EBIT 400.0
Personnel expenses 70.0
Tax rate 50.0%
Short term loans - Change 18/19 20.0
Brands - Change 18/19 20.0

Solution

D&A 30.0
EBIT 400.0
Operating taxes 200.0
D&A 30.0
Decrease in noncash working capital ###
Capital expenditures (10.0)
Free cash flows from operations 220.0

Moondance is investing: it spent 10 in CAPEX in 2019

#VALUE!

Square Pizza Srl - Key financials (€m)

EBITDA 2019 300.0
D&A 2019 50.0
New investments 2019 40.0
Disposals 2019 5.0
Noncash capital employed in balance sheet 2019 60.0
Noncash capital employed in balance sheet 2018 80.0
Tax rate 30.0%
Debt in balance sheet 2019 52.0
Debt in balance sheet 2018 68.0
Interests 2019 4.0

Solution

EBIT 250.0
Operating taxes (75.0)
D&A 50.0
Change in NWC 20.0
CAPEX (35.0)
FCFO 2019 210.0
Square Pizza Srl - Key financials (€m)
EBITDA 2019 300.0
D&A 2019 50.0
New investments 2019 40.0
Disposals 2019 5.0
Noncash capital employed in balance sheet 2019 60.0
Noncash capital employed in balance sheet 2018 80.0
Tax rate 30.0%
Debt in balance sheet 2019 52.0
Debt in balance sheet 2018 68.0
Interests 2019 4.0

Solution

EBIT 250.0 250.0

Operating taxes (75.0) 75
D&A 50.0 50.0
Change in NWC 20.0 20.0
CAPEX (35.0) 35.0
FCFO 2019 210.0 210.0
 #VALUE!

Full House LLC ($m) 2019 Full House LLC ($m) 2019
Change in WC - Change in WC -
CAPEX 100.0 CAPEX 100.0
EBIT 500.0 EBIT 500.0
D&A - D&A -
Interest expenses (50.0) Interest expenses 50.0
New loan 130.0 New loan 130.0
Dividends (30.0) Dividends 30.0

Solution Solution

a) EBIT 500.0 EBIT 500.0

CAPEX (100.0) CAPEX 100.0
FCFO 400.0 FCFO 400.0
Interests (50.0) Interests (50.0)
New debt 130.0 New debt 130.0
FCFE 480.0 FCFE 480.0

b) Interests account for a small portion of EBIT (from an earnings point of view) and of FCFO (from a cash flow profile). They are more than sust
Formal check (please see the next subsection)

Interest coverage ratio 10.0x A 10x interest coverage ratio is much higher than its standard 1,5x safety limit
w profile). They are more than sustainable

rd 1,5x safety limit

 #VALUE!

Blue SpA - 2018 events (€m)

Working capital management Tax management

Sales 500.0 Tax rate 2018 (will be paid 40.0%
Raw materials and employees 100.0 Bank financing
Sales 2017 collected in 2018 20.0 Interest expenses 81.0
Sales 2018 not collected during the year 30.0 New loan raised 10.0
Investment management Last payment for an old lo 6.0
D&A old assets 238.0 Shareholders
New investments 427.0 Dividends paid 58.0
New investments' useful life 10.0 Shares issued 10.0
Disposals 100.0

Solution

a) Income statement Income statement

Sales 500.0 Sales 500.0
Costs (100.0) Costs 100.0
D&A old (238.0) D&A old 238.0
D&A new (42.7) D&A new 42.7
EBIT 119.3 EBIT 119.3
Interests (81.0) Interests 81.0
EBT 38.3 EBT 38.3
Taxes (15.3) Taxes 15.3
Net income 23.0 Net income 23.0

Cash flows Cash flows

EBIT 119.3 EBIT 119.3
Operating taxes (47.7) Operating taxes (47.7)
D&A 280.7 D&A 280.7
Change in NWC (tax liabilities) 15.3 Change in NWC (tax liabilities) 15.3
Change in NWC (trade receivables) (10.0) Change in NWC (trade receivables) (10.0)
Capital expenditures (327.0) Capital expenditures (327.0)
FCFO 30.6 FCFO 30.6
Interests (81.0) Interests 81.0
Tax shield 32.4 Tax shield 32.4
Change in financial debt 4.0 Change in financial debt 4.0
FCFE (14.0) FCFE (14.0)

b) Change in equity (48.0) Change in equity (48.0)

Net cash flows (62.0) Net cash flows (62.0)
 #VALUE!

Sun Inc. - Balance sheet ($m) 2011 2012

Operational cash 10.0 12.0 Short-term debt
Excess cash 80.0 85.0 Account payables
Account receivable 200.0 220.0 Tax payable
Inventory 400.0 200.0 Dividend payable
Accruals and prepayments 100.0 105.0 Other current liabilities
Total current Assets 790.0 622.0 Total current liabilities
Net tangible fixed assets 1,000.0 1,150.0 Long-term debt
Non-operating assets 300.0 350.0 Decommissioning provision
Shareholder equity
Minority interest
Total Assets 2,090.0 2,122.0 Total liabilities and equity

Sun Inc - Income statement ($m) 2011 2012

Sales 500.0 600.0
Raw materials (200.0) (300.0)
Marketing and selling exp. (50.0) (75.0)
Staff cost (100.0) (100.0)
Depreciation (30.0) (15.0)
Interest paid (30.0) (30.0)
Interest received 5.0 5.0
Taxation (38.0) (34.0)
Net profit 57.0 51.0

Solution

a) Restated BS 2011 2012

Operating cash 10.0 12.0
Account receivable 200.0 220.0
Inventory 400.0 200.0
Other current assets 100.0 105.0
Account payables (540.0) (900.0)
Tax payable (200.0) (180.0)
Other current liabilities (320.0) (200.0)
Noncash WC (350.0) (743.0)
Fixex assets 1,000.0 1,150.0
Core invested capital 650.0 407.0
Surplus assets 300.0 350.0
(Decommissioning provision) (50.0) (50.0)
Net invested capital 900.0 707.0

Short-term debt 200.0 150.0

Dividend payable 130.0 130.0
Long-term debt 200.0 100.0
(Excess cash) (80.0) (85.0)
Net debt 450.0 295.0
Shareholder equity 250.0 162.0
Minority interest 200.0 250.0
Equity 450.0 412.0
Total sources 900.0 707.0

b) Income statement 2011 2012

EBITDA 150.0 125.0
EBIT 120.0 110.0
 EBT 95.0 85.0
Net income 57.0 51.0

Effective tax rate 40.0% 40.0%

c) Cash flows 2012

Operational taxes (44.0)
Total taxes (34.0)
Tax shield 10.0

2012
EBIT 110.0
(Operational taxes) (44.0)
+ Depreciation 15.0
(Increase) / decrease in noncash WC 393.0
CAPEX (165.0)
FCFO 309.0
Interest paid (30.0)
Interest received 5.0
Tax shield 10.0
(Increase) / decrease in surplus assets (50.0)
(Increase) / decrease in dec. provisions -
Increase / decrease in gross financial debt (150.0)
FCFE 94.0
Increase / decrease in equity (89.0)
Change in cash 5.0

Cross check:
Beginning cash 80.0
Cash flow of the year 5.0
Ending cash 85.0
Check with BS 85.0
Difference -
 2011 2012
200.0 150.0
540.0 900.0
200.0 180.0
130.0 130.0
320.0 200.0
1,390.0 1,560.0
200.0 100.0
50.0 50.0
250.0 162.0
200.0 250.0
2,090.0 2,122.0
EDHEC Business School Financial Analysis and Valuation
Academic Year 2021 - 2022 Alberto Ghezzi

Problem Set 5
Financial Analysis

Enter a cell with F2 to see its calculation

Blue figures: given inputs
Black figures: calculations
l Analysis and Valuation
Alberto Ghezzi
 #VALUE!

ShipCo Ltd - Income statement ($m) 2015 2016

Revenues 661.1 674.3
Cost of sales (439.6) (451.8)
Selling, general, and administrative (92.6) (107.9)
Depreciation (19.8) (20.2)
EBIT 109.1 94.4
Interest expense (7.5) (7.5)
Earnings before taxes 101.6 86.9
Taxes (30.5) (26.1)
Net income 71.1 60.8

ShipCo Ltd - Balance sheet ($m) 2015 2016

Operating cash 13.2 13.5 Accounts payable
Excess cash 118.2 139.8 Short-term debt
Accounts receivable 99.2 97.8 Accrued expenses
Inventory 231.4 242.8 Current liabilities
Current assets 462.0 493.8 Long-term debt
PP&E 267.8 276.5 Common stock
Equity investments 180.0 180.0 Retained earnings
Total assets 909.8 950.3 Liabilities and equity

Operating tax rate 30.0%

Solution

a) Balance sheet 2015 2016

Working cash 13.2 13.5
Accounts receivable 99.2 97.8
Inventories 231.4 242.8
Accounts payable (135.5) (134.9)
Accrued expenses (99.2) (97.8)
Noncash WC 109.1 121.4
Property, plant, and equipment 267.8 276.5
Core capital employed 376.8 397.9
Equity investments 180.0 180.0
Net capital employed 556.8 577.9

Short-term debt 45.0 45.0

Long-term debt 105.0 105.0
Debt and debt equivalents 150.0 150.0
Excess cash and marketable s. (118.2) (139.8)
Net debt 31.8 10.2
Equity 525.1 567.6
Total funds invested 556.8 577.9

b) NOPAT 76.4 66.1

Ratios 2015 2016

ROCE 20.3% 16.6% Year 2016 shows a dramatic decrease in performance of R
can see that the operating margin and asset turnover both
Operating margin 16.5% 14.0% The decline in capital turnover is driven by both an increase
Asset turnover 1.8x 1.7x an increase in property, plant, and equipment (PP&E) to sa
Tax burden 70.0% 70.0%
ROCE breakdown check 20.3% 16.6%
b) WACC 20.0% 20.0%
Value creation (spread) 0.3% (3.4%) The company is roughly turining even in value. Its growth c

Extra: economic profit 1.0 (13.5) This metric is equivalent to EVA. It measures the extra prof
It means that given the capital employed and its "normal" re
 2015 2016
135.5 134.9
45.0 45.0
99.2 97.8
279.7 277.6
105.0 105.0
100.0 100.0
425.1 467.6
909.8 950.3

ws a dramatic decrease in performance of ROCE. Upon further investigation, one

e operating margin and asset turnover both dropped.
apital turnover is driven by both an increase in operating working capital to sales and
property, plant, and equipment (PP&E) to sales, particularly in the last year.
s roughly turining even in value. Its growth creates little value in 2016 and destroys little in 2016

quivalent to EVA. It measures the extra profit (at an asset side level).
ven the capital employed and its "normal" required return (WACC), there is an extra value created / some value destroyed.
#VALUE!

Hotkeys GmbH - Key financials (€k) 2017 2018

CAPEX 400.0 600.0
EBITDA = EBIT 550.0 800.0

Loans 2016 2,000.0

Interest rate (on last year loans) 5.0%

Solution

2016 2017 2018 This cash flow statement layout is a shorter version of a full CF, given the only inputs in the exercise and the assumption
EBITDA (=EBIT) 550.0 800.0 that other items are either zero or non-existent.
CAPEX (400.0) (600.0)
Interests (100.0) (100.0)
Change in cash 50.0 100.0

Cash (50.0) (150.0) As in a financial model: beginning cash + cash flow of the year = ending cash
Loans 2,000.0 2,000.0 2,000.0 The exercise does not expect the loan to be repaid, hence it stays 2000 throughout the years
Net debt 2,000.0 1,950.0 1,850.0

ND / EBITDA 3.5x 2.3x

Covenant 3.0x 2.5x
Meet the covenant? No Yes
#VALUE!

Key inputs (€k)

Useful life 5.0
Beginning fixed assets 100.0
Constant EBITDA 30.0
Constant CAPEX 5.0

Solution

Year Fixed assets CAPEX D&A D&A D&A EBITDA

2018 100.0 30.0
2019 104.0 5.0 1.0 30.0
2020 107.0 5.0 1.0 1.0 30.0
2021 109.0 5.0 1.0 1.0 1.0 30.0
EBIT ROCE
30.0 30.0%
29.0 27.9%
28.0 26.2%
27.0 24.8%
#VALUE!

Key 2017 Financials (€m) Blind A Blind B Blind C

Sales 66,919 3,417 125
Sales (2016) 65,702 3,105 134
EBITDA 15,495 1,036 (12)
EBIT 8,012 595 (20)
Net income 3,377 400 (25)

Capital employed 58,995 1,941 60

Equity 48,079 783 (24)
Net debt 10,916 1,158 84

Solution

Sales growth 1.9% 10.0% (6.7%)

EBITDA % 23.2% 30.3% (9.6%)
EBIT % 12.0% 17.4% (16.0%)
Net income % 5.0% 11.7% (20.0%)

ND/EBITDA 0.7x 1.1x (7.0x)

D/E 0.2x 1.5x (3.5x)

Capital intensity (on full CE) 1.1x 1.8x 2.1x

ROCE before taxes 13.6% 30.7% (33.3%)
ROE 7.0% 51.1% 104.2%

Value creation EBITDA is high but D&A destroys value: very high capital intensity. Mature industry: low growth
Sustainability Low debt burden. Capacity to increase leverage
Profitability ROCE and ROE are both low, consistent with low EBIT, capital intensive industry
Overall Mature business. Cash generation is good (EBITDA) but CAPEX are also high (high D&A)
Only way to grow seems M&A and consolidating in the industry
Identity The company is ENI SpA (oil & gas)

Value creation High on all margins.

Sustainability Already levered, but more than covered by forecast cash (EBITDA proxy)
Profitability High both at company level and to shareholders
Overall High profitability despite requiring investments (since it used leverage)
Identity The company is Ferrari SpA (automotive)

Sustainability Too indebted already, uncapable to repay it in a short period of time.

Value creation Generating losses and net cash outflows. Lack of sustainability exists at operational level too
Profitability Non significant
Overall Both in operational and financial distress
Identity The company is Stefanel SpA (fashion)
#VALUE!

Starfish SA (€m) 2018A 2019E 2020E 2021E

Sales 100.0 105.0 110.3 115.8
EBITDA 13.0 13.7 14.3 15.0
EBIT 10.0 10.5 11.0 11.6
CAPEX 6.0 6.3 6.6 6.9
Working capital (noncash) 10.0 12.0 14.0 16.0

Fixed assets 20.0

Tax rate 30.0%

Solution

Growth 5.0% 5.0% 5.0% Growth in sales shows no issues

EBITDA margin 13.0% 13.0% 13.0% 13.0% Operating margins as well are stable a
EBIT margin 10.0% 10.0% 10.0% 10.0%

D&A 3.00 3.15 3.31 3.47

Fixed assets 20.00 23.15 26.46 29.93 Fixed assets increase, signaling an ag
Capital employed 30.00 35.15 40.46 45.93 Which causes CE to increase
ROCE 23.3% 20.9% 19.1% 17.6% And ROCE to decrease: the additional
increase in value creations (i.e. EBIT)
Growth in sales shows no issues
Operating margins as well are stable across years

Fixed assets increase, signaling an aggressive investment policy: CAPEX > D&A
Which causes CE to increase
And ROCE to decrease: the additional CE bought is not sustained by an adequate
increase in value creations (i.e. EBIT)
 #VALUE!

Bahamut Inc. - Balance sheet (€k) 2019 2019

Trade receivables 600.0 Trade payables 380.0
Stock 340.0 Warranty provisions 20.0
Advances to suppliers 25.0 Redundancy provision 65.0
Tangible assets 790.0 Deferred tax liability 115.0
Other intangibles 660.0 Long term bonds 1,490.0
Financial assets (non core) 190.0 Equity 805.0
Cash 270.0
Assets 2,875.0 Liabilities + Equity 2,875.0

Bahamut Inc - Income statement (€k) 2019

Sales 3,450.0
Dividend income 62.0
Raw materials (2,041.0)
D&A (130.0)
Logistics costs (55.0)
Personnel expenses (560.0)
Interest expenses (75.0)
Taxes (223.0)
Net income 428.0

Tax rate 24.0%

Solution

a) EBIT 664.0
NOPAT 504.6

Noncash WC 450.0
Fixed assets 1,450.0
Core CE 1,900.0
Surplus assets 125.0
Net CE 2,025.0

Net debt 1,220.0

Equity 805.0
Sources 2,025.0

b) ROCE 26.6%
d)
Bahamut Industry
c) EBIT margin 19.2% 15.0% Profit generation: Bahamut is more efficient with va
Capital intensity 1.82x 2.30x Capital intensity: Bahamus however requires more
Tax burden 76.0% 76.0%
ROCE 26.6% 26.2% The two offsetting forces lead to a similar profitabil
: Bahamut is more efficient with value creation (revenues and costs only)
Bahamus however requires more capital per unit sales to generate such margins

g forces lead to a similar profitability

 #VALUE!

Power Tombs Inc. - Balance sheet (€k) 2019 2019

Trade receivables 1,870.0 Trade payables 595.0
Stock 595.0 Warranty provisions 102.0
Advances to suppliers 17.0 Deferred tax liability 246.5
Tangible assets 1,020.0 Short term bank loans 935.0
Non consolidated subsidiaries 170.0 Long term bonds 195.5
Goodwill 127.5 Equity 2,150.5
Other intangibles 425.0
Assets 4,224.5 Liabilities + Equity 4,224.5

Power Tombs Inc. - Income statement (€k) 2019

Sales 8,280.0
Raw materials (3,507.5)
D&A (356.5)
Logistics costs (73.6)
Personnel expenses (3,220.0)
Dividend income 46.0
Interest expenses (138.0)
Taxes (309.3)
Net income 721.1

Solution

a) Fixed assets 1,572.5

Noncash WC 1,538.5
Surplus assets 170.0
Capital employed 3,281.0

Net debt 1,130.5

Equity 2,150.5
Sources of financing 3,281.0

D/E 52.6%
Accounting kD 12.2%
Accounting kD after tax 8.5%

Earnings before tax 1,030.4

Tax rate 30.02%

b) Compute ROCE on a "net" basis, i.e. incorporating surplus assets into capital employed and, consistently, exceptional P&L into operating inco
This will allow the ROE breakdown with the leverage effect formula to perfectly match the base ROE,
since the leverage effect derivation does not foresee the esistence of neither of them.

EBIT (incl. P&L on SA) 1,168.4

NOPAT 817.6
(96.6)
ROE 33.5%
ROCE 24.9%

c) Leverage effect 8.6%

ROE with leverage formula 33.5%
Check equivalence - As anticipated, the ROEs algebraically match
ceptional P&L into operating income.