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FIN 103 Financial Analysis And Valuation

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Question:



Instructions to students

•    This assignment covers Topics 5, 7, 8 and 9 and accounts for 50% of your final grade.

•    There are five (5) areas you need to focus on in this assignment. You should answer all areas.

    You are required to conduct research beyond the FIN103 subject materials when answering some of the assignment areas.

•    The overall word limit for the assignment is 2,000 words. Marks will only be awarded for answers up to the word limit (plus 10%) for each question. Any material written after this will not be counted towards your mark for that question. Headings, quotes and references within the body of the answer are included in the word count. Numerical tables, calculations, and reference lists are not included. For more information on word counts and their rationale, go to Assessment à Assignment à General assessment information.

•    Refer to the Criteria-based Marking Guide for guidelines on what is expected for each question.

•    The ‘General assessment information’ section in KapLearn contains information about format and presentation, word limits, citations and referencing, collusion, plagiarism and other policies, useful resources, submitting your assignment and accessing your results.

•    Full workings must be shown for all calculations. Show all calculations in the text of your assignment and not attached as an appendix. Appendices to assignments will not be read.

•    Answers are to be in your own words. Reference and cite all your sources (within the text of your answer) when quoting or using material from external sources. Include a reference list at the end of your assignment. Refer to the ‘Referencing and Citations Guide’ available from the ‘Library Learning Hub’ in KapLearn for further information on referencing.

•    State all assumptions used in providing your answer.

•    Requests for special consideration or information pertaining to special consideration written in the body of the assignment will not be considered by the marker. Refer to the ‘Refer to the ‘Extensions and special consideration’ section of the Assessment Policy on Kaplan’s website for more information.

 

Learning outcomes (LO) mapping

Marks

2.   Explain how corporations are financed, the needs of their stakeholders and the calculation of dividend returns to various types of shareholders.

3

3.   Calculate a company’s working capital, profitability and market performance ratios using its annual report.

20

4.   Assess the company’s performance using the results of the financial ratios calculated to make an investment recommendation.

22

5.   Explain key valuation concepts and the valuation process.

5

Total marks

50

Assignment presentation and referencing

Reference and cite all your sources when quoting or using material from external sources.

You are required to:

  • use an appropriate presentation and format for your assignment
  • demonstrate independent research and analysis
  • demonstrate appropriate use of relevant references
  • follow the Harvard referencing style as recommended in the ‘Referencing and Citations Guide’ available from the ‘Library Learning Hub’ in KapLearn
  • include a reference list at the end of your assignment following the recommended referencing style
  • adhere to the assignment word limit.

Background information

  • For this assignment you are required to evaluate the quality of JB HiFi’s (JBH’s) earnings, calculate and analyse market performance ratios related to JBH, and prepare a report in which you are required to provide an investment recommendation for JBH.
  • For the purposes of your analysis and discussion for questions 1, 2 and 4, ignore post balance date events at JBH (i.e. post 30 June 2017 events). In other words, your responses to questions 1, 2 and 4 should be based on JBH’s performance up to 30 June 2017. However, for Question 3, do not ignore any dividends that were declared post 30 June 2017 that relate to JBH’s financial year ended 30 June 2017.
  • Show all workings for any ratio calculations in your answers. Your workings and answers should be rounded (unless otherwise stated in a question) to the same extent that JBH has rounded amounts in its 2017 Financial Statements. For example, JBH’s total assets of $2,452.3 million as at 30 June 2017 would be shown in the assignment as $2,452.3 million.
  • Consistent with Assignment 2, assume that the only significant items in FY2017 were as follows:

      –    transaction fees and implementation costs of $22.4 million pre-tax ($15.7 million post tax) associated with the acquisition of The Good Guys

      –    goodwill and fixed asset impairment charges relating to JBH New Zealand of $15.8 million pre-tax ($11.1 million post-tax).

  • Assume that the current market price (CMP) for JBH at 30 June 2017 is $23.37.
  • Assume that the FY 2017 price/earnings ratio for the ASX Consumer Discretionary sector is 12.8 times (x), while the FY2017 dividend yield for this sector is 4.1%.
  • When calculating earnings per share (EPS), cash flow per share and net tangible assets (NTA) per share, assume the following in relation to JBH share capital movements during the financial year:

 

Date

Details

Number of shares issued/ (bought back)

Application price

$

Last market price cum issue

$

 

1 July 2016

Starting number of shares

98,947,309

 

 

1

31 August 2016

Employee option exercise

277,863

26.05

30.07

2

26 September 2016

Institutional entitlement offer

9,891,258

26.20

30.81

3

11 October 2016

Retail entitlement offer

5,246,066

25.20

29.55

4

28 February 2016

Employee option exercise

58,907

24.99

26.82

 

30 June 2017

Ending number of shares

114,421,403

 

 

      –    Assume that all share issues occur at the end of the dates of issue (i.e. at 5.30 pm or close of business).

      –    When time weighting the number of shares, work in days (not months) and use the exact number of shares (not the number of shares rounded to the nearest 1,000). Note that while partial shares can be carried forward in calculations, only whole shares should be shown in tables (shares are not divisible).

      –    Any calculations of market price ex-issue must be to four (4) decimal places. 

Question 1      Quality of earnings (12 marks | Word limit: 500 words)

LO3: Calculate a company’s working capital, profitability and market performance ratios using its annual report.

LO4: Assess the company’s performance using the results of the financial ratios calculated to make an investment recommendation.

(a)       Evaluate JBH’s quality of earnings with reference to the trend in earnings results (at the earnings before interest and taxes (EBIT) level as disclosed in JBH’s 2017 Annual Report) over the past five years; the occurrence of significant items in FY17; and the nature of its earnings base. Then provide an overall conclusion about JBH’s earnings quality. (7 marks)

(b)       Calculate JBH’s 2017 effective tax rate to the nearest whole percentage and provide a brief assessment of JBH’s effective tax rate. (3 marks)

(c)       Calculate JBH’s 2017 financial gearing profitability ratio ($m) to one (1) decimal place and provide an evaluation of this ratio. (2 marks)

Criteria-based marking guide for Question 1

Excellent (Mark range: 10–12 marks)

Satisfactory (Mark range: 6–9 marks)

Unsatisfactory (Mark range: 0–5 marks)

•  provides an evaluation of JBH’s EBIT trend over the last five years; the incidence of significant items in FY17; the quality of JBH’s earnings, covering all (or nearly all) key points. Provides an overall conclusion

•  provides an evaluation of some of the following: JBH’s EBIT trend over the last five years; the incidence of significant items in FY17; the quality of JBH’s earnings and an overall conclusion. However, the answer does not mention all key points

•  makes little or no attempt to the consider the following: JBH’s EBIT trend over the last five years; the incidence of significant items in FY17; the quality of JBH’s earnings and an overall conclusion


Insert your answers to Question 1(a)–(c) below this line 

  • Evaluate JBH’s quality of earnings with reference to the trend in earnings results (at the earnings before interest and taxes (EBIT) level as disclosed in JBH’s 2017 Annual Report) over the past five years; the occurrence of significant items in FY17; and the nature of its earnings base. Then provide an overall conclusion about JBH’s earnings quality. (7 marks)

Page 27

  • Over the past five years, JBH’s EBIT and Revenue has increased by $129.7m and $2,319.6m respectively. Both EBIT and Revenue have increased about 70-72% over the period. EBIT margin have remained the same and stable regardless of the increase in revenue and EBIT due to the acquisition of The Good Guys. This indicates that JBG’s earning have increased where its operating performance have remained stable in the last five years. As discussed in the financial report, The Good Guys business does not, itself, perform as expected or the acquisition has an adverse effect on the performance of JB Hi-Fi business due to, for example, management being preoccupied with The Good Guys business. The Group has developed a detailed integration plan for the businesses where appropriate. (page 28) Hence, there isn’t expected impact to the group. 

The cost of sales have been maintained at the same level as the growth in revenue as the increasing scale of the Group’s operations was able to deliver cost reductions which offset the increase in unexpected cost. (page 28)

Both EBIT and Revenue had increased significantly in 2017 due to the acquisition of The Good Guys. 

  • Overall, the company’s earnings have been stable over the years until 2017. There was a 42% increase in revenue in 2017 due to the acquisition of The Good Guys. The earning quality of the company is good as the gross profit margin of the company has remained stable over the last five years. 
  • It should be noted that all JBH’s performance indicators have been influenced by the timing of the acquisition of The Good Guys, with all ratios including earnings from The Good Guys from 28 November 2016 to 30 June 2017.

Quality of earnings

  • JBH’s EBIT was growing consistently between 2013 to 2016, the rate of growth in EBIT was between 5% - 10%. In 2017, EBIT had an increase of 39% in 2017 due to the acquisition / any external factors ? . The growth in 2017 is unlikely to sustain at a high growth, however, it is likely to remain positive as …. Refer financials…page 27 ?
  • NPAT of the group has been increasing steadily in the past 5 years.

Effective  tax rate ???

  •                –             transaction fees and implementation costs of $22.4 million pre-tax ($15.7 million post tax) associated with the acquisition of The Good Guys
  • –             goodwill and fixed asset impairment charges relating to JBH New Zealand of $15.8 million pre-tax ($11.1 million post-tax).
    Both significant expenses have affected the profits from continuing operations, however it has been offset by the increase of revenue from The Good Guys earnings – to be confirmed ?
    It is expected that the increase of revenue from The Good Guys should be reflected in profit in the next financial year without the one-off cost.
  • Nature of earnings base:
    It has been noted that company’s profits were derived from different sector and geographical region.
    other income – consulting ?
    the good guys ?
    new Zealand, online
  • Products offered by the group 
  • (b) Calculate JBH’s 2017 effective tax rate to the nearest whole percentage and provide a brief assessment of JBH’s effective tax rate. (3 marks)
  • (c)                 Calculate JBH’s 2017 financial gearing profitability ratio ($m) to one (1) decimal place and provide an evaluation of this ratio. (2 marks) 

End of answers to Question 1(a)–(c)

Question 2      Earnings per share and price/earnings ratio (12 marks | Word limit: 300 words)

LO3: Calculate a company’s working capital, profitability and market performance ratios using its annual report.

LO4: Assess the company’s performance using the results of the financial ratios calculated to make an investment recommendation.

(a)       Calculate JBH’s 2017 earnings per share (cents) to one (1) decimal place. Ex?issue prices must be calculated to two (2) decimal places and dilution factors must be calculated to four (4) decimal places. Show all your workings for the calculation of ex-issue prices and dilution factors.

             Note: Refer to the ‘Background information’ for additional information. (8 marks)

(b)       Calculate JBH’s 2017 price/earnings ratio (PER) at the current market price (provided in the ‘Background information’) to one (1) decimal place. (1 mark)

(c)       Explain how PER can be used to value JBH. (3 marks)

Criteria-based marking guide for Question 2(a)–(c)

Excellent (Mark range: 10–12 marks)

Satisfactory (Mark range: 6–9 marks)

Unsatisfactory (Mark range: 0–5 marks)

•  accurately calculates all aspects of earnings per share and PER (with minor errors)

•  provides a clear explanation of how the PER can be used to value JBH

•  accurately calculates most aspects of the earnings per share and PER (with several key errors)

•  provides an explanation of how the PER can be used to value JBH, covering some (but not all) key aspects

•  makes little or no attempt to calculate JBH’s earnings per share and PER

•  makes little or no attempt to explain how the PER can be used to value JBH, or the explanation provided is inaccurate

Insert your answers to Question 2(a)–(c) below this line 

End of answers to Question 2(a)–(c)

Question 3      Dividends (7 marks | Word limit: 300 words)

LO2: Explain how corporations are financed, the needs of their stakeholders and the calculation of dividend returns to various types of shareholders.

LO3: Calculate a company’s working capital, profitability and market performance ratios using its annual report.

LO4: Assess the company’s performance using the results of the financial ratios calculated to make an investment recommendation.

(a)       Calculate JBH’s 2017 dividend per share (cents) to one (1) decimal place and its pre-tax dividend yield at the current market price (provided in the ‘Background information’) to one (1) decimal place.
(2 marks)

(b)       Calculate JBH’s 2017 after-tax dividend yield for a superannuation fund (paying tax at 15%) at the current market price (provided in the ‘Background information’) to one (1) decimal place.

             Note: All steps in after-tax dividend per share calculations (before calculating after-tax dividend yield) must be in cents to one (1) decimal place. (3 marks)

(c)       Calculate JBH’s 2017 dividend cover (times) to one (1) decimal place and assess the adequacy of this dividend cover. (2 marks)

Criteria-based marking guide for Question 3

Excellent (Mark range: 6–7 marks)

Satisfactory (Mark range: 4–5 marks)

Unsatisfactory (Mark range: 0–3 marks)

•  correctly calculates dividend ratios, or with only minor errors

•  assesses the adequacy of JBH’s dividend cover with supporting rationale

•  most aspects of dividend ratios correct, although there are a few key errors

•  assesses the adequacy of JBH’s dividend cover but lacks valid supporting rationale

•  makes no attempt to calculate dividend ratios or ratio calculations are mostly incorrect

•  makes little or no attempt to evaluate JBH’s dividend cover

Insert your answers to Question 3(a)–(c) below this line  End of answers to Question 3(a)–(c)

Question 4      Net tangible assets and cash flow (9 marks | Word limit: 200 words)

LO3: Calculate a company’s working capital, profitability and market performance ratios using its annual report.

LO4: Assess the company’s performance using the results of the financial ratios calculated to make an investment recommendation.

(a)       Calculate JBH’s net tangible assets (NTA) per share at 30 June 2017 in dollars and cents, rounded to the nearest cent. (2 marks)

(b)       Evaluate JBH’s NTA per share compared to its current share price. (2 marks)

(c)       Calculate JBH’s 2017 cash flow per share (cents) to one (1) decimal place. (2 marks)

(d)       Identify and briefly discuss three (3) key items that caused JBH’s 2017 cash flow per share to differ (either positively or negatively) from its 2017 earnings per share. (3 marks)

Criteria-based marking guide for Question 4

Excellent (Mark range: 7–9 marks)

Satisfactory (Mark range: 4–6 marks)

Unsatisfactory (Mark range: 0–3 marks)

•  accurately calculates all aspects of NTA per share

•  accurately evaluates all (or nearly all) aspects of the NTA per share compared to its current share price

•  accurately calculates all aspects of cash flow per share and provides an accurate evaluation of it in relation to JBH’s operating activities

•  provides all (or nearly all) required reasons as to why cash flow per share differs from earnings per share. Answer does not contain inaccurate and/or irrelevant reasons

•  accurately calculates most aspects of NTA per share

•  accurately evaluates some aspects of the NTA per share compared to its current share price

•  accurately calculates most aspects of cash flow per share, provides some evaluation of it in relation to JBH’s operating activities

•  provides some reasons as to why cash flow per share differs from earnings per share. However, the answer does not mention all key points or contains some inaccurate and/or irrelevant reasons

•  makes little or no attempt to calculate NTA per share or incorrectly calculates most aspects of NTA per share

•  makes no attempt or makes an incorrect evaluation of the NTA per share compared to its current share price

•  makes little or no attempt to calculate cash flow per share or incorrectly calculates most aspects of cash flow per share, provides no evaluation of it in relation to JBH’s operating activities

•  makes no attempt or provides incorrect reasons as to why cash flow per share differs from earnings per share


Insert your answers to Question 4(a)–(d) below this line  End of answers to Question 4(a)–(d)

Question 5      Conclusions and recommendation (10 marks | Word limit: 700 words)

LO4: Assess the company’s performance using the results of the financial ratios calculated to make an investment recommendation.

LO5: Explain key valuation concepts and the valuation process

Using your discussion above to support your view, determine whether you would place a buy, hold or sell recommendation on JBH (assume current market price is the 30 June 2017 closing price).

In your response, and justifying your investment recommendation, you should:

  • include your evaluation of the ratios calculated in both assignments
  • discuss key qualitative factors (such as strategy and management) supporting your view
  • discuss the key areas of potential downside (or risk factors)
  • considers JBH’s dividend yield and PER.

Criteria-based marking guide for Question 5

Excellent (Mark range: 9–10 marks)

Satisfactory (Mark range: 5–8 marks)

Unsatisfactory (Mark range: 0–4 marks)

•  provides sound analysis and conclusions drawn from:

    –  quantitative analysis (ratios calculated throughout the assignment)

    –  valuation metrics

    –  qualitative factors

    –  downside risks

•  analysis and conclusions do not contain inaccuracies and/or irrelevant points

•  includes the evaluation of the ratios covering all (or nearly all) key points

•  correctly considers dividend yield and PER

•  recommendation is provided and is clearly supported and consistent with the analysis and conclusions

•  provides some analysis and conclusions drawn from:

    –  quantitative analysis (ratios calculated throughout the assignment)

    –  valuation metrics

    –  qualitative factors

    –  downside risks

•  analysis/conclusions contain some inaccuracies and/or irrelevant points

•  includes the evaluation of the ratios. However, the answer does not mention all key points or the evaluation contains some inaccurate and/or irrelevant analysis

•  considers dividend yield and PER with some errors or omissions

•  recommendation is provided and is largely supported and/or consistent with the analysis and conclusions

•  makes little or no attempt to provide analysis and conclusions drawn from:

    –  quantitative analysis (ratios calculated throughout the assignment)

    –  valuation metrics

    –  qualitative factors

    –  downside risks

•  analysis/conclusion contains some incorrect points or is incomplete

•  makes no attempt to include the evaluation the ratios or provides inaccurate and/or irrelevant evaluation of the trends in the ratios

•  does not consider dividend yield and PER

•  recommendation is unclear or not provided

Insert your answers to Question 5 below this line  End of answers to Question 5

End of Assignment.

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