Cases and Exercises S. Bozzolan – F.

Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Cases and Exercises

Part 1 1

Prepared by S. Bozzolan and F. Paolone

Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Chapter 1:

Review Questions

2
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 1
Missing Accounts

Below are incomplete balance sheets of ABC Corporation. Complete it:

Firm 1 Firm 2 Firm 3

Assets, beginning of period 1,000
Assets, end of period 1,100 500

Owner’s equity, beginning of period 500 200

Owners’ equity, end of period 1,000
Liabilities, beginning of period 200 600
Liabilities, end of period 500

Revenues of the period 2,000 600

Expenses of the period 1,800 180
Earnings after tax of the period 20 100
Dividends (from earnings of the period) 100 10 0
Shares issued (amount) during the 0 50 0
period

3
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 2
Balance sheet changes

Below are incomplete balance sheets of OPQ Corporation

End-of-year for
Year 1 Year 2 Year 3 Year 4
balance sheet items

Current assets 3,092 2,932

Noncurrent assets 18,002 18,16 17,996 20,286
Total assets 21,094 21,182

Current liabilities 2,978 2,866 3,002

Noncurrent liabilities 9,286 9,83
Owners’ equity 8,83 8,868 8,058 8,084
Total liabilities and
23,408
owners’ equity
Current assets / current
1.023 1.04
liabilities

a. Compute the missing amounts, and show the balance sheet at year-ends 1, 2, 3, and 4.

a. Comment on the asset and liability structure of the firm

4
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 3
Reconstructing an Income Statement

Below is some income statement information on company DEF.

Prepare an income statement for each of the three years with Gross Profit, Operating Profit, EBIT,
EBT, EAT

Year 1 Year 2 Year 3

Sales 21,184 49,308

Interest income 24 132 208

Cost of goods sold 16,916 24,372

Administrative and selling expenses 2,38 3,304 4,808

Research and development expenses 380 504 816

Income tax expense 444 864 1,696

Earnings after tax 2,124 3,776

5
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 4
Reconstructing an Income Statement

Below is some income statement information on company ABD.

Prepare an income statement for each of the three years with Gross Profit, Operating Profit, EBIT,
EBT, EAT

Year 1 Year 2 Year 3

Sales 21,087 26,613

Interest expense 75 90 81

Cost of goods sold 16,182 17,709

Administrative and selling expenses 3,966 4,533 5,547

Income tax expense 324 252 192

Earnings after tax 408 312

6
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 5
Profits, losses and cash flows

a. How would you explain that a firm can generate a profit, when at the same time its cash flow
from operations is negative?

b. How would you explain that a firm showing a net loss can have a positive cash flow from
operations?

7
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Chapter 1:

Solutions

8
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 1
Missing Accounts

Firm 1 Firm 2 Firm 3

Assets, beginning of period 1,000 400 1,500
Assets, end of period 1,100 500 1,500

Owner’s equity, beginning of period 500 200 900

Owners’ equity, end of period 600 260 1,000
Liabilities, beginning of period 500 200 600
Liabilities, end of period 500 240 500

Revenues of the period 2,000 200 600

Expenses of the period 1,800 180 500
Earnings after tax of the period 200 20 100
Dividends (from earnings of the period) 100 10 0
Shares issued (amount) during the 0 50 0
period

Firm 1
Liabilities beginning of period = Assets beginning of period – Owners’ equity beginning of period
= 1,000 – 500 = 500
Earnings of the period = Revenues of the period – Expenses of the period
= 2,000 – 1,800 = 200
Owners’ equity end of period =
= Owners’ equity beginning of period + Earnings after tax of the period – Dividends + Amount of
shares issued during the period
= 500 + 200 - 100 + 0 = 600
Liabilities end of period = Assets end of period – Owners’ equityend of period
= 1,100 – 600 = 500
Firm 2
Assets beginning of period = Liabilities beginning of period + Owners’ equity beginning of period
= 200 + 200 = 400
Revenues of period = Earnings after tax of period + Expenses of period
= 20 + 180 = 200
Owners’ equity end of period =
= Owners’ equity beginning of period + Earnings after tax of the period - Dividends + Amount of
shares issued during the period
9
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

= 200 + 20 - 10 + 50 = 260
Liabilities end of period = Assets end of period – Owners’ equity end of period
= 500 – 260 = 240

Firm 3
Owners’ equity beginning of period =
= Owners’ equity end of period - Earnings after tax of the period + Dividends - Amount of shares
issued during the period
= + 1,000 - 100 + 0 - 0 = 900
Assets beginning of period = Liabilities beginning of period + Owners’ equitybeginning of period
= 600 + 900 = 1,500
Assets end of period = Liabilities end of period + Owners’ equityend of period
= 500 + 1,000 = 1,500
Expenses of the period = Revenues of the period – Earnings after tax of the period
= 600 – 100 = 500

10
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 2
Balance sheet changes

End-of-year for
Year 1 Year 2 Year 3 Year 4
balance sheet items

Current assets 3,092 3,022 2,932 3,122

Noncurrent assets 18,002 18,16 17,996 20,286
Total assets 21,094 21,182 20,928 23,408
Current
assets/current 1.038 1.217 1.023 1.04
liabilities
Current liabilities 2,978 2,484 2,866 3,002
Noncurrent
9,286 9,83 10,004 12,322
liabilities
Owners’ equity 8,83 8,868 8,058 8,084
Total liabilities and
21,094 21,182 20,928 23,408
owners’ equity

a. Compute the missing amounts, and show the balance sheet at year-ends 1, 2, 3, and 4.

Year 1
Noncurrent assets = Total assets – Current assets
= 21,094 – 3,092 = 18,002
Total liabilities and owners’ equity = Total assets = 21,094
Owners’ equity = Total liabilities and owners’ equity – (Current liabilities + Noncurrent
liabilities)
= 21,094 – (2,978 + 9,286) = 8,830
Current assets/current liabilities = 3,092/2,978 = 1.038

Year 2
Total assets = Total liabilities and owners’ equity
= 21,182
Current assets = Total assets – Noncurrent assets
= 21,182 – 18,160 = 3,022
Currrent liabilities = (Total liabilities and owners’ equity – Owners’ equity) - Noncurrent
liabilities
= 21,182 – 8,868 – 9,830 = 2,484

11
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Current assets/current liabilities = 3,022/2,484 = 1.217

Year 3
Total assets = Current assets + Noncurrent assets
= 2,932 + 17,996 = 20,928
Total liabilities and owners’ equity = Total assets = 20,928
Current liabilities = Current assets/(Current assets/current liabilities)
= 2,932/1.023 = 2,866
Noncurrent liabilities = (Total liabilities and owners’ equity – Owners’ equity) – Current
liabilities
= (20,928 – 8,058) – 2,866 = 10,004
Year 4
Current assets = Current liabilities × (Current assets/current liabilities)
= 3,002 × 1.04 = 3,122
Total assets = Current assets + Noncurrent liabilities
= 3,122 + 20,286 = 23,408
Total liabilities and owners’ equity = Total assets = $23,408
Noncurrent liabilities = (Total liabilities and owners’ equity – Owners’ equity) – Current
liabilities
= (23,408 – 8,084) – 3,002 = 12,322

b. Comment on the asset and liability structure of the firm

The noncurrent assets (fixed assets)-to-current assets ratio stayed remarkably constant over the four-
year period, varying between 5.8 (Years 1, 2, and 3) and 6.5 (Year 4). The large value of this ratio
indicates that the firm belongs to a capital-intensive industry.
The noncurrent liabilities-to-owners’ equity ratio kept increasing, from 1.05 (Year 1) to 1.52 (Year
4). This suggests that the firm is using more and more debt relative to equity in financing its growth.

12
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 3
Reconstructing an Income Statement

Year 1
Gross profit = Sales – Cost of goods sold
= 21,184 – 16,916 = 4,268
Operating profit = Gross profit – (Administrative and selling expenses +
Research and development expenses)
= 4,268 – (2,380 + 380) = 1,508
Earnings before interest and tax (EBIT) = Operating profit = 1,508

Earnings before tax (EBT) = Earnings before interest and tax (EBIT) + Interest income =
1,508 + 24 = 1,532
Earnings after tax (EAT) = Earnings before tax (EBT) – Income tax expense
= 1,532 – 444 = 1,088

Year 2
Sales = Earnings after tax + Income tax expense – Interest income + Research and
development expenses + Administrative and selling expenses + Cost of goods
sold
= 2,124 + 864 – 132 + 504 + 3,304 + 24,372 = 31,036
Gross profit = Sales – Cost of goods sold
= 31,036 – 24,372 = 6,664
Operating profit =
= Gross profit – (Administrative and selling expenses + Research and development
expenses)
= 6,664 – (3,304 + 504) = 2,856

Earnings before interest and tax (EBIT) = Operating profit = 2,856

Earnings before tax (EBT) = Earnings before interest and tax (EBIT) + Interest income
= 2,856 + 132 = 2,988

Earnings after tax (EAT) = Earnings before tax (EBT) – Income tax expense
= 2,988 - 864 = 2,124

Year 3
13
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Earnings before tax (EBT) = Earnings after tax (EAT) + Income tax expense
= 3,776 + 1,696 = 5,472
Earnings before interest and tax (EBIT) = Earnings before tax (EBT) – Interest
income
= 5,472 – 208 = 5,264
Operating profit = Earnings before interest and tax (EBIT)
= 5,264
Gross profit = Operating profit + Administrative and selling expenses + Research and
development expenses
= 5,264 + 4,808 + 816 = 10,888
Cost of goods sold = Sales – Gross profit
= 49,308 – 10,888 = 38,420

14
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 4
Reconstructing an Income Statement

Year 1
Gross profit = Sales – Cost of goods sold
= 21,087 – 16,182 = 4,905
Operating profit = Gross profit – Administrative and selling expenses
= 4,905 – 3,966 = 939
Earnings before interest and tax (EBIT) = Operating profit = 939
Earnings before tax (EBT) = Earnings before interest and tax (EBIT) – Interest
expense
= 939 – 75 = 864
Earnings after tax (EAT) = Earnings before tax (EBT) – Income tax expense
= 864 – 324 = 540
Year 2
Earnings before tax (EBT) = Earnings after tax (EAT) + Income tax expense
= 408 + 252 = 660
Earnings before interest and tax (EBIT) = Earnings before tax (EBT) + Interest expense
= 660 + 90 = 750
Operating profit = Earnings before interest and tax (EBIT) = 750
Gross profit = Operating profit + Administrative and selling expenses
= 750 + 4,533 = 5,283
Sales = Gross profit + Cost of goods sold
= 5,283 + 17,709 = 22,992

Year 3
Earnings before tax (EBT) = Earnings after tax (EAT) + Income tax expense
= 312 + 192 = 504
Earnings before interest and tax (EBIT) = Earnings before tax (EBT) + Interest
expense
= 504 + 81 = 585
Operating profit = Earnings before interest and tax (EBIT) = 585
Gross profit = Operating profit + Administrative and selling expenses

15
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

= 585 + 5,547 = 6,132

Cost of goods sold = Sales – Gross profit
= 26,613 – 6,132 = 20,481

16
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 5
Profits, losses and cash flows

a. How would you explain that a firm can generate a profit, when at the same time its cash flow
from operations is negative?

b. How would you explain that a firm showing a net loss can have a positive cash flow from
operations?

A company can show a profit, while, during the same period, the cash flows from operating activities
are negative because the investment component of the operating cycle (working capital requirement)
increased more than the margin component of the operating cycle.
At the opposite, a firm can show a loss when its cash flows from operating activities is positive
in two cases:
a. The margin component of the operating cycle is negative, and the working capital
requirement decreased more than the absolute value of the margin component.
b. The margin component is positive, and the working capital requirement increased less
than the margin component.

17
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Chapter 2:

Reformulation of Financial Statements:

Exercises

18
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 1

Reformulate Balance Sheet and Income Statement and prepare the Cash Flow Statement

Balance Sheet
t t-1 t t-1
Assets Liabilities and Equity
Prepaid expenses 23 35 Account payable 1.245 1.733
Cash & Cash Equivalents 435 635 Accrued expenses 1.549 1.633
Accounts Receivable 1.827 1.728 Deferred tax liability 712 535
Inventory 2.876 1.982 Long term debt 3.678 2.450
PPE 3.567 3.653 Shareholder capital 432 432
Retained Earnings 1.112 1.250

Total Assets 8.728 8.033 Total Liabilities and Equity 8.728 8.033

Income statement
Revenues 7.493
COGS 5.722
SG&A expenses 453
Loss on disposal of PPE 121
Amortization 353
NFE 221
Income before tax 623
Income tax 295
Net Income 328

Reformulated Balance Sheet

t t-1 t t-1
Accounts Receivable 1.827 1.728 Cash & Cash Equivalents -435 -635
Inventory 2.876 1.982 NFO (St) -435 -635
Prepaid expenses 23 35
Account payable 1.245 1.733 Long term debt 3.678 2.450
Accrued expenses 1.549 1.633 NFO (Lt) 3.678 2.450
Deferred tax liability 712 535
Net Working Capital 1.220 -156 NFO 3.243 1.815

PPE 3.567 3.653 Equity 1.544 1.682

Net Fixed Assets 3.567 3.653

NOA 4.787 3.497 Employed Capital 4.787 3.497

Reformulated Income statement Cash Flow Statement

Revenues 7.493
COGS 5.722 EBITDA 1.318
Gross Profit 1.771 Change NWC 1.376
SG&A expenses 453 Cash Flow from Operations -58
EBITDA 1.318 NFE 221
Amortization 353 Income tax 295
Operating Profit 965 Cash Flow Operating Activity -574
Loss on disposal of PPE 121
EBIT 844 Change in NFA -86
NFE 221 Amortization 353
EBT 623 Loss on disposal of PPE 121
Income tax 295
19 Cash Flow Investing -388
Net Income 328
Change in NFO (Lt) 1.228
Share issued (Dividends) -466
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 2

Reformulate Balance Sheet and Income Statement and prepare the Cash Flow Statement

Balance Sheet
t t-1 t t-1
Assets Liabilities and Equity
Prepaid expenses 100 20 Account payable 1.350 500
Cash & Cash Equivalents 0 15 Accrued expenses 854 761
Accounts Receivable 3.504 4.333 Deferred tax liability 0 57
Inventory 1.300 1.500 Long term debt 2.500 1.250
PPE 7.050 3.000 Shareholder capital 250 3.500
Retained Earnings 7.000 2.800

Total Assets 11.954 8.868 Total Liabilities and Equity 11.954 8.868

Income statement
Revenues 14.503
COGS 13.544
SG&A expenses 980
Gain on disposal of PPE 345
Amortization 1.429
Net Interest Revenue 450
Income before tax -655
Income tax 295
Net Income -950

Reformulated Balance Sheet

t t-1 t t-1
Accounts Receivable 3.504 4.333 Cash & Cash Equivalents 0 -15
Inventory 1.300 1.500 NFO (St) 0 -15
Prepaid expenses 100 20
Account payable 1.350 500 Long term debt 2.500 1.250
Accrued expenses 854 761 NFO (Lt) 2.500 1.250
Deferred tax liability 0 57
Net Working Capital 2.700 4.535 NFO 2.500 1.235

PPE 7.050 3.000 Equity 7.250 6.300

Net Fixed Assets 7.050 3.000

NOA 9.750 7.535 Employed Capital 9.750 7.535

Reformulated Income statement Cash Flow Statement

Revenues 14.503
COGS 13.544 EBITDA -21
Gross Profit 959 Change NWC -1.835
SG&A expenses 980 Cash Flow from Operations 1.814
EBITDA -21 Net Interest Revenue 450
Amortization 1.429 Income tax 295
Operating Profit -1.450 Cash Flow Operating Activity 1.969
Gain on disposal of PPE 345
EBIT -1.105 Change in NFA 4.050
Net Interest Revenue 450 Amortization 1.429
EBT -655 Gain on disposal of PPE 345
Income tax 295
20 Cash Flow Investing -5.134
Net Income -950
Change in NFO (Lt) 1.250
Share issued (Dividends) 1.900
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 3

Reformulate Balance Sheet and Income Statement and prepare the Cash Flow Statement

Balance Sheet
t t-1 t t-1
Assets Liabilities and Equity
Prepaid expenses 500 650 Account payable 493 143
Cash & Cash Equivalents 250 -1.454 Accrued expenses 1.455 333
Accounts Receivable 2.388 1.540 Deferred tax liability 0 850
Inventory 350 550 Long term debt 1.350 5.000
PPE 2.354 7.584 Shareholder capital 500 2.500
Retained Earnings 2.044 44

Total Assets 5.842 8.870 Total Liabilities and Equity 5.842 8.870

Income statement
Revenues 13.944
COGS 13.433
SG&A expenses 700
Loss on disposal on PPE 0
Amortization 353
Net Interest Expense 676
Income before tax -1.218
Income tax 0
Net Income -1.218

Reformulated Balance Sheet

t t-1 t t-1
Accounts Receivable 2.388 1.540 Cash & Cash Equivalents -250 1.454
Inventory 350 550 NFO (St) -250 1.454
Prepaid expenses 500 650
Account payable 493 143 Long term debt 1.350 5.000
Accrued expenses 1.455 333 NFO (Lt) 1.350 5.000
Deferred tax liability 0 850
Net Working Capital 1.290 1.414 NFO 1.100 6.454

PPE 2.354 7.584 Equity 2.544 2.544

Net Fixed Assets 2.354 7.584

NOA 3.644 8.998 Employed Capital 3.644 8.998

Reformulated Income statement Cash Flow Statement

Revenues 13.944
COGS 13.433 EBITDA -189
Gross Profit 511 Change NWC -124
SG&A expenses 700 Cash Flow from Operations -65
EBITDA -189 Net Interest Expense 676
Amortization 353 Income tax 0
Operating Profit -542 Cash Flow Operating Activity -741
Loss on disposal on PPE 0
EBIT -542 Change in NFA -5.230
Net Interest Expense 676 Amortization 353
EBT -1.218 Loss on disposal on PPE 0
Income tax 0 Cash Flow Investing 4.877
Net Income -1.218
21 Change in NFO (Lt) -3.650
Share issued (Dividends) 1.218
Cash Flow Financing -2.432
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 4

Reformulate Balance Sheet and Income Statement and prepare the Cash Flow Statement

Balance Sheet
t t-1 t t-1
Assets Liabilities and Equity
Prepaid expenses 0 250 Account payable 3.055 3.567
Cash & Cash Equivalents 250 1.688 Accrued expenses 0 453
Accounts Receivable 2.806 231 Deferred tax liability 250 0
Inventory 2.604 2.001 Long term debt 3.201 1.500
PPE 3.500 2.750 Shareholder capital 150 150
Retained Earnings 2.504 1.250

Total Assets 9.160 6.920 Total Liabilities and Equity 9.160 6.920

Income statement
Revenues 9.003 -930
COGS 8.903
SG&A expenses 1.502
Gain on Disposal of PPE 1.001
Amortization 750
Net Interest Revenues 221
Income before tax -930
Income tax 295
Net Income -1.225

Reformulated Balance Sheet

t t-1 t t-1
Accounts Receivable 2.806 231 Cash & Cash Equivalents -250 -1.688
Inventory 2.604 2.001 NFO (St) -250 -1.688
Prepaid expenses 0 250
Account payable 3.055 3.567 Long term debt 3.201 1.500
Accrued expenses 0 453 NFO (Lt) 3.201 1.500
Deferred tax liability 250 0
Net Working Capital 2.105 -1.538 NFO 2.951 -188

PPE 3.500 2.750 Equity 2.654 1.400

Net Fixed Assets 3.500 2.750

NOA 5.605 1.212 Employed Capital 5.605 1.212

Reformulated Income statement Cash Flow Statement

Revenues 9.003
COGS 8.903 EBITDA -1.402
Gross Profit 100 Change NWC 3.643
SG&A expenses 1.502 Cash Flow from Operations -5.045
EBITDA -1.402 Net Interest Revenues 221
Amortization 750 Income tax 295
Operating Profit -2.152 Cash Flow Operating Activity -5.119
Gain on Disposal of PPE 1.001
EBIT -1.151 Change in NFA 750
Net Interest Revenues 221 Amortization 750
EBT -930 Gain on Disposal of PPE 1.001
Income tax 295 Cash Flow Investing -499
Net Income -1.225
22 Change in NFO (Lt) 1.701
Share issued (Dividends) 2.479
Cash Flow Financing 4.180
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 5

Reformulate Balance Sheet and Income Statement and prepare the Cash Flow Statement

Balance Sheet
t t-1 t t-1
Assets Liabilities and Equity
Prepaid expenses 0 50 Account payable 2.012 1.440
Cash & Cash Equivalents 2.322 -433 Accrued expenses 455 560
Accounts Receivable 643 3.233 Deferred tax liability 321 321
Inventory 533 1.500 Long term debt 2.000 1.429
PPE 3.390 3.000 Shareholder capital 800 1.200
Retained Earnings 1.300 2.400

Total Assets 6.888 7.350 Total Liabilities and Equity 6.888 7.350

Income statement
Revenues 8.434 601
COGS 6.433
SG&A expenses 1.200
Gain on Disposal of PPE 0
Amortization 750
Net Interest Revenues 550
Income before tax 601
Income tax -499
Net Income 1.100

Reformulated Balance Sheet

t t-1 t t-1
Accounts Receivable 643 3.233 Cash & Cash Equivalents -2.322 433
Inventory 533 1.500 NFO (St) -2.322 433
Prepaid expenses 0 50
Account payable 2.012 1.440 Long term debt 2.000 1.429
Accrued expenses 455 560 NFO (Lt) 2.000 1.429
Deferred tax liability 321 321
Net Working Capital -1.612 2.462 NFO -322 1.862

PPE 3.390 3.000 Equity 2.100 3.600

Net Fixed Assets 3.390 3.000

NOA 1.778 5.462 Employed Capital 1.778 5.462

Reformulated Income statement Cash Flow Statement

Revenues 8.434
COGS 6.433 EBITDA 801
Gross Profit 2.001 Change NWC -4.074
SG&A expenses 1.200 Cash Flow from Operations 4.875
EBITDA 801 Net Interest Revenues 550
Amortization 750 Income tax -499
Operating Profit 51 Cash Flow Operating Activity 5.924
Gain on Disposal of PPE 0
EBIT 51 Change in NFA 390
Net Interest Revenues 550 Amortization 750
EBT 601 Gain on Disposal of PPE 0
Income tax -499 Cash Flow Investing -1.140
Net Income 23
1.100
Change in NFO (Lt) 571
Share issued (Dividends) -2.600
Cash Flow Financing -2.029
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Case Study 1 - Moncler

Starting from the reformulated balance sheet and income statement prepare the Cash Flow
Statement

Reformulated Balance Sheet Cash Flow Sta

t t-1 t-2

Operating Assets (St) 391,9 351,3 309,9 EBITDA

Operating Liabilities (St) 445,4 372 290,3 Change in NWC
Net Working Capital -53,5 -20,7 19,6 Special items
Tangible assets 806,8 177 138,2 Cash flow from operations
Intangible Assets 435 424,5 426,3 Net Financial Expenses
Other fixed Assets 159,5 94,2 80,8 Provision for Income Taxes
Operating liabilities (long term) 86,1 99,5 91,5 Cash flow from operatng activities
Net Fixed Assets 1315,2 596,2 553,8
NOA 1261,7 575,5 573,4 Change in Net Fixed Assets
Depreciation and Amortization
Cash and Cash Equivalents -759,1 -546,3 -394,1 Change in Lease and hire agreement
Financial Instruments -3,1 -0,3 -3,9 Cash Flow Investing
Capital Leases (St) 105,5 0 2,1
LT derivative hedging 0 -27,7 -22,2 Change in Financial Debts
LT Lease and hire agreement 533,8 0 0 Dividends / Share issued
LT financial debts 78,2 80,8 67,9 Cash Flow Financing
NFO -44,7 -493,5 -350,2
Equity 1306,4 1069 923,6 Cash Flow
Employed Capital 1261,7 575,5 573,4

Net change in Cash & Cash Equivalents

Reformulated Income Statement Cash and Cash Equivalents (Beg.)
t t-1 t-2 Cash and Cash Equivalents (End.)
EBITDA 662,9 470,6 388,1
Depreciation and Amortization 171,1 56,5 47,3 Change in Cash and Cash Equivalents
Operating Profit 491,8 414,1 340,8
Special items -0,6 -1,3 -3,8
EBIT 491,2 412,8 337
Net Financial Expenses 20,6 0,6 1,3
EBT 470,6 412,2 335,7
Provision for Income Taxes 112 79,7 85,9
Minority Interest from Continuing Ops. 0 -0,1 -0,1
Net Income 358,6 332,6 249,9

24
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Case Study 2 – Salvatore Ferragamo

Starting from the reformulated balance sheet and income statement prepare the Cash Flow
Statement

Salvatore Ferragamo

Reformulated Balance Sheet Cash Flow Statement

t t-1 t-2 t t-1
Inventories 363 326 375 EBITDA 215 249
Provisions -3 -5 -7 Change NWC 3 -112
Receivables 196 220 218 Cash Flow from Operations 212 361
Prepayments 0 0 50 Net Financial Expense 14 13
Deferred Revenue 15 16 15 Provision for Income Taxes 46 59
ST Accrued Income 0 0 0 Cash Flow Operating Activity 152 289
Payables 255 245 229
Customer Advances 4 4 3 Change in NFA 0 -20
Deferred tax liabilities/Other 10 8 7 Depreciation / Amortization 65 62
Accrued payroll and expenses 7 8 8 Gain/Loss on Sale of Assets 1 1
Working Capital Requirement 295 292 404 Impairment of Fixed Assets 6 1
Cash Flow Investing -72 -44
Tangibles 674 624 618
Accumulated Depreciation -408 -368 -367 Change in NFO (Lt) 12 5
Accumulated Amortization -88 -78 -71 Share issued (Dividends) -51 -88
Intangibles 131 122 108 Cash Flow Financing -39 -83
Other non current assets 2 4 5
Deferred Tax Assets 75 79 112 Change in Cash & Cash Equiv. 41 162
Non-current Prepaid Expenses 2 2 2
Legal and Risk reserve 19 14 14
Severance indemnity 11 12 12 Cash & Cash Equivalents (beg.) 142 -20
Other non current liabilities 58 59 61 Cash & Cash Equivalents (end) 183 142
Net Fixed Assets 300 300 320 Change 41 162
Net Operating Assets 595 592 724
0 0
Net Short Term Debt -183 -142 20
Net Long Term Debt -2 -14 -19
Net Financial Position -185 -156 1

Equity 780 748 723

Capital Employed 595 592 724

Reformulated Income Statement

t t-1 t-2
Total Revenues 1.347 1.393 1.438
COGS 484 494 472
Gross Profit 863 899 966
SG&A Expenses 648 650 641
EBITDA 215 249 325
Depreciation/Amortization in COR/COGS 1 1 1
Depreciation/Ammortization in SGA 64 61 62
Operating Profit 150 187 262
Gain/Loss on Sale of Assets 1 1 1
Impairment of Fixed Assets 6 1 1
EBIT 143 185 260
Net Financial Expense 14 13 15
EBT 129 172 245
Provision for Income Taxes 46 59 47
Net Income after taxes 83 113 198
Minority Interest -2 4 4
Net Income 81 117 202

25
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Case Study 3 – Technogym

Starting from the reformulated balance sheet and income statement prepare the Cash Flow
Statement

Technogym

Reformulated Balance Sheet Cash Flow Statement

t t-1 t-2 t t-1
Account Receivables 164 122 101 EBITDA 128 116
Inventories 90 64 72 Change NWC 73 7
Prepaid Expenses 5 5 6 Cash Flow from Operations 55 109
Other Current Assets 2 3 0 Net financial Expenses -2 -3
(Accounts payable) -5 -7 -3 Provision for Income Taxes 14 25
(Accrued Expenses) -16 -1 -1 Cash Flow Operating Activity 43 87
(Other Current Liabilities, Total) -62 -81 -77
Working Capital Requirement 178 105 98 Change in NFA 14 4
Depreciation / Amortization 22 24
Property/Plant/Equipment, Total - Net 143 139 144 Loss(Gain) on Sale of Assets - Operating 5 2
Other Long Term Assets 30 25 18 Cash Flow Investing -41 -30
Intangibles, Net 36 29 24
Defered Income Tax - Long Term Asset 17 15 14 Change in NFO (Lt) -33 5
Note Receivable - Long Term 16 0 0 Change in Other NFO (St) 45 -15
(Deferred Income Tax - LT Liability) 0 -1 -1 Share issued (Dividends) -8 -21
Other Liabilities, Total -55 -34 -30 Cash Flow Financing 4 -31
Net Fixed Assets 187 173 169
Net Operating Assets 365 278 267 Change in Cash & Cash Equiv. 6 26

Equity 214 133 86 Cash & Cash Equivalents (beg.) 79 53

Notes Payable/Short Term Debt 186 135 153 Cash & Cash Equivalents (end) 85 79
Current Port. of LT Debt/Capital Leases 18 24 21 Change 6 26
(Cash) 0 0 0
(Other financial assets) -85 -79 -53 0 0
Net Short Term Debt 119 80 121
Long Term Debt 55 85 84
(LT - Investments - Other) -23 -20 -24
Net Long Term Debt 32 65 60
Capital Employed 365 278 267

Reformulated Income Statement

t t-1 t-2
Revenues 633 598 555
Cost of Goods sold 329 317 312
Gross Profit 304 281 243
Selling/General/Administrative Expense 154 148 138
Bad written-off provision 0 1 0
Other Operating Expenses, Total 21 16 14
Other Non-Operating Income (Expense) 1 0 1
EBITDA 128 116 90
Depreciation/Amortization 22 24 23
Operating profit 106 92 67
Loss(Gain) on Sale of Assets - Operating 5 2 5
Earnings Before Interest and Taxes (EBIT) 101 90 62
Interest Expense - Non-Operating 2 1 2
Interest Income - Non-Operating 1 2 1
Investment Income - Non-Operating 3 2 3
Net financial Expenses -2 -3 -2
Earnings Before Taxes (EBT) 103 93 64
Provision for Income Taxes 14 25 23
Earnings after taxes 89 68 41
Minority interest -5 3 2
Net income 84 71 43

26
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 9
Effect of transactions on working capital requirement

Indicate the effect of the following transactions on the working capital requirement:

a) More customers pay with cash instead of credit

b) More of raw material is paid for with cash
c) More discounts are offered to customers
d) More finished goods are produced for order

27
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Chapter 2:

Solutions

28
 Accounts Receivable 1.827 1.728 Deferred tax liability 712 535
Inventory 2.876 1.982 Long term debt 3.678 2.450
PPE 3.567 3.653 Shareholder capital 432 432
Retained Earnings 1.112 1.250
Cases and Exercises S. Bozzolan – F. Paolone
FinancialTotal
Statement
Assets Analysis 8.728 8.033 Total Liabilities and Equity 8.728 8.033
MSc in Corporate Finance
Luiss Guido Carli University Income statement
AcademicRevenues
Year 2020/2021 7.493
COGS 5.722
__________________________________________________
SG&A expenses 453
Loss on disposal of PPE 121
Amortization 353
NFE 221
Income before tax 623
Income tax 295
Exercise 1
Net Income 328

Reformulated Balance Sheet

t t-1 t t-1
Accounts Receivable 1.827 1.728 Cash & Cash Equivalents -435 -635
Inventory 2.876 1.982 NFO (St) -435 -635
Prepaid expenses 23 35
Account payable 1.245 1.733 Long term debt 3.678 2.450
Accrued expenses 1.549 1.633 NFO (Lt) 3.678 2.450
Deferred tax liability 712 535
Net Working Capital 1.220 -156 NFO 3.243 1.815

PPE 3.567 3.653 Equity 1.544 1.682

Net Fixed Assets 3.567 3.653

NOA 4.787 3.497 Employed Capital 4.787 3.497

Reformulated Income statement Cash Flow Statement

Revenues 7.493
COGS 5.722 EBITDA 1.318
Gross Profit 1.771 Change NWC 1.376
SG&A expenses 453 Cash Flow from Operations -58
EBITDA 1.318 NFE 221
Amortization 353 Income tax 295
Operating Profit 965 Cash Flow Operating Activity -574
Loss on disposal of PPE 121
EBIT 844 Change in NFA -86
NFE 221 Amortization 353
EBT 623 Loss on disposal of PPE 121
Income tax 295 Cash Flow Investing -388
Net Income 328
Change in NFO (Lt) 1.228
Share issued (Dividends) -466
Cash Flow Financing 762

Change in Cash & Cash Equiv. -200

Cash & Cash Equivalents (beg.) 635

Cash & Cash Equivalents (end) 435
Change -200

29
 Inventory 1.300 1.500 Long term debt 2.500 1.250
PPE 7.050 3.000 Shareholder capital 250 3.500
Retained Earnings 7.000 2.800

Cases and Exercises

Total Assets 11.954 S. Bozzolan11.954
8.868 Total Liabilities and Equity – F. Paolone
8.868
Financial Statement Analysis
MSc in Corporate Finance Income statement
Revenues
Luiss Guido Carli University 14.503
COGS 13.544
Academic Year 2020/2021
SG&A expenses 980
__________________________________________________
Gain on disposal of PPE 345
Amortization 1.429
Net Interest Revenue 450
Income before tax -655
Exercise 2
Income tax 295
Net Income -950

Reformulated Balance Sheet

t t-1 t t-1
Accounts Receivable 3.504 4.333 Cash & Cash Equivalents 0 -15
Inventory 1.300 1.500 NFO (St) 0 -15
Prepaid expenses 100 20
Account payable 1.350 500 Long term debt 2.500 1.250
Accrued expenses 854 761 NFO (Lt) 2.500 1.250
Deferred tax liability 0 57
Net Working Capital 2.700 4.535 NFO 2.500 1.235

PPE 7.050 3.000 Equity 7.250 6.300

Net Fixed Assets 7.050 3.000

NOA 9.750 7.535 Employed Capital 9.750 7.535

Reformulated Income statement Cash Flow Statement

Revenues 14.503
COGS 13.544 EBITDA -21
Gross Profit 959 Change NWC -1.835
SG&A expenses 980 Cash Flow from Operations 1.814
EBITDA -21 Net Interest Revenue 450
Amortization 1.429 Income tax 295
Operating Profit -1.450 Cash Flow Operating Activity 1.969
Gain on disposal of PPE 345
EBIT -1.105 Change in NFA 4.050
Net Interest Revenue 450 Amortization 1.429
EBT -655 Gain on disposal of PPE 345
Income tax 295 Cash Flow Investing -5.134
Net Income -950
Change in NFO (Lt) 1.250
Share issued (Dividends) 1.900
Cash Flow Financing 3.150

Change in Cash & Cash Equiv. -15

Cash & Cash Equivalents (beg.) 15

Cash & Cash Equivalents (end) 0
Change -15

30
 Inventory 350 550 Long term debt 1.350 5.000
PPE 2.354 7.584 Shareholder capital 500 2.500
Retained Earnings 2.044 44

Cases and Exercises

Total Assets 5.842 S. Bozzolan –5.842
8.870 Total Liabilities and Equity F. Paolone
8.870
Financial Statement Analysis
MSc in Corporate Finance Income statement
Revenues
Luiss Guido Carli University 13.944
COGS 13.433
Academic Year 2020/2021
SG&A expenses 700
__________________________________________________
Loss on disposal on PPE 0
Amortization 353
Net Interest Expense 676
Income before tax -1.218
Exercise 3
Income tax 0
Net Income -1.218

Reformulated Balance Sheet

t t-1 t t-1
Accounts Receivable 2.388 1.540 Cash & Cash Equivalents -250 1.454
Inventory 350 550 NFO (St) -250 1.454
Prepaid expenses 500 650
Account payable 493 143 Long term debt 1.350 5.000
Accrued expenses 1.455 333 NFO (Lt) 1.350 5.000
Deferred tax liability 0 850
Net Working Capital 1.290 1.414 NFO 1.100 6.454

PPE 2.354 7.584 Equity 2.544 2.544

Net Fixed Assets 2.354 7.584

NOA 3.644 8.998 Employed Capital 3.644 8.998

Reformulated Income statement Cash Flow Statement

Revenues 13.944
COGS 13.433 EBITDA -189
Gross Profit 511 Change NWC -124
SG&A expenses 700 Cash Flow from Operations -65
EBITDA -189 Net Interest Expense 676
Amortization 353 Income tax 0
Operating Profit -542 Cash Flow Operating Activity -741
Loss on disposal on PPE 0
EBIT -542 Change in NFA -5.230
Net Interest Expense 676 Amortization 353
EBT -1.218 Loss on disposal on PPE 0
Income tax 0 Cash Flow Investing 4.877
Net Income -1.218
Change in NFO (Lt) -3.650
Share issued (Dividends) 1.218
Cash Flow Financing -2.432

Change in Cash & Cash Equiv. 1.704

Cash & Cash Equivalents (beg.) -1.454

Cash & Cash Equivalents (end) 250
Change 1.704

31
 Prepaid expenses 0 250 Account payable 3.055 3.567
Cash & Cash Equivalents 250 1.688 Accrued expenses 0 453
Accounts Receivable 2.806 231 Deferred tax liability 250 0
Inventory 2.604 2.001 Long term debt 3.201 1.500
Cases and
PPE
Exercises 3.500 2.750 Shareholder capital
S. Bozzolan –150
F. Paolone
150
Financial Statement Analysis Retained Earnings 2.504 1.250
MSc in Corporate Finance
Luiss Guido Carli University
Total Assets 9.160 6.920 Total Liabilities and Equity 9.160 6.920
Academic Year 2020/2021
Income statement
__________________________________________________
Revenues 9.003 -930
COGS 8.903
SG&A expenses 1.502
Gain on Disposal of PPE 1.001
Exercise 4
Amortization 750
Net Interest Revenues 221
Income before tax -930
Income tax 295
Net Income -1.225

Reformulated Balance Sheet

t t-1 t t-1
Accounts Receivable 2.806 231 Cash & Cash Equivalents -250 -1.688
Inventory 2.604 2.001 NFO (St) -250 -1.688
Prepaid expenses 0 250
Account payable 3.055 3.567 Long term debt 3.201 1.500
Accrued expenses 0 453 NFO (Lt) 3.201 1.500
Deferred tax liability 250 0
Net Working Capital 2.105 -1.538 NFO 2.951 -188

PPE 3.500 2.750 Equity 2.654 1.400

Net Fixed Assets 3.500 2.750

NOA 5.605 1.212 Employed Capital 5.605 1.212

Reformulated Income statement Cash Flow Statement

Revenues 9.003
COGS 8.903 EBITDA -1.402
Gross Profit 100 Change NWC 3.643
SG&A expenses 1.502 Cash Flow from Operations -5.045
EBITDA -1.402 Net Interest Revenues 221
Amortization 750 Income tax 295
Operating Profit -2.152 Cash Flow Operating Activity -5.119
Gain on Disposal of PPE 1.001
EBIT -1.151 Change in NFA 750
Net Interest Revenues 221 Amortization 750
EBT -930 Gain on Disposal of PPE 1.001
Income tax 295 Cash Flow Investing -499
Net Income -1.225
Change in NFO (Lt) 1.701
Share issued (Dividends) 2.479
Cash Flow Financing 4.180

Change in Cash & Cash Equiv. -1.438

Cash & Cash Equivalents (beg.) 1.688

Cash & Cash Equivalents (end) 250
Change -1.438

32
 Inventory 533 1.500 Long term debt 2.000 1.429
PPE 3.390 3.000 Shareholder capital 800 1.200
Retained Earnings 1.300 2.400

TotalExercises
Cases and Assets 6.888 7.350 Total Liabilities and Equity
S. Bozzolan 6.888 7.350
– F. Paolone
Financial Statement Analysis
Income statement
MSc in Corporate Finance
Revenues 8.434 601
Luiss Guido
COGS Carli University 6.433
Academic
SG&AYear 2020/2021
expenses 1.200
__________________________________________________
Gain on Disposal of PPE 0
Amortization 750
Net Interest Revenues 550
Income before tax 601
Exercise 5
Income tax
Net Income
-499
1.100

Reformulated Balance Sheet

t t-1 t t-1
Accounts Receivable 643 3.233 Cash & Cash Equivalents -2.322 433
Inventory 533 1.500 NFO (St) -2.322 433
Prepaid expenses 0 50
Account payable 2.012 1.440 Long term debt 2.000 1.429
Accrued expenses 455 560 NFO (Lt) 2.000 1.429
Deferred tax liability 321 321
Net Working Capital -1.612 2.462 NFO -322 1.862

PPE 3.390 3.000 Equity 2.100 3.600

Net Fixed Assets 3.390 3.000

NOA 1.778 5.462 Employed Capital 1.778 5.462

Reformulated Income statement Cash Flow Statement

Revenues 8.434
COGS 6.433 EBITDA 801
Gross Profit 2.001 Change NWC -4.074
SG&A expenses 1.200 Cash Flow from Operations 4.875
EBITDA 801 Net Interest Revenues 550
Amortization 750 Income tax -499
Operating Profit 51 Cash Flow Operating Activity 5.924
Gain on Disposal of PPE 0
EBIT 51 Change in NFA 390
Net Interest Revenues 550 Amortization 750
EBT 601 Gain on Disposal of PPE 0
Income tax -499 Cash Flow Investing -1.140
Net Income 1.100
Change in NFO (Lt) 571
Share issued (Dividends) -2.600
Cash Flow Financing -2.029

Change in Cash & Cash Equiv. 2.755

Cash & Cash Equivalents (beg.) -433

Cash & Cash Equivalents (end) 2.322
Change 2.755

33
 Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Case Study 1 - Moncler

Cash Flow Statement

2

309,9 EBITDA 662,9 470,6

290,3 Change in NWC -32,8 -40,3
19,6 Special items -0,6 -1,3
138,2 Cash flow from operations 695,1 509,6
426,3 Net Financial Expenses 20,6 0,6
80,8 Provision for Income Taxes 112 79,7
91,5 Cash flow from operatng activities 562,5 429,3
553,8
573,4 Change in Net Fixed Assets 719 42,4
Depreciation and Amortization 171,1 56,5
394,1 Change in Lease and hire agreement 533,8 0
-3,9 Cash Flow Investing -356,3 -98,9
2,1
-22,2 Change in Financial Debts 127,8 8,9
0 Dividends / Share issued -121,2 -187,1
67,9 Cash Flow Financing 6,6 -178,2
350,2
923,6 Cash Flow 212,8 152,2
573,4

Net change in Cash & Cash Equivalents 212,8 152,2

Cash and Cash Equivalents (Beg.) 546,3 394,1
2 Cash and Cash Equivalents (End.) 759,1 546,3
388,1
47,3 Change in Cash and Cash Equivalents 212,8 152,2
340,8
-3,8
337
1,3
335,7
85,9
-0,1
249,9

34
 Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Case Study 2 – Salvatore Ferragamo

Cash Flow Statement

t-2 t t-1
375 EBITDA 215 249
-7 Change NWC 3 -112
218 Cash Flow from Operations 212 361
50 Net Financial Expense 14 13
15 Provision for Income Taxes 46 59
0 Cash Flow Operating Activity 152 289
229
3 Change in NFA 0 -20
7 Depreciation / Amortization 65 62
8 Gain/Loss on Sale of Assets 1 1
404 Impairment of Fixed Assets 6 1
Cash Flow Investing -72 -44
618
-367 Change in NFO (Lt) 12 5
-71 Share issued (Dividends) -51 -88
108 Cash Flow Financing -39 -83
5
112 Change in Cash & Cash Equiv. 41 162
2
14
12 Cash & Cash Equivalents (beg.) 142 -20
61 Cash & Cash Equivalents (end) 183 142
320 Change 41 162
724
0 0
20
-19
1

723
Case Study 3 – Technogym
724

Cash Flow Statement

t-2
t-2 t t-1
101 EBITDA 128 116
1.438
72 Change NWC 73 7
472
6 Cash Flow from Operations 55 109
966
0 Net financial Expenses -2 -3
641-3 Provision for Income Taxes 14 25
325-1 Cash Flow Operating Activity 43 87
-771
62
98 Change in NFA 14 4
262 Depreciation / Amortization 22 24
144 1 Loss(Gain) on Sale of Assets - Operating 5 2
181 Cash Flow Investing -41 -30
260
24
15
14 Change in NFO (Lt) -33 5
2450 Change in Other NFO (St) 45 -15
-1
47 Share issued (Dividends) -8 -21
-30
198 Cash Flow Financing 4 -31
169 4
267
202 Change in Cash & Cash Equiv. 6 26

86 Cash & Cash Equivalents (beg.) 79 53

153 Cash & Cash Equivalents (end) 85 79
21 Change 6 26
0
-53 0 0
121
84
-24
60
267
35

t-2
555
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 6

Indicate the effect of the following transactions on the working capital requirement:

a) More customers pay with cash instead of credit

Decrease
b) More of raw material is paid for with cash
Decrease
c) More discounts are offered to customers
Increase
d) More finished goods are produced for order
Increase

36
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Chapter 3:

Project Work: Presentation template

37
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Balance Sheet
2019 2018 2017 2019 2018 2017
%
Trade Receivables (Net) 167,9 155 120,7 13,31% 26,93% 21,05%
Income taxes 1,6 11,6 38,4 0,13% 2,02% 6,70%
Other current assets 23,7 16,1 19,3 1,88% 2,80% 3,37%
Inventories (net) 198,7 168,6 131,5 15,75% 29,30% 22,93%
Operating Assets (St) 391,9 351,3 309,9 31,06% 61,04% 54,05%
0 0 0 0,00% 0,00% 0,00%
Trade Payables 269,9 240,6 190,3 21,39% 41,81% 33,19%
Tax payable 115,8 70,2 54,3 9,18% 12,20% 9,47%
Accrued Payroll 39,9 46,2 37,7 3,16% 8,03% 6,57%
Other liabilities 19,8 15 8 1,57% 2,61% 1,40%
Operating Liabilities (St) 445,4 372 290,3 35,30% 64,64% 50,63%
Net Working Capital -53,5 -20,7 19,6 -4,24% -3,60% 3,42%

Land - Building (Net) 718,2 96,1 82,4 56,92% 16,70% 14,37%

Plant and Equipment (Net) 59,9 57,1 44,8 4,75% 9,92% 7,81%
Other fixed assets (net) 9 5,3 4,2 0,71% 0,92% 0,73%
Construction in progress (Net) 19,7 18,5 6,8 1,56% 3,21% 1,19%
Tangible assets 806,8 177 138,2 63,95% 30,76% 24,10%

Brand - Patent 223,9 223,9 223,9 17,75% 38,91% 39,05%

Key Money 20,5 25,7 31 1,62% 4,47% 5,41%
Other intangibles 35 19,3 15,8 2,77% 3,35% 2,76%
Goodwill 155,6 155,6 155,6 12,33% 27,04% 27,14%
Intangible Assets 435 424,5 426,3 34,48% 73,76% 74,35%

Deferred tax assets 129,1 91,9 79 10,23% 15,97% 13,78%

Other Non-current Receivables, Net 21,9 0,5 0,4 1,74% 0,09% 0,07%
Non-current Prepaid Expenses 8,5 1,8 1,4 0,67% 0,31% 0,24%
Other fixed Assets 159,5 94,2 80,8 12,64% 16,37% 14,09%
Deferred tax liabilities 68,7 70,1 68,7 0,00% 0,00% 0,00%
Other long term operating liabilities 17,4 29,4 22,8 0,00% 0,00% 0,00%
Operating liabilities (long term) 86,1 99,5 91,5 0,00% 0,00% 0,00%
Net Fixed Assets 1315,2 596,2 553,8 104,24% 103,60% 96,58%

Invested Capital 1261,7 575,5 573,4 100,00% 100,00% 100,00%

38
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Balance Sheet
2019 2018 2017 2019 2018 2017
%
Trade Receivables (Net) 167,9 155 120,7 13,31% 26,93% 21,05%
Income taxes 1,6 11,6 38,4 0,13% 2,02% 6,70%
Cash
Otherand Cash assets
current Equivalents -759,1
23,7 -546,3
16,1 -394,1
19,3 -60,16%
1,88%
-94,93%
2,80%
-68,73%
3,37%
Financial Instruments
Inventories (net) -3,1
198,7 -0,3
168,6 -3,9
131,5 -0,25%
15,75% -0,05%
29,30% -0,68%
22,93%
Capital Leases (St) Assets (St)
Operating 105,5
391,9 0
351,3 2,1
309,9 8,36%
31,06%
0,00%
61,04%
0,37%
54,05%
NF0 (St) -656,7 -546,6 -395,9 -52,05% -94,98% -69,04%
0 0 0 0,00% 0,00% 0,00%
LT derivative
Trade hedging
Payables 269,90 -27,7
240,6 -22,2
190,3 0,00%
21,39% -4,81%
41,81% -3,87%
33,19%
LT
TaxLease and hire agreement
payable 533,8
115,8 0
70,2 54,30 42,31%
9,18% 0,00%
12,20% 0,00%
9,47%
LT financial
Accrued debts
Payroll 78,2
39,9 80,8
46,2 67,9
37,7 6,20%
3,16% 14,04%
8,03% 11,84%
6,57%
Other liabilities NFO (Lt) 612
19,8 53,1
15 45,7
8 48,51%
1,57% 9,23%
2,61% 7,97%
1,40%
NFO Operating Liabilities (St) -44,7
445,4 -493,5
372 -350,2
290,3 -3,54%
35,30% -85,75%
64,64% -61,07%
50,63%
Net Working Capital -53,5 -20,7 19,6 -4,24% -3,60% 3,42%
Common Stocks 51,6 51,2 51 4,09% 8,90% 8,89%
Legal,
Land -Statutory, Appropriated Reserves
Building (Net) 10,3
718,2 10,3
96,1 10,3
82,4 0,82%
56,92% 1,79%
16,70% 1,80%
14,37%
Other reserve
Plant and Equipment (Net) 719,1
59,9 504,4
57,1 457,3
44,8 56,99%
4,75% 87,65%
9,92% 79,75%
7,81%
Equity
Other Minority/Non Controlling Interest
fixed assets (net) 0,19 0,1
5,3 0,1
4,2 0,01%
0,71% 0,02%
0,92% 0,02%
0,73%
Retained Earnings
Construction in progress (Net) 166,6
19,7 170,6
18,5 155,2
6,8 13,20%
1,56% 29,64%
3,21% 27,07%
1,19%
Net Result of Tangible
the Group
assets 358,7
806,8 332,4
177 249,7
138,2 28,43%
63,95% 57,76%
30,76% 43,55%
24,10%
Equity 1306,4 1069 923,6 103,54% 185,75% 161,07%
Brand - Patent 223,9 223,9 223,9 17,75% 38,91% 39,05%
Employed
Key MoneyCapital 1261,7
20,5 575,5
25,7 573,4
31 100,00%
1,62% 100,00%
4,47% 100,00%
5,41%
Other intangibles 35 19,3 15,8 2,77% 3,35% 2,76%
Goodwill 155,6 155,6 155,6 12,33% 27,04% 27,14%
Intangible Assets 435 424,5 426,3 34,48% 73,76% 74,35%

Deferred tax assets Income

129,1 Statement
91,9 79 10,23% 15,97% 13,78%
Other Non-current Receivables, Net 201921,9 2018 0,5 2017 0,4 2019
1,74% 2018
0,09% 2017
0,07%
Non-current Prepaid Expenses 8,5 1,8 1,4 0,67% 0,31% 0,24%
Total Revenue Other fixed Assets 159,5
1627,7 94,2
1420,1 80,8
1193,7 12,64%
100,00% 16,37%
100,00% 14,09%
100,00%
Deferred
Cost tax liabilities
of sales 68,7
362,4 70,1
320,2 68,7
276,2 0,00%
22,26% 0,00%
22,55% 0,00%
23,14%
Otherprofit
Gross long term operating liabilities 1.265,3
17,4 1.099,9
29,4 917,5
22,8 0,00%
77,74% 0,00%
77,45% 0,00%
76,86%
Operating
Stock-based liabilities (long
Compensation term)
in SGA 86,1
29,4 99,5
29,6 91,5
23,5 0,00%
1,81% 0,00%
2,08% 0,00%
1,97%
Net Fixed Assets
General and administrative expenses 1315,2
147,7 596,2
127,8 553,8
108,7 104,24%
9,07% 103,60%
9,00% 96,58%
9,11%
Selling expenses 483,2 428,9 365,1 29,69% 30,20% 30,59%
Invested Capital
Advertising Expenses 1261,7
113,2 575,5
99,5 573,4
79,4 100,00%
6,95% 100,00%
7,01% 100,00%
6,65%
Depreciation and Amortization 171,1 56,5 47,3 10,51% 3,98% 3,96%
EBITDA 662,9 470,6 388,1 40,73% 33,14% 32,51%
Depreciation and Amortization 171,1 56,5 47,3 10,51% 3,98% 3,96%
Operating Profit 491,8 414,1 340,8 30,21% 29,16% 28,55%
Special items (0,6) (1,3) (3,8) -0,04% -0,09% -0,32%
EBIT 491,2 412,8 337,0 30,18% 29,07% 28,23%
Net Financial Expenses 20,6 0,6 1,3 1,27% 0,04% 0,11%
EBT 470,6 412,2 335,7 28,91% 29,03% 28,12%
Provision for Income Taxes 112 79,7 85,9 6,88% 5,61% 7,20%
Minority Interest from Continuing Ops. 0,0 (0,1) (0,1) 0,00% -0,01% -0,01%
Net Income 358,6 332,6 249,9 22,03% 23,42% 20,93%

39
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Cash Flow Statement

2019 2018

EBITDA 662,9 470,6

Change in NWC -32,8 -40,3
Special items -0,6 -1,3
Cash flow from operations 695,1 509,6
Net Financial Expenses 20,6 0,6
Provision for Income Taxes 112,0 79,7
Cash flow from operatng activities 562,5 429,3

Change in Net Fixed Assets 719 42,4

Depreciation 171,1 56,5
Change in Lease and hire agreement 533,8 0,0
Cash Flow Investing (356,3) (98,9)

Change in Financial Debts 127,8 8,9

Dividends / Share issued (121,2) (187,1)
Cash Flow Financing 6,6 (178,2)

Cash Flow 212,8 152,2

Net change in Cash & Cash Equivalents 212,8 152,2

Cash and Cash Equivalents (Beg.) 546,3 394,1
Cash and Cash Equivalents (End.) 759,1 546,3

Change in Cash and Cash Equivalents 212,8 152,2

40
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Ratio Analysis
2019 2018 2017
ROE 27,45% 31,11% 27,06%
ROIC x Financial Leverage (3) x [ Financial Cost Ratio x Tax Ratio ]
ROIC 38,93% 71,73% 58,77% EBIT / NOA
Financial Leverage (3) 0,97 0,54 0,62 NOA / Equity
Financial Cost Ratio 0,96 1,00 1,00 EBT / EBIT
Tax Ratio 0,76 0,81 0,74 EAT / EBT
ROIC x Tax Ratio + [ (ROIC – Cost of Debt) x Financial Leverage (1) ] x Tax Ratio
ROIC 38,93% 71,73% 58,77% EBIT / NOA
Cost of Debt -46,09% -0,12% -0,37% Net Financial Expense / NFO
Financial Leverage (1) -0,03 -0,46 -0,38 NFO / Equity
Tax Ratio 0,76 0,81 0,74 EAT / EBT
ROIC = Profit Margin (PM) * Asset Turnover (ATO)
Profit Margin 30,18% 29,07% 28,23% PM = EBIT / Sales
Asset Turnover 1,29 2,47 2,08 ATO = Sales / NOA

NFO (45) (494) (350) NOA – Equity

Financial Leverage (1) -0,03 -0,46 -0,38 NFO / Equity
Financial Leverage (2) -0,04 -0,86 -0,61 NFO / NOA
Financial Leverage (3) 0,97 0,54 0,62 NOA / Equity

NWC (53) (21) 20 Operating Assets Short Term – Operating Liabilities Short Term

DSO 38 40 37 Accounts Receivable(end) / Sales * 365

Average payment period 251 246 170 Accounts Payable(end) / Purchases * 365
Days in Inventories 200 192 174 Inventory(end) / COGS * 365
CCC (13) (14) 40 DSO + Days in Inventories – Average Payment Period

Net Working Capital Financing (St) 12,27 26,41 (20,20) NFO (st) / NWC
Net Working Capital Financing (Lt) (11,44) (2,57) 2,33 (Equity + NFO (lt) ) / NWC

Current Ratio 22,19 (43,38) 32,62 Current Assets / Current Liabilities

Acid Test 1,73 1,96 1,97 (Cash + Accounts Receivable ) / Current Liabilities

41
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Chapter 4:

Additional Exercises:

42
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 1

The following is the simplified financial statements.

BALANCE SHEET
t t-1 t t-1
PPE 1,000 2,000 Notes payable 450 1,000
Brand 100 200 Other short term liability (operating) 200 1,100
Goodwill 200 200 Financial debts 1,200 1,200
Accounts receivable 450 300 Accrued expenses 200 100
Inventories 700 400
Other short term assets (operating) 300 400 Equity 1,400 1,000
Cash and cash equivalent 700 900
TOTAL 3,450 4,400 TOTAL 3,450 4,400

INCOME STATEMENT t
Sales 4,000
COGS 2,000
Amortization of PPE 400
Amortisation of brand 100
SG&A Expenses 100
Interest revenues 100
Interest expenses 300
Taxes 400
Net Income 800

Prepare the Managerial Balance Sheet, the reformulated Income Statement (with EBITDA, EBIT, NOPAT) and
the Cash Flow Statement.

43
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 2

Indicate the effects of the transactions on net profit, net working capital, EBITDA, and free cash flow. Use + to indicate an increase, - to indicate a decrease, and 0 to
indicate no effect.

Net Profit NWC EBITDA Cash Flow Operating Investing Financing

Shares are issued in change of a building

A depreciation of inventories is accounted
A fixed asset is sold for cash for more than a book value
A financial asset is sold for less than a book value
Corporate income tax is registered
There is a write-off of account receivable
A cash dividend is paid
Accounts receivables are collected
Merchandise is purchased on account
Equipment is acquired, the payment is due after 2 years
An impairment loss is accounted
An amortization is accounted
A rent paid in advance is accounted (60% for the actual period)

For cash transactions indicate also if they refer to operating, investing or financial activity.

44
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 3

The following line items are taken from a Cash Flow Statement of a service company.
Amortisation of software 400
Bonds (2,400)
Change in accounts payable (50)
Change in accounts receivable 600
Change in Inventories 250
Change in other short term assets (operating) (405)
Change in other short term liabilities (operating) 285
Depreciation and Amortisation 250
Dividends (3,400)
EBITDA 1,500
Extraordinary charges (250)
Investment in software (500)
Issue of new shares 7,000
Payments for plant and other property (2,000)
Proceeds from disposition of plant and other property 800
Proceeds from marketable securities and other investments 1,200
Purchases of marketable securities and other investments (1,500)
Repayment of Long Term debts (2,000)
Taxes (400)

Reconstruct the Cash Flow Statement and Calculate the Free Cash Flow using a tax rate of 30%

45
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 4

The following are partial financial statements for an industrial firm that you are required to analyse.
Period End Date 31-Dec-2019 31-Dec-2018

Cash 356.1 331.4

Accounts Receivable 700.3 650.0
Inventories 513.6 482.0
Prepaid Expenses 34.3 27.4
Other Current Assets 59.3 101.7
Total Current Assets 1,663.6 1,592.5
PPE 226.0 206.7
Goodwill 373.4 346.2
Intangibles 332.3 282.1
LT Investments 0.4 0.4
Note Receivables - Long Term 9.3 11.6
Deferred Income Tax - Long Term 110.1 116.2
Total Noncurrent Assets 1,051.5 963.2

Accounts Payable 256.3 275.7

Accrued Expenses 347.3 347.2
Notes Payable - Short Term 3.8 2.8
Current Portion of LT Debt 49.9 154.4
Other liabilities 66.7 62.3
Total Current Liabilities 724.0 842.4
Long Term Debt 846.2 634.5
Deferred Income Tax - LT Liability 36.3 40.6
Other Liabilities, LT 105.5 88.6
Total Noncurrent Liabilities 988.0 763.7
Total Equity 1,003.1 949.6
Total Liabilities and Equity 2,715.1 2,555.7

Period End Date 31-Dec-2019

COGS (1,409.7)
Depreciation / Amortization (39.7)
Gain on Sale of Assets - Operating 0.2
Income Taxes (46.1)
Interest Expense (30.0)
Interest Income 1.1
Investment Income - Non-Operating (2.5)
Net income 126.9
Other Non-Operating Expense (0.4)
Other Operating Expenses 15.4
Research & Development (88.7)
Restructuring Charge 0.0
Revenues 2,622.1
SG&A (894.8)

Reformulate the Financial Statements and Prepare the Cash Flow Statement

46
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 5
The following line items are taken from a Cash Flow Statement of an industrial company.

Amortization € 450
Change in Inventory € 5.000
Change in Trade Receivables & Other € 2.000
Change in Trade Payables & Other € 1.000
Change in Short Term tax liabilities € 750
Change in Shareholder Capital € 230
EBITDA € 7.450
Equity investments in controlled firms € 430
Impairment of Intangibles € 1.200
Investment Income (Expense) -€ 400
Other Change in Equity -€ 3.000
Purchase Tangible Assets & Properties € 175
Purchase Intangible Assets € 4.300
Risk Provisions € 320
Sale & Other Movements (Tangibles Assets) € 2.000
Sale of Investment € 1.300
Tax € 220
Variation of Financial Assets € 100
Variation of Financial Debts € 1.000

Using these data

(1) prepare the reformulated Cash Flow Statement;

(2) calculate the Free Cash Flow without the tax effect on firm’s EBIT
(3) calculate the Free Cash Flow with the tax effect on firm’s EBIT

47
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 6
Use the following set of information to prepare the balance sheet, the income statement and
calculate the Free Cash Flow based on the NOPAT:

Profit margin (2019) : 30%

ROIC (2019) : 8%

ROE (2019) : 15%

Cash flow invested in operating fixed assets during 2019 : 500

Marginal Tax rate (2019): 30%

EBIT (2019) : 1,000

Amortization (2019): 10% of Net Fixed Assets at end of the fiscal year

NWC / Sales (2019) : 10%

Taxes (2019) : 200

NWC (31.12.2018) : 600

NFO / Equity (31.12.2019): 2

48
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Chapter 5:

Residual Earnings Model:

49
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Accrual Accounting and Valuation:

Pricing Book Values

Suggested exercises:
E 5.1
E 5.2
E 5.3
E 5.4
E 5.5
E 5.6
E 5.7
E 5.8
E 5.9
E 5.10
E 5.11
E 5.13
E 5.15

50
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

E5.1. Forecasting Return on Common Equity and Residual Earnings

Set up the pro forma as follows:

2012 2013 2014 2015

Eps 3.00 3.60 4.10

Dps 0.25 0.25 0.30

Bps 20.00 22.75 26.10 29.90

ROCE 15.00% 15.83% 15.71%

RE (10% charge) 1.00 1.325 1.49

(a) The answer to the question is in the last two lines of the pro forma
(b) As forecasted residual earnings are positive, the shares of this firm are worth a premium over
book value.

E5.2. ROCE and Valuation

As expected, ROCE is equal to the required return, expected residual earnings are zero. So the shares
are worth their book value per share. Book value per share = $3,200/500 = $6.40. So price per share is
$6.40.

51
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

E5.3. A Residual Earnings Valuation

If t = 3

Forecast year
1 2 3
2012 2013 2014 2015
Earnings 388 570 599
DIVIDENDS 115 160 349
BOOK VALUE 4.310 4.583 4.993 5.243

ROCE 9,00% 12,44% 12,00%

RE (charge) 10,00% -43 112 100
Discount rate 1,10 1,21 1,33
Present value of RE -39 92 75
Total present value of RE 128

Book value (growth rate) 6,33% 8,95% 5,01%

RE (growth rate) -10,74%
g 5,00%
Continuing value 2.094
PV of continuing value 1.573

Value of the company 6.011

Value per Share 4,36

Premium Value of the company (2012) 6.011

Book Value (2012) 4.310

1.701

Premium per share 1,23

P/B ratio 1,39

52
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

If t = 5

Forecast year
1 2 3 4 5
2012 2013 2014 2015 2016 2017
Earnings 388 570 599 629 660
DIVIDENDS 115 160 349 367 385
BOOK VALUE 4.310 4.583 4.993 5.243 5.505 5.780

ROCE 9,00% 12,44% 12,00% 12,00% 12,00%

RE (charge) 10% -43 112 100 105 110
Discount rate 1,10 1,21 1,33 1,46 1,61
Present value of RE -39 92 75 72 68
Total present value of RE 268

Book value (growth rate) 6,33% 8,95% 5,01% 5,00% 5,00%

RE (growth rate) -10,74% 5,02% 4,97%
g 5%
Continuing value 2.308
PV of continuing value 1.433

Value of the company 6.011

Value per Share 4,36

Premium Value of the company (2012) 6.011

Book Value (2012) 4.310

1.701

Premium per share 1,23

P/B ratio 1,39

53
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

E5.4. A Residual Earnings Valuation and Target Prices

Forecast year
1 2 3 4 5
2012 2013 2014 2015 2016 2017
EPS 3,90 3,70 3,31 3,59 3,90
DPS 1,00 1,00 1,00 1,00 1,00
BPS 22,00 24,90 27,60 29,91 32,50 35,40

ROCE 17,73% 14,86% 11,99% 12,00% 12,00%

RE (charge) 0,12 1,26 0,71 - 0,00 0,00 -
Discount rate 1,1200 1,2544 1,4049 1,5735 1,7623
Present value of RE 1,13 0,57 - 0,00 0,00 -
Total present value of RE 1,692
g
Continuing value 0
PV of continuing value 0,000

Value per share 23,692

54
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

E5.5. Residual Earnings Valuation and Return on Common Equity

(a) Set the current year as Year 0.

Earnings, Year 1 = 15.60 × 0.15 = 2.34

Residual earnings, Year 1 = 2.34 – (0.10 × 15.60) = 0.78

RE 0 0.78
This RE is a perpetuity, so V0 = B 0 + = 15.60 + = 23.40
0.10 0.10

P B = 23.40 15.60 = 1.5

a) No effect: future payout does not affect current price and future dividends don’t affect current
book value: P/B is still 1.5. But the issue is a little subtle.
The idea that dividend payout does not matter is premised on the assumption that dividends do
not affect investment activity—that is the assumption behind the famous Miller & Modigliani
dividend irrelevance notion. If the retained earnings were invested at the same ROE of 15% (and
thus affecting investments), then the value and P/B will change. For the value to stay the same, it
has to be that management (who make the dividend decision) concludes that retained earnings
cannot be invested at the same ROE of 15%. If they did not, they should not be paying a dividend
and destroying value! (Of course, they could pay a dividend and borrow to replace the funds for
investment).

55
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

E5.6. Value of a Project

0 1 2 3 4 5
Depreciation 30 30 30 30 30
Book Value 150 120 90 60 30 0

Earnings 15% 22,5 18 13,5 9 4,5

RE 12% 4,5 3,6 2,7 1,8 0,9

PV of RE 4,02 2,87 1,92 1,14 0,51

Total PV of RE 10,46

Value of the project 160,46

56
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

E5.7. Using Accounting-Based Techniques to Measure Value Added for a Going Concern

Forecast year
Timeline 1 2 3 4 5 6 7

Investment 150,00 150,00 150,00 150,00 150,00 150,00 150,00 150,00

Amortization and Book Value 1 2 3 4 5 6 7

Book Value 150,00
Amortizable value 150,00
year 5
Amortization (investment(1)) 30,00 30,00 30,00 30,00 30,00
Amortization (investment(2)) 30,00 30,00 30,00 30,00 30,00
Amortization (investment(3)) 30,00 30,00 30,00 30,00 30,00
Amortization (investment(4)) 30,00 30,00 30,00 30,00
Amortization (investment(5)) 30,00 30,00 30,00
Amortization (investment(6)) 30,00 30,00
Amortization (investment(7)) 30,00

Amoritzation "period t" 30,00 60,00 90,00 120,00 150,00 150,00 150,00

Book Value 150,00 270,00 360,00 420,00 450,00 450,00 450,00 450,00

Earnings 15% 22,50 40,50 54,00 63,00 67,50 67,50 67,50

Expected rate of return 12%

Residual earnings 4,50 8,10 10,80 12,60 13,50 13,50 13,50

Discount factor 0,8929 0,7972 0,7118 0,6355 0,5674 0,5066 0,4523

PV of Residual Earnings 26,17 4,02 6,46 7,69 8,01

Continuing value 112,50

PV of Continuing Value 71,50

Value 247,67

Value added = Premium 97,67

57
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

E5.8. Creating Earnings and Valuing Created Earnings

a. Earnings = Revenues – Expenses

= $440 - $360 = $80
Earnings in the text example were $40. Clearly earnings have been created,
by expensing $40 of the investment in the prior period and thus reducing
Year 1 expenses by $40.

b. ROCE = $80/$360 = 22.22%

Residual earnings = $80 – (0.10 × 360) = 44

$44
c. Value = $360 + = $400
1.10
Even though earnings have been created, the calculated value is the same as that
in the text (before earnings were created).

58
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

E5.9. Residual Earnings Valuation: Black Hills Corp

The pro forma for the exercise is as follows:

Forecast Year
____________________________________
1999 2000 2001 2002 2003 2004

Eps 2.39 3.45 2.28 2.00 1.71

Dps 1.06 1.12 1.16 1.22 1.24
Bps 9.96 11.29 13.62 14.74 15.52 15.99

ROCE 24.0% 30.6% 16.7% 13.6% 11.0%

RE (11% charge) 1.294 2.208 0.782 0.379 0.003
Discount rate (1.11)t 1.110 1.232 1.368 1.518 1.685
Present value of RE 1.166 1.792 0.572 0.250 0.002

Total present value of RE to 2004 3.78

Continuing value (CV) 0.0
Present value of CV 0.00
Value per share 13.74

a. ROCE and residual earnings are in the pro forma

b. If ROCE is to continue at 11% after 2004, then residual earnings are expected to be
zero. The continuing value is zero. The value is $13.74 per share – a Case 1 valuation.
c. As the CV = 0, the target price is equal to forecasted bps of $15.99 at 2004.

59
Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

E5.10. Valuing Dell, Inc.

The pro forma for 2009 and 2010 and the value it implies is as follows:

2008 2009 2010

EPS 1.47 1.77

DPS 0.00 0.00

BPS 1.813 3.283 5.053

RE (10%) 1.289 1.442

Discount rate 1.10 1.21

PV of RE 1.172 1.192

Total PV to 2010 2.364

Continuing value 24.99

1.442 ´ 1.04
1.10 - 1.04
PV of continuing value 20.66

Value per share 24.84

Note: BPS at the end of fiscal-year 2008 = $3,735/2,060 shares = $1.813.

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

E5.11. Valuing General Electric Co.

Forecast year
1 2
2004 2005 2006
EPS 1,71 1,96
DPS 50% 0,86 0,98
BPS 10,47 11,33 12,31

ROCE 16,33% 17,31%

RE (charge) 10% 0,66 0,83
Discount rate 1,1000 1,2100
Present value of RE 0,60 0,68
Total present value of RE 1,29
g 4%
Continuing value 14,34
PV of continuing value 11,85

Value per share 23,61

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

E5.13. Converting Analysts’ Forecasts to a Valuation: Nike, Inc.

Forecast year
1 2 3 4 5
2008 2009 E 2010 E 2011 E 2012 E 2013 E
EPS 3,80 3,90 4,45 5,03 5,68 6,42
DPS 0,88 0,90 1,02 1,16 1,31 1,48
BPS 15,93 18,93 22,36 26,23 30,60 35,54

ROCE 24,5% 23,5% 22,5% 21,7% 21,0%

RE (charge) 10% 2,307 2,557 2,794 3,057 3,360
Discount rate 1,100 1,210 1,331 1,464 1,611
Present value of RE 2,097 2,113 2,099 2,088 2,086
Total present value of RE 10,484
g 4%
Continuing value 58,24
PV of continuing value 36,16

Value per share 62,58

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

E5.15. Impairment of Goodwill

(a) As the asset is at fair value (the acquisition price) on the balance sheet, it is expected to earn
at the required return on book value: Residual earnings is projected to be zero. (Fair value in
an acquisition always prices the acquisition to earn at the required rate of return.)

(b) The book value must be marked down to fair market value under IAS 38. The book value at
the end of 2011 before the write down, is 301 + 79 = 380 (the depreciated amount of the
tangible assets plus the good will).

Forecasted earnings for 2012 on this book value (at the forecasted ROCE of 9%) is

380 × 0.09 = 34.2

For a 10% required return, the book value that yields residual earnings in 2012 equal to zero =
34.2 × 10 = 342:

RE2012 = 34.2 – (0.10 × 342) = 0

A book value of 342 is thus “fair value.”

Accordingly, the amount of impairment = 380 – 342 = 38.

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Chapter 6:

Residual operating Income Model:

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Suggested exercises:

E 14.1
E 14.2
E 14.7
E 14.16
E 14.17 (excluding point a.)

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

E14.1. Residual Earnings and Residual Operating Income

Using beginning of period balance sheet amounts,

Residual earnings (RE) = 900 – (0.12 × 5,000) = 300

Residual operating income (ReOI) = 1,400 – (0.11 × 10,000) = 300
Residual financing expense (ReNFE) = 500 – (0.10 × 5,000) =0

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

E14.2. Calculating Residual Operating Income and its Drivers

Forecast year
1 2 3
2007 2008 2009 2010
Operating Income 187,00 200,09 214,10 229,08
NOA 1.214,45 1.299,46 1.390,42 1.487,75

RNOA (%) = ROIC (%) 16,48% 16,48% 16,48%

Residual Operating Income (ReOI) 10,1% 77,43 82,85 88,65

Growth in NOA 7,00% 7,00% 7,00%

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

E14.7. Residual Operating Income Valuation

Forecast year
1 2 3 4
2012 2013 E 2014 E 2015 E 2016 E
Operating Income 187,00 200,09 214,10 229,08
NOA 1.135,00 1.214,45 1.299,46 1.390,42 1.487,75
NFO 720,00
Equity 415,00

RNOA (%) = ROIC (%) 16,48% 16,48% 16,48% 16,48%

Residual Operating Income (ReOI) 10,1% 72,37 77,43 82,85 88,65

Discount Rate 1,101 1,212 1,335 1,469

PV of ReOI 65,73 63,88 62,08 60,33

Total PV of ReOI 252,01

Without growth
Continuing Value 877,70
PV of Continuing Value 597,31

Enterprise Value 1.984,32

NFO 720,00

Equity Value 1.264,32

With growth
Growth in ReOI 7,00% 7,00% 7,00%

Continuing Value 3.059,77

PV of Continuing Value 2.082,28

Enterprise Value 3.469,29

NFO 720,00

Equity Value 2.749,29

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

E14.16. Calculating Residual Operating Income: Dell, Inc.

a)
NOA, beginning of year = 13,230 – 20,439 = -7,209 (NOA are negative)

ReOI = OI – (0.12 x NOA) = 2,618 – (0.12 x -7,209) = 3,483

b)
Because Dell’s NOA were negative, its ReOI is greater than is operating income.

Dell generated value in operations from

Operating income of $1,325 million (sales less operating expenses in trading with customers)
A negative investment in NOA: shareholders earned 12% on operating debt in excess of
operating assets.
(Operating creditors financed operating assets and more). Dell used other people’s money.
See

Further analysis of the drivers of residual operating income would involve analysis of profit
margins and asset turnovers.

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

E14.17. Residual Operating Income Valuation: Nike, Inc., 2004

Forecast year
1
2003 2004 2005 E
Operating Income 961,00 1.010,05
Net Financial Expense 16,00
NOA 4.330,00 4.551,00
NFA -302,00 289,00
Equity 4.028,00 4.840,00

RNOA (%) = ROIC (%) 22,19% 22,19%

Residual Operating Income (ReOI) 8,6% 588,62 618,66

Discount Rate 1,086

PV of ReOI 569,67
Total PV of ReOI 569,67

Without growth
Continuing Value 7.193,75
PV of Continuing Value 6.624,08

Enterprise Value 11.744,75

NFA 289,00

Equity Value 12.033,75

With growth
Growth in ReOI 4%

Continuing Value 13.987,16

PV of Continuing Value 12.879,52

Enterprise Value 18.000,19

NFA 289,00

Equity Value 18.289,19

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Chapter 7:

Exercises and Mock Exams:

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 7.1

Question 1

At the end of 2016, a financial analyst forecasts earnings and dividends as in the following table.

2017 2018 2019

Earnings 1,000 1,100 1,200
Dividends 400 800 1,000
After issuing the forecast, financial analysts discover that the firm have decided to write down its
inventory at the end of 2016 by 500. The effect of the write down is that the company is expected to
buy more raw materials for 1,100 in 2017 and to have the same level of inventories expected before
the write down at the end of the 2017.

Provide the company’s value per share before and after the write down of the inventory. The book
value at 31.12.2016 is 7,500. You can use a capitalization rate of 13%, and an estimate of the growth
rate of 1% after 2019 (for perpetuity). The number of shares is equal to 100.

Without write down With write down

2017 2018 2019 2017 2018 2019

Without the write down With the write down

Equity value at 31.12.2016
Enterprise value at 31.12.2016

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Exercise 7.2

Question 1

The following are summary income statement and balance sheet numbers for a firm for year 2018
and financial analyst forecasts for the period 2019 - 2021.

The firm has a required return for operations of 9% and a required return for shareholders of 11%.

Financial Analysts are not able to provide a reliable forecast of the dividends, because the firm has
not yet disclosed its dividend plan for the period 2018-2021.

2018 A 2019 E 2020 E 2021 E

Sales 1.900 2.000 2.200 2.900
Operating expenses 1.200 1.500 1.900 2.450
Net Financial Expenses 100 250 200 300

Net Operating Assets 3.000 3.400 3.300 3.500

Net Financial Assets 100 200
Net Financial Obligations 250 300
Equity

Amortization is estimated 10% of NOA at the end of the period

Marginal Tax Rate is 30%

Based on these forecasts, calculate

1) Income Statement for each year of the forecasted period

2) Residual Operating Income for 2019, 2020 and 2021
3) Residual Earnings for 2019, 2020 and 2021
4) Equity Value at 31.12.2018
5) Enterprise Value at 31.12.2018

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

MOCK Exam 1.

Alfa is a manufacturing company that produces components for engines of electric car windows. It
operates in Italy and sells to all the major players in the car industry.
Below you find the simplified financial statements of year 2018 and 2017.

2018 2017 2018 2017

Cash 110 50 Accounts payable 1.200 1.040
Goodwill 300 400 Operating liabilities 300 400
Short term investments 540 500 Accrued liabilities 390 450
Accounts receivable 1.030 790 Long-term debt 450 1.970
Inventory 910 840
PPE 2.840 2.710 Common equity 3.390 1.430
5.730 5.290 5.730 5.290

Sales 4.500
Cost of Goods sold 3.500
Selling and General Expenses 200
Amortization (PPE) 300
Amortization (Goodwill) 100
Gain on disposal of financial assets 200
Interest income 150
Interest expense 30
Income taxes 200
Net Income 520

Firms statutory rate 30%

Additional information
Operating liabilities are considered long term
The Cash flow statements should refer to Net Financial Obligations (Short Term)

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

TIME Ex 1 Ex 2 Ex 3 Ex 4 Ex 5 Ex 6 Ex 7
Attending Student 90 min Yes Yes Yes No Yes No No
Non-Attending Student 150 min Yes Yes Yes Yes Yes Yes Yes

Question 1

Prepare the strategic balance sheet

Question 2

Reformulate the income statement with EBITDA, Operating Income

Calculate also the NOPAT

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Question 3

Prepare the cash flow statement

Question 4

Calculate the following financial ratios (for 2018 only)

Use the “end of the period” numbers!
To calculate the Cash Conversion Cycle use 360 days, refer to the COGS (not purchase)

Formula Numbers

ROE

ROA

PM

ATO

Financial Leverage

Cash Conversion Cycle

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Question 5

Calculate the enterprise value under the following assumptions

Consider the following pro-forma based on analysts’ forecasts in early 2019.

• Year Earnings growth is expected to be 5% until the end of 2021

• Dividends are 10% of the book value of the previous year
Using a required return for equity of 10% calculate:
- Scenario 1: The enterprise value at 31.12.2018 if the difference between ROCE
and the required rate of return after 2021 is expected to be 0
- Scenario 2: The enterprise value at 31.12.2018 if the RE after 2021 is the same of
the RE of year 2021
- Scenario 3: The enterprise value at 31.12.2018 if the growth of the RE after 2021
is 3%
Consider no digits after the decimal point.

2019 2020 2021

Scenario 1:

Scenario 2:

Scenario 3:

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Question 6

Forecasting and valuation

Calculate the Return on Operating Assets and the Residual Operating Income for 2019 with the
following assumptions:

- Use a cost of capital for operations of 9%

- Sales revenue is forecasted to grow at a 6% rate per year in the future, on a
constant asset turnover of 1.25.
- Operating profit margins of 14% are expected to be earned each year

NOTE: Use OPERATING PROFIT not NOPAT

- Question 1 : Forecast return on operating assets (RNOA) for 2019

RNOA (2019)

- Question 2 : Forecast Residual Operating Income for 2019

ReOI (2019)

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Cases and Exercises S. Bozzolan – F. Paolone
Financial Statement Analysis
MSc in Corporate Finance
Luiss Guido Carli University
Academic Year 2020/2021
__________________________________________________

Question 7

Complete the following table

Cash flow Cash Flow
Operating
EBITDA EBIT from from
Cash Flow
Investments Financing

1. Dividends are paid

2. A financial asset is sold for cash at a loss
3. An impairment loss is accounted
4. An Account Receivable is written off
5. A depreciation of inventories is registered
6. An operating asset is sold for cash at a loss
7. New revenues are registered
9. Obsolete inventory is written off
10. A rent is paid in advance
11. Raw materials are purchased on account

79