BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, PILANI - K. K.

BIRLA GOA CAMPUS

Second Semester 2018-19, Mid-Semester Examination March, 2019
BUSINESS ANALYSIS AND VALUATION (ECON F355)
(Answer all questions)

Date: 16/03/2019 Time: 90 Minutes Total Marks: 30

A. Each question carries 1 mark. (1*6 = 6 Marks)

1. Because managers do not have perfect foresight, actual customer defaults are likely to be
different from estimated defaults, leading to a -----------------.
2. A firm’s ------------ provides a reconciliation of its performance based on accrual accounting and
cash accounting.
3. In the period of rising prices, LIFO firm has the ------------gross profit than FIFO firm.
4. In the period of rising prices, debt-to-equity ratio -------------for LIFO firm compared to FIFO firm.
5. Days’ receivable for the current quarter----------------for a firm, that has decided to increase the
sales for the current quarter by filling all customer orders, provided that prior to the transaction,
quarterly sales are less than receivables.
6. Assuming that all other things are equal, the company that sells product evenly throughout the
quarter has a -------------- cash and a ---------------accounts receivable balance at the quarter-end
than the company that ships all products in the last two weeks of the quarter. Each company’s
customers pay thirty days after receiving shipment.

B. Each question carries 4 marks. (4*6=24 Marks)

1. Coca-Cola and Pepsi are both very profitable soft drinks. Inputs for these products include corn
syrup, bottles/cans and soft drink syrup. Coca cola and Pepsi produce the syrup themselves and
purchase the other inputs. They then enter into exclusive contracts with independent bottlers to
produce their products. Use the five forces framework and competitive advantage concept to
explain how Coca-Cola and Pepsi are able to retain most of the profits in this industry.

2. Following informations have been obtained by an analyst for the company, Colar Beverages.
a) Channel stuffing has been done, where Colar Beverages stuffed as much as $4.45 billion
worth of products into wholesalers’ warehouse from 2016 through 2018. The company’s
sales and cost of sales for 2018 are $20,139 and $7,554, respectively.

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 b) During this period growth in inventory far outpaced growth in sales, leading to a 58%
increase in day’s inventory from 100 days for the quarter ending September 30, 2016 to 158
days for the quarter ending March 2018. Inventory at the end of March 2018 was valued at
$574.5 million. This increase raises questions for analysts about Colar Beverages’ inventory
value and potential obsolescence. How much excess inventory do you estimate Colar
Beverages is holding in March 2018 if the firm’s optimal days’ Inventory is 100 days?
Calculate the inventory impairment charge for Creative Technology if 60 percent of this
excess inventory is deemed to be worthless.
The company’s tax rate in 2018 was 40 percent. Record both (a and b) the changes to Colar
Beverages’ financial statements.

3. The cigarette industry is subject to litigation for health hazards posed by its products. The
industry has been in an ongoing process of negotiating a settlement of these claims with state
and federal governments. As the CFO for Altria Group, the parent company of Philip Morris, one
of the larger firms in the industry, what information would you report to investors in the annual
report on the firm’s litigation risks? How would you assess whether the firm should record a
liability for this risk, and if so, what approach would you use to assess the value of this liability?
As a financial analyst following Philip Morris, what questions would you raise with the CEO over
the firm’s litigation liability?

4. In 2018, the Supernil Farm fertilizer Inc., a manufacturer of farm fertilizer, announced that it had
received a subpoena from the SEC seeking documents related to its revenue recognition
practice. From 2017 to 2018, Supernil’s days’ receivable had increased from 100 to 125 days an
increase of 20%. Upon investigation, the SEC detected a number of improper revenue
transactions, including shipments from the factory to the warehouse that had been recorded as
sales. If the firm’s optimal days’ receivable is 100 days, calculate the amount of revenue and
account receivable that would have to be declined in the 2018 financial report. Supernil’s
marginal tax rate is 35 percent, and the ratio of cost of sales to sales is 40 percent. At the end of
March 2018, Account receivable balance is $ 1 billion and an allowance for doubtful accounts for
Supernil is 35%. Provide the necessary adjustment in the books of account.

5. At the end of 2017, the Rolls-Royce Group provided in its footnotes that its plant and equipment
had an original cost of £ 5,000 million and that accumulated depreciation was £ 3,000. Rolls-

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 Royce depreciates its plant and equipment on a straight-line basis under the assumption that
the assets have an average useful life of 15 years (assume a 10 percent salvage value). Rolls-
Royce’s tax rate equals 25%. What adjustments should be made to Rolls-Royce’s (i) balance
sheet at the end of 2017; and ii) income statement for the year 2018, if you assume that the
plant and equipment has an average useful life of 10 years (and a 10 percent salvage value)?

6. In 2005, IBM had a return on equity of 26.7 percent, whereas Hewlett-Packard’s return was only
6.4 percent. Use the decomposed ROE framework to provide possible reasons for this difference
based on the data below:
IBM HP
NOPAT/ Sales 9.0% 2.7%
Sales/Net Assets 2.16 2.73
Effective after tax interest rate 2.4% 1.1%
Net financial leverage 0.42 -0.16