Financial Analysis

Financial Analysis

Answer 1) Assets Valuation

Valuation of assets is the market value of assets of the company which is based on the replacement cost considering the physical and moral deterioration. Speaking briefly about the value of assets, we can say that their value - a value of the company, expressed in monetary term. The traditional method of asset valuation was the price of their acquisition or production costs including depreciation. However, persistent inflation, the development of the market make prices volatile, causing the value of assets may introduce a serious error. Some companies, controlling its financial statements, assess assets every year, while others - never, because of which suffer losses and bear the extra costs. Fixed assets, except land and knowledge are studied on the basis of net cost, while the current estimate is composed of two - net realizable value and cost.

IFRS also include the assets in the accounting records in accordance with four different methods of assessment assets:

The actual cost of acquisition

Replacement cost

A possible sale price

Present value

According to the International Valuation Standards, “the price is a term denoting the amount of money required, offered, or paid for a product or service”. It is historical facts that regardless of whether or not it is declared open, or remains a secret, in view of the financial capabilities, motivations, or special interests of specific buyers and sellers, the price paid for goods or services may not match the value that could be assigned to these goods or services of other persons. However, the price usually is an indicator of relative value to assign to these goods or services according to customer and / or the seller in the circumstances.

Answer 2) Free cash flows Calculation 2012-2016

Data

2011 Revenue

$40 million

Expected growth rate

7% to 3%

projected EBIT margins

10%

Income Tax rate

40%

Depreciation

3% of the revenue

Projected Capital expenditures 2012

$1 million

Projected Operating working capita

5% of revenue

Free cash flow formula

 

2012

2013

2014

2015

2016

EBIT(1-Tax Rate)

41.76

41.36

40.96

40.56

40.16

Add: Depreciation & Amortization

1.2528

1.2408

1.2288

1.2168

1.2048

Less: Change in Net Working Capital 

2.088

2.068

2.048

2.028

2.008

Less: Capital Expenditure

1.07

1.06

1.05

1.04

1.03

FCF

39.8548

39.4728

39.0908

38.7088

38.3268

Answer 3) Required Rate of Return on Equity

The required rate of return is the minimum return that an investor wishes on investment based on the amount of risk. The required rate of return is derived through an analysis of discounted cash flow, taking into account several different factors.

Required rate of return = Risk free rate + [Beta of investment (Market return - Risk free rate)]

Data

Risk-free rate

2.60%

Beta

0.9

Equity risk premium

6%

Small stock risk premium

3%

RoR = 2.6% + [0.9(6%-2.6%)]

RoR = 5.66%

If the rate of company performance is not equal to the required rate of return, the investor will not invest. This is because the investment would be too risky compared to potential yields. Investors will not take much risk if something better paid. The required rate of return is a good measure to better maximize their capital. Many companies make an analysis of the rate of performance to determine whether to undertake a project, a new product or a joint venture. If the rate of return is not sufficient to justify the investment required to launch a new product line or get into an ...