ACCT5910 – Business Analysis and Valuation Term 1 2024 Final Examination

Java Python ACCT5910 – Business Analysis and Valuation

Term 1, 2024

Final Examination

Question 1: Business Strategy Analysis [20 marks]

Limityour answer to 2pages. We will not grade anything beyond the second page ofyour answer.

a.   Identify the industry in which Reject Shop Ltd (ASX: TRS) operates in and using the Porter’s five-forces model discuss the competitive environment within this industry. (8marks)

b.   Discuss how macroeconomic conditions are expected to influence the strategic position of the Reject Shop Ltd, and the key risks associated with these responses. (6marks)

c.   Identify the key competitors to Reject Shop Ltd. Discuss the competitive advantages that Reject Shop Ltd enjoys relative to these competitors. (6marks)

Question 2: Financial Analysis [20 marks]

Limityour answer to 2pages. We will not grade anything beyond the second page ofyour answer.

a.  Compute Reject Shop Ltd return on common  shareholders equity (ROE) for the fiscal years 2021, 2022 and 2023 using average common equity in the denominator. (3marks)

b. Use the Dupont model to decompose Reject Shop Ltd’s ROE into profit margin, asset turnover, and leverage for the financial years 2021, 2022 and 2023. (3marks)

c.  Comment on Reject Shop Ltd operating asset management over the period 2021 to 2023. In doing so, provide the evolution of appropriate financial ratios, including but not limited to (i) operating working capital to revenue; (ii) trade receivables turnover; (iii) inventory turnover; (iii) accounts payable turnover; and (iv) cash conversion cycle. (7marks)

d.  Using the ratios calculated in Questions 2(a) to 2(c), discuss how the financial ratios o ACCT5910 – Business Analysis and Valuation Term 1, 2024 Final Examination ver time reflect the strategy of Reject Shop Ltd. (7marks)

Question 3: Forecasting [30 marks]

Limityour answer to 1 page. We will not grade anything beyond the first page ofyour answer.

a.   Based on the firm’s strategy  and your ratio analysis above, provide forecasts, with assumptions and justifications, for Reject Shop Ltd in 2024 and 2025 of the following items: (i)Sales Growth; (ii) Profit Margin; (iii) Asset Turnover; and (iv) Leverage. (20marks)

b.    Describe the factors that makes it difficult to provide forecasts of these key profit drivers for Reject Shop Ltd for the next two years. (10marks)

Question 4: Valuation [30 marks]

Limityour answer to 3 pages. We will not grade anything beyond the second page ofyour answer.

a.     Using your estimates from Question 3(a)(i) forecast Reject Shop Ltd residual income for 2024 and 2025, assuming a cost of equity capital of 8%. State any additional assumptions that you need to make. (9marks)

b.    Using your forecasts from Question 4(a) and a cost of equity capital of 8%, compute the value per share of Reject Shop Ltd stock using the residual income model. Assume that 2025 is the terminal year for valuation, with a constant terminal growth rate of 4%. (8marks)

c.    Assume the current market price for Reject Shop Ltd is $4.90. Using your valuation from Question 4(b) provide a trading recommendation. In your response, discuss potential reasons for why your valuation differs from the assumed market price. (6marks)

d.    Using Monte Carlo analysis, describe the steps to assess the sensitivity of your valuation to the inputs in the valuation model. Based on your analysis, discuss the confidence you have in the trading recommendation you made in Question 4(c)