2.Exercises Balance sheet UK PDF

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THE READING OF THE FINANCIAL STATEMENTS: THE BALANCE SHEET EXERCISES 1. You should determine, for each of the following events occurring on December the 31st, which item of the balance sheet will be affected, the amount of its variation and its influence on the book value of the equity, at the end of the fiscal year N : a. The World Company uses 20 million euros of its cash reserves to repay its long-term debt. b. A fire has destroyed 5 million euro inventories that were not insured. c. The World Company uses 5 million euros of its cash reserves and borrows 5 million euros to purchase a 10 million euro building. d. A client of the World Company has received 3 million euros of goods that he has not paid yet. In the meantime, he went bankrupt ; he will not be able to pay. e. The engineers of the World Company discovered a new technical process which will make it possible to reduce the production costs by 50% next year. f. The main competitor of the World Company announces a strong decrease in the final prices, which forces the World Company to do the same by next January. 2.

According to the balance sheet of the World Company (see table 2.1), how much the book value of the World Company’s equity has changed between N-1 and N ? Does it imply a rise in the share price of the World Company ? You should explain.

3. The book value of General Mecanic’s equity is equal to 116 billion dollars, with 10.6 billions shares outstanding, each having a price of 17 $. General Mecanic’s cash reserves amount to 84 billion dollars and its total debt equals 410 billion dollars. a. How much is its market capitalization ? How much its price to book ratio ? b. How much is its leverage ratio ? You will successively provide the leverage based on the book value and the market value of the equity. c. How much is the market value of the economic assets ?

4.

GAP’s book value of the equity equals 3.017 billion dollars and its share price equals 27.90 $ for 489.22 millions of shares outstanding. Abercrombie & Fitch’s book value of the equity equals 1.693 billion dollars, its share price, 35.48 $ for 82.55 millions of shares outstanding. How much is the price to book ratio for each company ? What conclusion can we draw from this comparison ?

5. From the balance sheet of Alpha, you should compute the following indicators for the years N and N-1 : 1) The Working Capital Requirement (WCR), the Net Working Capital (NWC) and the cash level while considering that the marketable securities are easily transformable into cash. You should comment the situation. 2) The net debt and the financial leverage 3) The book value of the economic assets If the shares issued by ALPHA are traded in the Stock Exchange at a 60 euro price and if there are 1 000 000 shares outstanding in N, you should compute the following indicators for the year N :

4) The Price to Book ratio in N 5) The market-based leverage ratio in N 6) The market value of the economic assets in N The Balance-sheet of Alpha Assets

N

N-1

Non-current intangible assets Non-current tangible assets Of which Lands and plants Equipments

20

18

98

Financial noncurrent assets Non-current assets Inventories and Work in progress Trade receivables Other receivables and prepaid expenses Other financial assets Cash & cash equivalents Current assets Total assets

72

Equity and Liabilities Share capital and premia Reserves

58.7

48.5

39.3

23.5

1.0

N

N-1

24

22

10

8

Retained earnings

0.9

0.4

Net profit of the year Shareholders’ equity

5

6

39.9

36.4

88.6 13

65 10.7

119 25.2

90 14.3

24.8 0

13.2 0

Non-current provisions Long-term debt Short-term debt

2.0

1.0

Trade payables

29.9

14

1.5

8

Tax and social debt

1.1

0.4

53.5 172.5

36.5 126.5

44 172.5

25.1 126.5

Current liabilities Total liabilities...