Tutorial 9 Prospective analysis (Theory - I) exam questions and suggested answers PDF

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Tutorial 9, week 8 Prospective analysis Past exam questions and suggested answers 1.

The following is the analysts' EPS forecast estimate for Palladium Ltd (5 estimates) and Blueswan Ltd (13 estimates). Analyze the information and briefly comment on the analysts' forecast for the two companies. (5 marks)

Palladium Ltd (AUD$) EPS mean estimate EPS median estimate High estimate Low estimate Blueswan Ltd (AU$) EPS mean estimate EPS median estimate High estimate Low estimate

30/06/2021 0.43 0.35 0.60 0.07 30/06/2021 0.07 0.05 0.06 0.02

30/06/2022 0.42 0.39 0.56 0.09 30/06/2022 0.12 0.09 0.16 0.05

30/06/2023 0.26 0.22 0.48 0.05

30/06/2024 0.18 0.20 0.41 0.03

30/06/2023 0.24 0.20 0.28 0.11

30/06/2024 0.32 0.27 0.39 0.23

Suggested answers: There are two major differences in earnings estimates between the two companies. The difference between mean and median earnings estimates for Blueswan is lower than that of Palladium. The gap between the high estimate and low estimate is very high for Palladium, while it is lower for Blueswan. The reason for such a difference in the analysts’ earnings estimate can be because of the information available on the two companies and the number of analysts following. There is more uncertainty associated with the prediction of EPS using analysts forecast for Palladium as compared to Blueswan Ltd. 2.

Dofasco Ltd announced an interim dividend of $0.25 (EPS $4.50) on 18 February 2019 for the financial year ended 30 June 2018. This is the first time in the last 10 years that the company has declared dividend payment. The company made a profit in 2015 for the first time. Analyze the impact of initiation of dividend payments on your forecast of earnings of the company in 2019. (4 marks) Suggested answers: Dividends initiation may be meaningful when (1) managers have better information than investors about the company’s future earnings and (2) managers use that information to initiate dividend payments. The cash dividend initiation for the 2018 period can be thought of as a management forecast for future earnings improvement. The initiation of dividend payments sends a good signal to the capital market participants. An analyst will assume that the company’s profit is only going to increase in the future given that the company’s operations may have become profitable and sustainable. Even though the amount of dividend is very low, it also signals that the company wants to retain more earnings for future growth.

3.

In July 2018, Foothill Ltd, a men’s footwear retailer and manufacturer announced the closure of 3 of its 20 retail outlets due to tough market conditions. The company also announced a complete closedown of its only footwear manufacturing unit in Victoria. Analyze the impact of the closedown of the 3 stores and manufacturing unit on the company’s revenue and profit for the 2019 financial year, compared to the 2018 financial year. (3 marks) Suggested answer: If the motive for the closedown of the stores is to reduce further loss than it will increase the profit of the company in 2019. The revenue from the retail sales due to closedown will be lost completely but the loss will be avoided. It is hard to say whether the closure of the manufacturing unit will reduce revenue or not. May be the manufacturing unit was operating under capacity and closure may reduce the revenue marginally. Closedown will reduce fixed costs associated with the manufacturing unit and hence, overall the profit is expected to increase....