Introduction to Finance
Instructions
Please read carefully before you answer
• Bachelor Students are to write an individual essay of a minimum of 1800 and a maximum of 2000 words
• Upload your final paper in MS Word (for text) and MS Excel (for calculations) file format; other formats will NOT be assessed.
• Students are required to submit a working website link of the selected case study company’s financial statements used in answering the respective questions. The link is part of what has to be included in the introduction paragraph when answering questions. ONLY the excerpts of the case study financial statements must be shown in the appendix. Note that failure to submit the said financial statements will cause your paper NOT to be assessed.
Questions
Hermès International (Select a public company which is in the business of producing and marketing fast-moving consumer goods)
To execute the tasks below consult the company’s annual report over the 3 year period 2017-2019. In addition to the requirements for each question, ensure to provide formulas, assumptions and models as appropriate. Analysis or conclusions which are not based on the applicable theory will consequently limit your marks.
Task 1. Ratio analysis
You are required to:
I. Analyze the company’s consolidated financial statements over 2017-2019 using the following ratios as defined in the book (Financial Management for Decision Makers, Peter Atrill, 9th edition):
A. 4 Profitability ratios
B. 5 Efficiency ratios
C. 2 Liquidity ratios
D. 2 Financial gearing ratios
II. Reflect on these ratio outcomes over the 3 year period, and provide your conclusions and recommendations to the Board.
Task 2. Sensitivity analysis
Treat the figures in the 2017-2019 Income Statement and Balance Sheet of the company of your choice as if it were a 3-year prognosis. You are asked to execute a separate sensitivity analysis on the original figures as presented in the company’s annual report with each of the following 4 items:
1. Sales in each of the 3 years are 10% higher than currently “forecasted”; use the ‘percent- of-sales’ method
2. Sales in each of the 3 years are 10% lower than currently “forecasted”; use the ‘percent- of-sales’ method
3. Operating costs in each of the 3 years are 7% higher than currently “forecasted”
4. Operating costs in each of the 3 years are 7% lower than currently “forecasted”
For each of the situations A, B , C , and D you are required to:
I. Show the effects on the total 3-year Income Statements and Balance Sheets, including the effect on the required financing.
II. Discuss the implications of each of these effects with the Board and draw conclusions with respect to the main risks in the business over this “prognosis” period.
Task 3. Working capital analysis
In this task, you are also to assume that the figures in the 2017-2019 Income Statement and Balance Sheet of the company of your choice are a 3 year prognosis. Consider the following 6 deviations from the original figures :
1. Trade receivables of each of the 3 years are 20% higher than currently “forecasted”
2. Trade receivables of each of the 3 years are 20% lower than currently “forecasted”
3. Trade payables of each of the 3 years are 30% higher than currently “forecasted”
4. Trade payables of each of the 3 years are 15% lower than currently “forecasted”
5. Inventories of each of the 3 years are 40% higher than currently “forecasted”
6. Inventories of each of the 3 years are 20% lower than currently “forecasted”
You are required to:
I. Discuss the effects of each of these 6 deviations on the operating cash cycle in all 3 years.
II. Provide recommendations to the Board on what the focus of their working capital management should be for each of the six (6) scenarios above.
Task 4. Capital structure analysis
Discuss the capital structure of the company over the years 2017-2019.
You are required to:
I. Relate the term of the different sources of funds to the term of the different uses of funds.
II. Provide a rationale for your conclusions for each of the ‘’term of sources and application (uses)of funds” based on the appropriate concepts used in capital budgeting.
