Financial Statement Analysis and Financial Models

PART 2. FINANCIAL STATEMENT ANALYSIS AND FINANCIAL MODELS

Ross and Westerfield want to use financial planning models to prepare a projected (pro forma) financial statement to determine the profitability and financial health of the business for next four years if they go public. The income statement ending Dec 31, 2020, and the company’s balance sheet as at Dec 31, 2020, are shown below. Use the financial statement to answer the following questions:

5. What was company’s profitfor 2020?

6. Compute the following three profitability ratios and explain to Ross and Westerfield whether the business did better or worse in 2020 relative to the performance of the industry.

i. Profit margin

ii. Return on assets

iii. Return on equity, and

iv). Calculate and explain operating cash flow

The industry ratios are as follows:

Current ratio 3 times

Total debt ratio 40.0%

7. The business current assets comprise of cash and other current assets whilst its current liabilities comprise of only accounts payable. Compute and explain the current ratio and total debt ratio for the business in 2020.

8. Ross believes that if the business goes public large capital can be raised to increase sales and cash flows to maximize the value of the firm. Assuming the business projects a 35% increase in operating revenue (sales) per year what will be the anticipated operating revenue in three years from now (i.e., in 2023)?

9. If net income is projected to increase by 30% per year, what will be the profit margin in 2023?

10. What will be the estimated earnings per share (EPS) in 2023 if 5 million shares are issued?