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ACCT7106 Final Exam (Suggested Solutions)

A. Buy recommendation as Value (RIM) > Value (DDM) > Stock price.

B. The valuations are different from DDM and RIM as the growth rate of CSE in FY24 is not
equal to the terminal growth rate.
C. P/B ratio > 1 which could be due to the following reasons:
• Most assets are measured at modified historical cost, not fair value.
• Accounting does not recognise the value of most intangible assets on the Balance
Sheet, especially internally generated intangibles.
• Expenditures such as R&D and advertising are largely expensed as incurred, but
might retain value.
• A collection of assets can be worth more when used together than when used
separately (synergy).
D. As only EPS and DPS forecasts are available, unlevered valuation models (DCF and ReOI)
cannot be used. Since the forecast horizon is short when working with analyst consensus
forecast, the residual income model (RIM) will give a better valuation as compared to the
dividend discount model (DDM). Thus, RIM should be preferred.
E. Advantage of RIM: Focuses on earnings, which is a better measure of performance than
dividends or FCF.
Disadvantage of RIM: More complex than DDM.
Question 25.
If Peter has misclassified non-trade receivables as operating assets then the following valuation
parameters will be affected:
• NOA: NOA will be overstated.
• NFO: NFO will be overstated.
• WACC: WACC will be understated as NFO is overstated.
ACCT7106 Final Exam (Suggested Solutions) - Semester 1, 2022
5
• OI: Information regarding interest income is not mentioned in the question. Assuming
Peter ensured that there was a direct association between operating assets and operating
income items, it is possible that Peter has classified interest income from non-trade
receivables as operating income instead of financial income. If this is true then OI will
be overstated.
• RI: RI = OI – NOAt-1 x WACC. It is difficult to figure out whether RI will be overstated
or understated.
• ReOI Valuation: It will be difficult to figure out whether calculated total enterprise
value will be understated or overstated. But it is more likely to be incorrect as several
valuation parameters are incorrect.
Question 26.
A. 76.2
B. 69.0
C. 9.0
FY22 FY23 FY24
FCF 3.30 3.63
PV 3.00 3.00
TV 76.23
PV(TV) 63.00
Total PV 69.00
NFO 15.00
Value of equity 54.00
Shares outstanding 6.00
Value per share 9.00