Q No.2: Statement of Financial position for Aroma Corporation is given below for the period ending Dec 31 2020. Assets Liabilities & Equity cash 32 accounts payable 211 bank account 16 accruals 63 prepaid assets 121 salaries payable 54 inventories 350 Total current liabilities 328 Total current assets 569 long term bonds 190 Total fixed liabilities 190 land 179 building 187 prefered stock 96 retained earnings 103 Total fixed assets 366 common equity 218 Total Equity 417 total assets 935 Total liabilities & Equity 935 *All values given in ‘000 $. Other Information: PAT = 320 EBIDTA=428 RF= 5% Rm= 15 % Geared Beta of Aroma’s Industry is 1.3 (Preferred stocks are considered as debt financing) Profit Margin and Market Share of Aroma Corporation are constantly declining for last 3 years and various options are being discussed at board level for getting into a new venture with a fresh Brand Name and better product Quality and shut down the operations in existing name. A competitor has also offered to acquire operations of Aroma Corporation. On the other hand a group of investors still believe that company has potential to grow due to its old customer base which are quite satisfied by the offered services and are ready to inject more debt in the company. Analyst to CFO has gathered below information to be used in strategic Planning. Cost of Debt = 18% Tax Rate = 25% For coming 5 Years there isn’t any chance of growth in Market share and profit but after 5 years a constant growth of 9 % is expected. Future Cashflow for a period of 5 Years: Years Cash Flows 1 106 2 121 3 100 4 112 5-Terminal 100 CEO has advised to have a concrete information about company’s value and a suggestion of using various range of company’s value is given by Finance director. Required: You, as a financial strategist will be leading the presentation in next Board meeting and you are required to calculate Value of Aroma Corporation with following methods: Asset Based Valuation Earning Based Valuation Cash flow Based Valuation You are also expected to explain silent features of these 3 methods.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Q No.2:
| Assets | Liabilities & Equity | |||||||
| cash | 32 | accounts payable | 211 | |||||
| bank account | 16 | accruals | 63 | |||||
| prepaid assets | 121 | salaries payable | 54 | |||||
| inventories | 350 | |||||||
| Total current liabilities | 328 | |||||||
| Total current assets | 569 | long term bonds | 190 | |||||
| Total fixed liabilities | 190 | |||||||
| land | 179 | |||||||
| building | 187 | 96 | ||||||
| 103 | ||||||||
| Total fixed assets | 366 | common equity | 218 | |||||
| Total Equity | 417 | |||||||
| total assets | 935 | Total liabilities & Equity | 935 |
*All values given in ‘000 $.
Other Information:
PAT = 320
EBIDTA=428
RF= 5%
Rm= 15 %
Geared Beta of Aroma’s Industry is 1.3
(Preferred stocks are considered as debt financing)
Profit Margin and Market Share of Aroma Corporation are constantly declining for last 3 years and various options are being discussed at board level for getting into a new venture with a fresh Brand Name and better product Quality and shut down the operations in existing name.
A competitor has also offered to acquire operations of Aroma Corporation.
On the other hand a group of investors still believe that company has potential to grow due to its old customer base which are quite satisfied by the offered services and are ready to inject more debt in the company.
Analyst to CFO has gathered below information to be used in strategic Planning.
Cost of Debt = 18%
Tax Rate = 25%
For coming 5 Years there isn’t any chance of growth in Market share and profit but after 5 years a constant growth of 9 % is expected.
Future Cashflow for a period of 5 Years:
| Years | Cash Flows |
| 1 | 106 |
| 2 | 121 |
| 3 | 100 |
| 4 | 112 |
| 5-Terminal | 100 |
CEO has advised to have a concrete information about company’s value and a suggestion of using various range of company’s value is given by Finance director.
Required:
You, as a financial strategist will be leading the presentation in next Board meeting and you are required to calculate Value of Aroma Corporation with following methods:
- Asset Based Valuation
- Earning Based Valuation
- Cash flow Based Valuation
- You are also expected to explain silent features of these 3 methods.
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