QUESTION 11 A financial analyst is comparing two companies using a top-down appr
ID: 2340772 • Letter: Q
Question
QUESTION 11
A financial analyst is comparing two companies using a top-down approach. Which of the following would cause the biggest problem in the evaluation process?
One company's financial year-end is 31 October, while the other company's financial year-end is 31 December.
The companies operate in different industries.
One company has been in business significantly longer than the other company.
Inflation has been low for several years
QUESTION 9
Selected data from the financial statements of Ned Kelly (NK) are presented below.
2017
2016
Total comprehensive income
$145 000
$123 000
Cash dividends paid on ordinary share
42 000
38 000
Average number of ordinary shares
170 000
135 000
Market price per ordinary share year-end
16.00
13.00
Earnings per share for 2017 is:
$0.76
$1.57
$0.49
$0.95
One company's financial year-end is 31 October, while the other company's financial year-end is 31 December.
The companies operate in different industries.
One company has been in business significantly longer than the other company.
Inflation has been low for several years
QUESTION 9
Selected data from the financial statements of Ned Kelly (NK) are presented below.
2017
2016
Total comprehensive income
$145 000
$123 000
Cash dividends paid on ordinary share
42 000
38 000
Average number of ordinary shares
170 000
135 000
Market price per ordinary share year-end
16.00
13.00
Earnings per share for 2017 is:
$0.76
$1.57
$0.49
$0.95
Explanation / Answer
Question 11:
In top down approach of analysis, the investor (analyst) starts analysing by reviewing the macro picture of the economy, then the region in which the company operates, followed by industry analysis and finally the analysis is narrowed down to company analysis.
Of the three problems given, the problem that affects the top down approach of analysis very much is
that if the companies under analysis operate in different industries. If the companies belong to different industries, the evaluation criteria that affect one industry would not be relevant for the other company and thus posing bigger problem in analysis.
The other two problems (ie., difference in accouting year and longer existing company) can be managed by making suitable adjustments in the evaluation process which is relatively easier.
Q.9:
Formula for calculating the EPS (Earning per share) is;
(Net income for the period - Preferred stock dividend) / Avg no. of Equity shares outstanding
Avg no.of equity shares = (170000+135000)/2 = 152500
Netincome for the year 2017- preferred dividend = $145000-0= $145000
Therefore, EPS for the year 2017 = $145000/152500 = $ 0.95082 = $0.95
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