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(Answered) Financial Analysis and Valuation (FIN103) Assignment 3: Company valuation and investment recommendations

May 20, 2023

Background information

• For this assignment you are required to evaluate the quality of JB HiFi’s (JBH’s) earnings, calculate and analyse market performance ratios related to JBH, and prepare a report in which you are required to provide an investment recommendation for JBH.

• For the purposes of your analysis and discussion for questions 1, 2 and 4, ignore post balance date events at JBH (i.e. post 30 June 2017 events). In other words, your responses to questions 1, 2 and 4 should be based on JBH’s performance up to 30 June 2017. However, for Question 3, do not ignore any dividends that were declared post 30 June 2017 that relate to JBH’s financial year ended 30 June 2017.

• Show all workings for any ratio calculations in your answers. Your workings and answers should be rounded (unless otherwise stated in a question) to the same extent that JBH has rounded amounts in its 2017 Financial Statements. For example, JBH’s total assets of $2,452.3 million as at 30 June 2017 would be shown in the assignment as $2,452.3 million.

• Consistent with Assignment 2, assume that the only significant items in FY2017 were as follows:

– transaction fees and implementation costs of $22.4 million pre-tax ($15.7 million post tax) associated with the acquisition of The Good Guys

– goodwill and fixed asset impairment charges relating to JBH New Zealand of $15.8 million pre-tax ($11.1 million post-tax).

• Assume that the current market price (CMP) for JBH at 30 June 2017 is $23.37.

• Assume that the FY 2017 price/earnings ratio for the ASX Consumer Discretionary sector is 12.8 times (x), while the FY2017 dividend yield for this sector is 4.1%.

Question
SEQ Question * ARABIC 1
Quality of earnings (12 marks | Word limit: 500 words)

LO3: Calculate a company’s working capital, profitability and market performance ratios using its annual report.

LO4: Assess the company’s performance using the results of the financial ratios calculated to make an investment recommendation.

(a) Evaluate JBH’s quality of earnings with reference to the trend in earnings results (at the earnings before interest and taxes (EBIT) level as disclosed in JBH’s 2017 Annual Report) over the past five years; the occurrence of significant items in FY17; and the nature of its earnings base. Then provide an overall conclusion about JBH’s earnings quality. (7 marks)

(b) Calculate JBH’s 2017 effective tax rate to the nearest whole percentage and provide a brief assessment of JBH’s effective tax rate. (3 marks)

(c) Calculate JBH’s 2017 financial gearing profitability ratio ($m) to one (1) decimal place and provide an evaluation of this ratio. (2 marks)

Question
SEQ Question * ARABIC 2
Earnings per share and price/earnings ratio (12 marks | Word limit: 300 words)

LO3: Calculate a company’s working capital, profitability and market performance ratios using its annual report.

LO4: Assess the company’s performance using the results of the financial ratios calculated to make an investment recommendation.

(a) Calculate JBH’s 2017 earnings per share (cents) to one (1) decimal place. Ex‑issue prices must be calculated to two (2) decimal places and dilution factors must be calculated to four (4) decimal places. Show all your workings for the calculation of ex-issue prices and dilution factors.

Note: Refer to the ‘Background information’ for additional information. (8 marks)

(b) Calculate JBH’s 2017 price/earnings ratio (PER) at the current market price (provided in the ‘Background information’) to one (1) decimal place. (1 mark)

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