Section A (30%) - Case Study Analysis Answer ALL questions in this section. TwoBoxes Thanks Company (TBT) is engaged in manufacturing and selling surgical masks. Wilson, a senior research analyst of XBY Investment Bank, prepares financial statements forecast shortly after TBT announced the annual result in 2019. The latest and financial statements are shown as below (all in Smil.): 2020 2021 6 ,986 8,034 4.1924,981 2022E 8,436 5,062 TBT Company Income Statement 2019 Total revenues 5,589 Operating costs and expenses 3,568 Earnings before interest, taxes, depreciation and amortization 2,021 Depreciation and amortization 383 Operating profit 1,638 Interest expense 138 Profit before taxes 1,500 Tax (40%) 600 Profit for the year 2.794 400 2,394 294 2,100 840 1.260 3,053 458 2,595 325 2,270 908 1.362 3,374 524 2,850 350 2,500 1.000 1,500 900 400 450 500 975 Dividend *E - Estimated Cash Accounts Receivables Non-current Assets Total Assets TBT Company Consolidated Statement of Financial Positions 2019 2020 850 950 1,456 1,598 1.358 2.020 3,664 4.568 2021 1.250 1,786 3.717 6,753 2022E 1,568 1.958 5,252 8 ,778 Total Liabilities Total Shareholders' Equity 1,441 2.223 3.664 1,535 3,033 4,568 1,858 4,895 6,753 1,058 7,720 8,778 *E - Estimated Section A (Continued) Additional Information about the Company and the market: Standard deviation of TBT stock's returns: 35% Standard deviation of market returns: 20% No. of common shares outstanding: 500 million Risk-free rate: 2% Expected market return: 12% Correlation of TBT stock return with market return: 0.8 Wilson plans to use the Two-stage Dividend Discount Model to evaluate the share price of TBT Company, assuming constant dividend growth from Year 2022 onwards. Required: (a) Calculate the following figures: (1) Sustainable growth rate based on financial data in 2022. (rounded to 4 decimal places (3 marks) (ii) the appropriate discount rate (4 marks) (iii) the justified share price of the Company (7 marks) (b) Identify and explain THREE weaknesses of using the Two-stage Dividend Discount Model in this case. (6 marks) (c) Explain why earnings is not the good indicator for assessing company value comparing with using free cash flow in general. (4 marks) (d) Wilson would like to use free cash flow model to cross check the value in (a)(iii) and finds that equity beta is larger than asset beta. Explain the finding without any calculations. (3 marks) (e) Wilson notices the price-to-book (P/B) value of EET Group, the listed company engaged in selling jewellery in Hong Kong, is 0.7. Explain the implication of the ratio value if the stock is priced correctly. (3 marks) - End of Section A - Section A (30%) - Case Study Analysis Answer ALL questions in this section. TwoBoxes Thanks Company (TBT) is engaged in manufacturing and selling surgical masks. Wilson, a senior research analyst of XBY Investment Bank, prepares financial statements forecast shortly after TBT announced the annual result in 2019. The latest and financial statements are shown as below (all in Smil.): 2020 2021 6 ,986 8,034 4.1924,981 2022E 8,436 5,062 TBT Company Income Statement 2019 Total revenues 5,589 Operating costs and expenses 3,568 Earnings before interest, taxes, depreciation and amortization 2,021 Depreciation and amortization 383 Operating profit 1,638 Interest expense 138 Profit before taxes 1,500 Tax (40%) 600 Profit for the year 2.794 400 2,394 294 2,100 840 1.260 3,053 458 2,595 325 2,270 908 1.362 3,374 524 2,850 350 2,500 1.000 1,500 900 400 450 500 975 Dividend *E - Estimated Cash Accounts Receivables Non-current Assets Total Assets TBT Company Consolidated Statement of Financial Positions 2019 2020 850 950 1,456 1,598 1.358 2.020 3,664 4.568 2021 1.250 1,786 3.717 6,753 2022E 1,568 1.958 5,252 8 ,778 Total Liabilities Total Shareholders' Equity 1,441 2.223 3.664 1,535 3,033 4,568 1,858 4,895 6,753 1,058 7,720 8,778 *E - Estimated Section A (Continued) Additional Information about the Company and the market: Standard deviation of TBT stock's returns: 35% Standard deviation of market returns: 20% No. of common shares outstanding: 500 million Risk-free rate: 2% Expected market return: 12% Correlation of TBT stock return with market return: 0.8 Wilson plans to use the Two-stage Dividend Discount Model to evaluate the share price of TBT Company, assuming constant dividend growth from Year 2022 onwards. Required: (a) Calculate the following figures: (1) Sustainable growth rate based on financial data in 2022. (rounded to 4 decimal places (3 marks) (ii) the appropriate discount rate (4 marks) (iii) the justified share price of the Company (7 marks) (b) Identify and explain THREE weaknesses of using the Two-stage Dividend Discount Model in this case. (6 marks) (c) Explain why earnings is not the good indicator for assessing company value comparing with using free cash flow in general. (4 marks) (d) Wilson would like to use free cash flow model to cross check the value in (a)(iii) and finds that equity beta is larger than asset beta. Explain the finding without any calculations. (3 marks) (e) Wilson notices the price-to-book (P/B) value of EET Group, the listed company engaged in selling jewellery in Hong Kong, is 0.7. Explain the implication of the ratio value if the stock is priced correctly. (3 marks) - End of Section A