Question

In: Accounting

Question 3. (20 marks) With COVID-19 causing havoc in countries all over Europe and the Americas,...

Question 3.

With COVID-19 causing havoc in countries all over Europe and the Americas, there had been a dramatic slow down in manufacturer orders from these countries in China. Many factories in the Dongguan corridor have been closed since Chinese New Year. Even factories that were opened were laying idle with minimum workers. With no income from their factory jobs, many female workers resorted to sell cosmetics in person and on Douyin.

An investment fund noticed this trend, did further research, and found that Revlon, a U.S. based cosmetic brand, is the preferred brand for these workers turned KOL (“Key Opinion Leader”). Upon further analysis, this fund is considering buying shares of Revlon.

These are selected financial information as collected by the analyst of this investment fund:

Share price                                                USD 12.75

Beta                                                                      1.08

2019:

Net income                                          -157.7 million

Total asset                                            2,981 million

Total Liabilities                                    3,245 million

Total Equity                                        -1,221 million

Shares outstanding                      53.3 million shares

  1. Discuss and explain how the analyst can deal with Revlon’s negative earnings when performing valuation.
  2. Discuss and explain how the analyst can deal with Revlon’s negative book value of equity when performing valuation.
  3. Given the higher systematic risk of the market, do you expect Revlon shares to fluctuation more or less than the over market?
  4. Calculate and interpret the following ratios for Revlon: ROE, ROE, debt to invested capital, debt to equity, EPS, and PE ratio.

Solutions

Expert Solution

Question 1

The analyst can deal with Revlon's negative earnings when performing valuation, analysts usually exert various metrics for making the estimate. For Example, we can get the Business Sales ratio. Therefore, negative profits remain unusually difficult in evaluating a company. Recently started companies are considered the process because they have only sales to present as an increase in their balance sheets.

Question 2

The analyst can deal with Revlon’s negative book value of equity when performing valuation, they have to practice the Market Price plus the book value is not granted.

Question 3

The beta is 1.08 which is more than one, so, it says that the variation in Revlon will be more. So, I expect Revlon shares to fluctuation more than over the market.

Question 4

ROE(Return on Equity) is

==> (-157.7) / (-1221)

==> 12.91 Percent

Debt to invested capital is

==> 3245 / ( 53.3 * 12.75 )

==> 4.775

Debt to Equity calculated below

==> 3245 / ( -1221 )

==> -2.657.

(EPS)Earnings per share

==> ( -157.7 ) / 53.3

==> -2.958

PE Ratio(Price / Earnings Ratio)

==> 12.75 / ( -2.958 )

==> -4.31


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