Calculate and interpret LCCs financial leverage

Reference no: EM132238197

Assignment Question -

LCC Chocolate Company (LCC) is a leading manufacturer and distributor of quality confectionary products throughout Europe and Australia. LCC is a publicly traded firm located in Denmark and has been in business over 60 years. LCC complies with International Financial Reporting Standards (IFRS).

David Lim, an equity analyst with a large pension fund, has been asked to complete a comprehensive analysis of LCC in order to evaluate the possibility of a future investment.

David compiles the selected financial data found in Exhibit 1 and learns that LCC owns a 30% equity investment in a supplier located in the United States. LCC uses the equity method to account for its investment in the U.S. associate. The associate prepares its financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP).

Exhibit 1: Selected Financial Data - LCC Chocolate Company

In millions	2017	2016
Income Statement
Revenue	€60,229	€55,137
Earnings before interest and taxes	7,990	7,077
Earnings before tax	7,590	6.779
Income from associates^a	354	270
Net income	6,501	5,625
Balance Sheet
Total assets^b	€56,396	€53,111
Investment in associate	5,504	5,393
Stockholders' equity^c	30,371	29,595
^a Not included in EBIT or EBT
^b Total assets were €45,597 at the end of 2015
^c Stockholders' equity was €27,881 at the end of 2015

David reads the LCC's revenue recognition footnote found in Exhibit 2

Exhibit 2: Revenue Recognition Footnote

In millions - Revenue is recognized, net of returns and allowances, when the goods are shipped to customers and collectability is assured. Several customers remit payment before delivery in order to receive additional discounts. LCC reports these amounts as unearned revenue until the goods are shipped. Unearned revenue was €7,201 at the end of 2017 and €5,514 at the end of 2016.

LCC operates two geographic segments: Europe and Australia. Selected financial information for each segment is found in Exhibit 3.

Exhibit 3: Selected Financial Information by Segment

In millions	EBIT	Revenue	Total Capital Expenditure	Total Assets
Europe	€7,203	€50,463	€4,452	€36,642
Australia	€787	€9,766	€8,269	€14,250

At the beginning of 2017, LCC entered into an operating lease for manufacturing equipment. At inception, the present value of the lease payments, discounted at an interest rate of 10% was €300 million. The lease term is six years, and the annual payment is €69 million. Similar equipment owned by LCC is depreciated using the straight-line method and no residual values are assumed.

David gathered the information in Exhibit 4 to determine the implied "stand-alone" value of LCC without regard to the value of its U.S. associate.

Exhibit 4: Selected 2017 Market Capitalization Data

In millions	LCC	Associate
Market capitalization	€97,525	$32,330
Current exchange rate (€ per $)	€0.70
Average exchange rate (€ per $)	€0.73

Required -

(a) Using the data found in Exhibit 1 and Exhibit 2, calculate and interpret LCC's financial leverage in 2017 as compared with 2016.

(b) Using the data found in Exhibit 3, appraise if LCC has been misallocating its resources over the different regions.

(d) Using the data in Exhibit 1 and Exhibit 4, calculate LCC's P/E multiple without regard to its U.S. associate.

Note - Need 900+ words report with APA format.

Reference no: EM132238197

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