Question

f. Return on Assets Ratio 8. Earnings per share (diluted) 2. Compare the Gross Margin Ratio to the 2017 Canadian Industry average of 45.8% for each company. Which company is closer to the industry average gross margin ratio? Does this correspond to your profitability ratios from 1 above-explain your answer? 3. Find the enterprise value for each company using "yahoo! finance" and ticker symbols RET.TO for Reitmans and ATZ.TO for Aritzia. What should the share price be based on Enterprise Value? (For this calculation divide (EV + och debt) by by total number of shares outstanding of all classes of shares from the financial statements). What is the share closing price on October 31, 2019 for each company? Based on your EV calculation would the shares of each company be overpriced or underpriced? 4. Assume you bought 100 Reitmans (symbol RET.TO) shares and 100 Aritzia (symbol ATZ.TO) shares on October 31, 2018 and you sold them on October 31, 2019 (find the share prices by going to the "yahoo! Finance" web site). What was your gain on the sale? What was your realized annual return? (Show your calculations) Be sure to include the dividends you would have received, if any, in your calculation of your annual return. (Recall that if you own the stock on the Record Date you would receive the dividend on the payment date whether you still owned the shares or not on the actual payment date.) Which company has the better rate of return? Is it better than a return on a risk free investment (Find the annual average risk free return on one year Canadian Treasury bills)? 5. Find the beta for each company. (yahoo! finance is a good sources for the betas). Explain what the detas Tidicate for each of the companies. 6. Use the Capital Asset Pricing Model to calculate the expected return an investor would expect for each company. Find the current annual average risk free return on Canadian Treasury bills and assume the average market risk premium in Canada is 5.8%. How does this expected return as calculated using CAPM compare with

Answer 1

(Note: The prices of shares are from yahoo finance and the purchase/sale price is average of opening and closing price)

REITMANS SHARES:

Opening price of one share as on October 31, 2018 = 3.9100

Closing price of one share as on October 31, 2018 = 3.9000

Purchase Price of one share as on October 31, 2018 = Average of opening and closing price

= (3.9100+3.9000)/2

= 3.9050

Opening price of one share as on October 31, 2019 =1.9200

Closing price of one share as on October 31, 2019 = 1.9300

Sale price of one Share as on October 31, 2019 = Average of opening and closing price

= (1.9200+1.9300)/2

= 1.9250

Loss on sale of one share = Purchase price - Sale price

= 3.9050 - 1.9250

= 1.9800

Loss on sale of 100 shares of Reitmans = 1.9800*100

= 198.00

Dividend received during the holding period

Record Date 06/01/2019 = 0.05

Record Date 07/04/2019 = 0.05

Record Date 07/07/2019 = 0.05

Record Date 06/10/2019 = 0.05

Total Dividend Received = 0.20

Realized Annual Return = (Sale price-Purchase Price+Dividend Received) /Purchase price *100

= (1.9250-3.9050+0.20)/3.9050 *100

= -1.7800/3.9050*100

= -45.58%

ARITZIA SHARES:

Opening price of one share as on October 31, 2018 = 19.09

Closing price of one share as on October 31, 2018 = 19.37

Purchase Price of one share as on October 31, 2018 = Average of opening and closing price

= (19.09+19.37)/2

= 19.23

Opening price of one share as on October 31, 2019 =18.70

Closing price of one share as on October 31, 2019 = 18.77

Sale price of one Share as on October 31, 2019 = Average of opening and closing price

= (18.70+18.77)/2

= 18.735

Loss on sale of one share = Purchase price - Sale price

= 19.23-18.735

= 0.495

Loss on sale of 100 shares of Aritzia = 0.495*100

= 49.50

There was no record date during the holding period of shares

Hence, Total Dividend Received = 0

Realized Annual Return = (Sale price-Purchase Price+Dividend Received) /Purchase price *100

= (18.735-19.23+0)/19.23 *100

= -0.495/19.23 *100

= -2.57%

Conclusion: Aritzia has better rate of return than Retimans

Annual Average Risk Free Return on One Year Canadian Treasury Bills as on October 31,2019 = 1.68%

Conclusion: However, the rate of return on both the shares held by us is negative. Hence, return on a risk free investment is better than investing in Shares of Reitmans and shares of Aritzia.