All questions are based on the annual reports of Magna International and Martinrea International. The 2016 annual reports are available on Brightspace. For prior year statements and reports, you should download them from the appropriate corporate website, or SEDAR (https://www.sedar.com).
Calculations should be carried to 4 decimal places. For example, 0.21164 becomes 0.2116 or 21.16%.
Additional information about the industry, competitors, or other economic information that you consider relevant to your analysis may be added as appropriate. All sources should be clearly referenced, including Financial Statement footnotes.
(20 marks) Employee Benefit Plans.
Summarize the employee benefit plans Martinrea offers. Are the pension and other post-retirement plans fully funded? Why do you suspect that there are plan assets only for the pension plans and not for the other retirement benefits? (Please indicate the note number and/or page number of the information you cite from the annual report)
How were Martinrea’s defined benefit pension AND other benefit plans reported in the Income Statement and the Balance Sheet of 2016? (Be sure to indicate the amount and the item where the defined benefit plans were included in the statements)
How did Martinrea’s pension and other post retirement benefits plans affect the company’s cash flow in 2016?
(10 marks) Impairment
In 2016 Martinrea reported a significant amount in impairment charges. Explain what caused these charges
Explain how the impairment charges are reported on the financial statements.
(30 marks) Investments
Investments are typically divided into three categories: those with little or no influence, those with significant influence, and those with control. For both Magna and Martinrea indicate the magnitude of the first two both in terms of dollars and in terms of common size percentages.
Have there been any significant changes in the last two years for either company with regard to their significant influence equity investments? From reading the companies’ annual reports and/or other financial filings can you determine the strategic nature of these investments?
Have there been any significant changes in the last two years for either company with regard to subsidiaries that they control? That is, have there been any mergers, acquisitions, or divestitures? If there were any acquisitions, how were they financed? Were there any intangible or goodwill effects? If there were any divestitures, did the company report a gain or loss on the sale?
(20 Marks) Operating Leases
Estimate the off-balance sheet lease liability for Magna at December 31, 2016 using a discount rate of 6%.
Compute RNOA ratio, Liability-to-Equity ratio and Times Interest Earned ratio for Magna using the reported financial statements and the financial statements adjusted for the constructive capitalization of the operating leases. Briefly discuss how operating leases affect these two ratios. Use the statutory income tax rate when needed.
(20 marks) Income Tax
Compare the statutory and effective tax rates of Magna and Martinrea for both 2016 and 2015 and summarize your comparison.
What contributed the most to the deferred tax assets of Manga at the year ending December 31, 2016? Explain why this item created a deferred tax asset.
What contributed the most to the deferred tax liability for Magna at the year ending December 31, 2016? Explain why this item created a deferred tax liability.
Magna reported “tax benefit of loss carry forwards” of $715 million as of December 31, 2016 and “Valuation allowance against tax benefit of loss carry forwards” of $615 million. How do you interpret this?