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Financial statements 5th Edition Stephen Barrad - Solutions

The shares of a firm trade on the stock market at a total of $1.2 billion and its debt trades at $600 million. What is the value of the firm (its enterprise value)?
An analyst estimates that the enterprise value of a firm is $2.7 billion. The firm has $900 million of debt outstanding. If there are 900 million shares outstanding. What is the analyst's estimated value per share?
A firm reports book value of shareholders’ equity of $850 million with 25 million shares outstanding. Those shares trade at $45 each in the stock market. An analyst values the equity by following the scheme: Value = Book value + Extra value. She calculates extra value of $675 million. Should she
a. General Mills, Inc., the large manufacturer of packaged foods, reported the following in its annual report for the year ending May 25, 2008 (in millions):Short term borrowing .........$ 442.0Long-tern debt ...........4,348.7Stockholders equity .........6,215.8The short-term borrowing and
Microsoft Corp. reported the following in its annual report to the Securities and Exchange Commission for fiscal year 2004. Classify each item as involving an operating, investing, or financing activity. Amounts are in millions.a. Common stock dividends ............ $1,729b. General and
The so-called Internet Bubble gripped stock markets in 1998, 1999, and 2000, as discussed in the chapter. Internet stocks traded at multiples of earnings and sales rarely seen in stock markets. Start-ups, some with not much more than an idea, launched initial public offerings (IPOs) that sold for
Changes in shareholders' equity are determined by total earnings minus net payout to shareholders, but the change in shareholders' equity is not equal to net income (in the income statement) minus net payout to shareholders. Why?
Dividends are the only way to pay cash out to shareholders. True or False?
Explain the difference between net income and net income available to common. Which definition of income is used in earnings-per-share calculations?
Why might a firm trade at a price-to-book ratio (P/B) greater than l.0?
Explain why firms have different price-earnings (P/E) ratios.
Explain the difference between accounting value added (earnings) and shareholder value added.
Give some examples in which there is poor matching of revenues and expenses.
Price-to-book ratios are determined by how accountants measure book values. Can you think of accounting reasons for why price-to-book ratios were high in the 1990s? What other factors might explain the high P/B ratios?
Why are dividends not an expense in the income statement?
Why is depreciation of plant and equipment an expense in the income statement?
Is amortization of a patent right an appropriate expense in measuring value added in operations?
Why is the matching principle important?
Why do fundamental analysts want accountants to follow the reliability criterion when preparing financial reports?
The following questions pertain to the same firm.a. The balance sheet reports $400 million in total assets and $250 million in shareholders' equity at the end of a fiscal period. What are the firm's liabilities?b. The income statement reports $30 million in net income and $175 million in total
A firm reported $130 million increase in cash over a year. It also reported $400 million in cash flow from operations, and a net $75 million paid out to claimants in financing activities. How much did the firm invest in operations?
You received the following statement for 2009 for your savings account at a bank. Cash balances in the account earn interest at a 5 percent rate per annum.Balance, January 1, 2009 ...........$100Earnings at an interest rate of 5% p.a..... 5Withdrawals ................ (5)Balance, December 31, 2009
From the following information for the year 2009, prepare an income statement and a statement of shareholders' equity, under GAAP rules, for a company with shareholders' equity at the beginning of 2009 of $3,270 million. Amounts are in millions.Sales ..................... $4,458Common dividends
Indicate where in the financial statements the following appear under GAAP:a. Investment in a certificate of deposit maturing in 120 days.b. Expenses for bad debts.c. Allowances for bad debts.d. Research and development expenditures.e. A restructuring charge.f. A lease of an asset for its entire
Generally accepted accounting principles (GAAP) notionally follow the matching principle. However, there are exceptions. Explain why the following accounting rules, required under GAAP, violate the matching principle.a. Expenditures on research and development into new drugs are expensed in the
A chief executive reported the following numbers for fiscal year 2009 to an annual meeting of shareholders (in millions):Revenues ............... $2,300Total expenses, including taxes ....... 1,750Other comprehensive income ....... (90)Total assets, end of year ......... 4,340Total
The following numbers appeared in the annual report of General Mills, Inc., the consumer foods manufacturer, for the fiscal year ending May 2008 (in millions of dollars):The firm has no preferred stock.For fiscal 2008, calculatea. Total liabilities at yearend.b. Comprehensive income forthyear.
Consider the following excerpts from Genentech's 2004 income statement and cash flow statement. From the 2004 income statement (in millions):Revenues ................... ?Costs and expensesCost of sales .............. $672.5Research and development ......... 947.5Marketing, general, and
At the end of its 2007 fiscal year, Cisco Systems, Inc., the producer of routers and other hardware and software for the telecommunications industry, reported shareholders' equity of $31,931 million. At the end of the first nine months of fiscal 2008, the firm reported $32,304 million in equity
General Motors ended its 2007 year with shareholders' equity of – $37,094 million at December 31 (yes, negative equity!). Six months later, at June 30, 2008, it reported –$56,990 million in equity after paying a dividend of $283 million to shareholders. There were no other transactions with
During the four fiscal quarters of 2001 and the first quarter of 2002, WorldCom incorrectly capitalized access charges to local networks as assets (as explained in Box 2.3). The amount of costs capitalized were as follows:First quarter, 2001 ............ $780 millionSecond quarter, 2001
The shares of Nike, Inc., traded at $55 per share at the beginning of fiscal year 2008 and closed at $67 per share at the end of the year. Nike paid a dividend of 87.5 cents per share during the year. What was the return to holding Nike's shares during 2008?
Nike, Inc., is a leading manufacturer and marketer of sport and fashion footwear. Incorporated in 1968 and headquartered in Beaverton, Oregon, its brand name has become almost universal, delivering sales of over $18.5 billion by 2008 and making it the largest seller of athletic footwear and apparel
What explains differences between firms' price-to-sales ratios?
It is common to compare firms on their price-to-ebit ratios. What are the merits of using this measure? What are the problems with it?
It is also common to compare firms on their price-to-ebitda ratios. What are the merits of using this measure? What are the dangers?
Why do trailing P/E ratios vary with dividend payout?
If a firm has a P/E ratio of 12 and a profit margin on sales of 6 percent, what is its price-to-sales (P/S) ratio likely to be?
If a firm is expected to have a profit margin of 8 percent but trades at a price-to sales ratio of 25, what inferences would you make?
What do traders mean when they refer to stocks as "glamour stocks" and "value stocks?"
Why would you expect asset-based valuation to be more difficult to apply to a technology firm, like Dell, Inc., than to a forest products company, like Weyerhaeuser?
The yield on a bond is independent of the coupon rate. Is this true?
It is sometimes said that firms prefer to make stock repurchases rather than pay dividends because stock repurchases yield a higher eps. Do they?
Your answer to concept question C3.10 should have been: Yes. If share repurchases increase eps more than dividends, do share repurchases also create more value than dividends?
Should a firm that pays higher dividends have a higher share value?
A firm trading with a total equity market value of $100 million reported earnings of $5 million and book value of $50 million. This firm is used as a comparable to price an IPQ firm with earnings per share of $2.50 and book value per share of $30 per share. Neither firm pays dividends. What
A firm with 100 million shares outstanding repurchased 10 million shares at the market price of $20 per share. What is the total market value of the equity after the repurchase? What is the per-share value after the repurchase?
A firm reported $250 million in total assets and $140 in debt. It had no interest-bearing securities among its assets. In the income statement it reported $560 million in sales. The firm’s 80 million shares traded at $7 each. Calculatea. The price-to-book ratio (P/B)b. The unlevered
a. A firm issues a zero-coupon bond with a face value of $1,000, maturing in five years. Bonds with similar risk are currently yielding 5 percent per year. What is the value of the bond?b. A firm issues a bond with a face value of $1,000 and a coupon rate of 5 percent per year, maturing in five
In the year 2008, a real estate analyst forecasts that a rental apartment building will generate $5.3 million each year in rents over the five years 2009-2013. Cash expenses are expected to be $4.2 million a year. At the end of five years, the building is expected to sell for $I2 million. Real
Here are some accounting numbers and market values (in millions) for Hewlett-Packard and Gateway for 2002. These two computer manufactures are considered to be comparables for Dell, Inc.a. Calculate price-to-sales, price-earnings (P/E), and price-to-book (P/B) ratios for Hewlett-Packard and
The following table gives accounting data from the 1994 annual reports of six biotechnology firms. The market value of the equity of five of the firms is also given. All numbers are in millions of dollars. From these numbers, estimate a value for Genentech, Inc. Genentech had a book value of $1,349
General Mills, the consumer foods company, traded at 1.6 times sales in 2008. It was reporting a net profit margin on its sales of 9.5 percent. What was its P/E ratio?
a. Buying a stock. A firm is expected to pay an annual dividend of $2 per share forever. Investors require a return of 12 percent per year to compensate for the risk of not receiving the expected dividends. The firm's shares trade for $19 each. What is the value added by buying a share at $19?b. An
Weyerhaeuser, the forest products producer, traded at $42 at the beginning of 1996. Beta services typically place its beta at 1.0 with a market risk premium of 6 percent. The risk free rate at the end of 1995 was 5.5 percent. The firm was expected to pay dividends of $1.60 per share in 1996 and
On January 1, 2008, Debtor Corporation issued 10,000 five-year bonds with a face value of $1,000 and an annual coupon of 4 percent. Bonds of similar risk were yielding 8 percent p.a. in the market at the time.a. What did the firm receive for each bond issued?b. At the end of 2008, the market was
a. XYZ Corporation had 158 million shares outstanding on January 1, 2009. On February 2, 2009, it issued an additional 30 million shares to the market at the market price of $55 per share. What was the effect of this share issue on the price per share of the firm?b. On February 28, 2009, directors
During fiscal year 2008, Dell repurchased 179 million shares on the market for $4,004 million. There were 2,239 million shares outstanding prior to the repurchase. What was the effect of the repurchases on the per-share price of Dell's stock?
Weyerhaeuser, the forest products producer, traded at $42 at the beginning of 1996. Its cost of equity capital, calculated with the CAPM, is 11.5 percent. It is expected to pay dividends of $1.60 per share in 1996 and 1997. Straightforward calculations (as in Exercise E3.11) give it an expected
A risk analyst gives Sun Microsystems, the networking computer firm, a CAPM equity beta of 1.38. The risk-free rate is 4.0 percent.a. Prepare a table with the cost of capital that you would calculate for the equity with the following estimates of the market risk premium:4.5%6.0%7.5%9.0%b. Other
Analysts give Procter & Gamble, the consumer products firm, an equity beta of 0.65.The risk-free rate is 4.0 percent. An analyst calculates an equity cost of capital for the firm of 7.9 percent using the capital asset pricing model (CAPM). 'What market risk premium is she assuming?
Cordant Technologies, based in Salt Lake City, manufactures rocket motors, "fasteners" (bolts), and turbine engine components for the aerospace industry. For the first half of 1999, its sales were $1.28 billion, up 7 percent on the same period for the previous year. Net income was $85.7 million, or
In the early 1970s a widely publicized list of the "Nifty Fifty" stocks was drawn up. This list, which included Avon Products, Polaroid, Coca-Cola, McDonald's, Walt Disney, American Express, and Xerox, was touted as a set of "good buys." Most of the firms traded at high multiples. Their PIE ratios
Weyerhaeuser Company grows, harvests, and processes timber and develops residential real estate. Incorporated in Washington State, the company has four business segments: timberlands; wood products; pulp, paper, and packaging; and real estate. The company manages 5.3 million acres of commercial
Investors receive dividends as payoffs for investing in equity shares. Thus the value of a share should be calculated by discounting expected dividends. True or false?
Some analysts trumpet the saying "Cash is King." They mean that cash is the primary fundamental that the equity analyst should focus on. Is cash king?
Should a firm that has higher free cash flows have a higher value?
After years of negative free cash flow, General Electric reported a positive free cash flow of $7,386 million in 2003. Look back at GE's cash flows displayed in Exhibit 4.2. Would you interpret the 2003 free cash flow as good news?
Which of the following two measures gives a better indication of the value added from selling inventory(a) Cash received from customers minus cash paid for inventory, or (b) Accrual revenue minus cost of goods sold? Why?
What explains the difference between cash flow from operations and earnings?
What explains the difference between free cash flow and earnings?
Why is an investment in a T-bill not an investment in operations?
Explain the difference between levered cash flow and unlevered cash flow.
Why must the interest component of cash flow or earnings be calculated on an after-tax basis?
At the end of 2009, you forecast the following cash flows (in millions) for a firm with net debt of $759 million;You forecast that free cash flow will grow at a rate of 4% per year after 2012. Use a required return of 10% in answering the following questions.a. Calculate the firm's enterprise
At the end of 2009, you forecast that a firm's free cash flow for 2010 will be $430 million. If you forecast that free cash flow will grow at 5% per year there after, what is the enterprise value? Use a required return of 10%.
At the end of 2008, you forecast the following cash flows for a firm for 2009-2012 (in millions of dollars):What difficulties would you have in valuing this firm based on the forecasted cash flows? What would explain the decreasing free cash flow over the fouryears?
The following summarizes the parts of a firm€™s cash flow statement that have to do with operating and investing activities (in millions).The firm made interest payments of $1,342 million and received $876 in interest receipts from T-bills that it held. The tax rate is 35 percent.
The Coca-Cola Company reported "Net cash provided by operating activities" of $7,150 million in its 2007 cash flow statement. It also reported interest paid of $405 million and interest income of $236 million. Coke has a 36% tax rate. What was the company's cash flow from operations for
The Coca-Cola Company reported "Net cash provided by operating activities" of $7,150 million in its 2007 cash flow statement. Coke also reported $5,981 million in net income for the period. How much of net income was in the form of accruals?
After reviewing the discounted cash flow valuation of Coca-Cola in Exhibit 4.1, consider the free cash flows below that were reported by Coke for 2004-2007. They are based on the actual reported cash flows but are adjusted for interest and investments in interest-bearing securities {in millions of
Kimberly-Clark Corporation (KMB) manufactures and markets consumer paper products under brand names that include Kleenex, Scott, Cottonnelle, Viva, Kotex, and WypAll. For fiscal year 2004, the firm reported the following numbers (in millions):Net income (in income statement)
At the beginning of its fiscal year 2006, an analyst made the following forecast for General Mills, Inc., the consumer foods company, for 2006-2009 (in millions of dollars):General Mills reported $6,192 million in short-term and long-term debt at the end of 2005 but very little in interest-bearing
For the first nine months of 2005, General Motors Corporation reported the following in its cash flow statement. GM runs an automobile operation supported by a financing arm, and both activities are reflected in these statements.Net interest paid during the 2005 period was $4,059 million, compared
Wal-Mart has been the most successful retailer in history. The panel below reports cash flows and earnings for the firm from 1988 to 1996 (in millions of dollars, except per-share numbers):The cash flows are unlevered cash flows.a. Why would such a profitable firm have such negative free cash
PepsiCo, the beverage and food conglomerate, reported net income of $4,212 million for 2004 and $5,054 million in (levered) cash flow from operations. How much of the net income reported was accruals? PepsiCo reported the following in the investment section of its cash flow statement for
a. A firm reported $405 million in revenue and an increase in net receivables of $32 million. What was the cash generated by the revenues?b. A firm reported wages expense of $335 million and cash paid for wages of $290 million. What was the change in wages payable for the period?c. A firm reported
Microsoft Corp. reported $36.835 billion in revenues for fiscal year 2004. Accounts receivable, net of allowances, increased from $5.196 billion in 2003 to $5.890 billion. Microsoft has been criticized for underreporting revenue. Revenue from software licensed to computer manufacturers is not
The Coca-Cola Company and Home Depot have been very profitable companies, typically trading at high multiples of earnings, book values, and sales. This case asks you to value the two companies using discounted cash flow analysis, and to appreciate the difficulties involved. Exhibit 4.1 in the text
Information indicates that a firm will earn a return on common equity above its cost of equity capital in all years in the future, but its shares trade below book value. Those shares must be mispriced. True or false?
Jetform Corporation traded at a price-to-book ratio of 1.01 in May 1999. 1ts most recently reported ROCE was 10.1 percent, and it is deemed to have a required equity return of 10 percent. What is your best guess as to the ROCE expected for the next fiscal year?
Telesoft Corp. traded at a price-to-book ratio of 0.98 in May 1999 after reporting an ROCE of 52.2 percent. Does the market regard this ROCE as normal, unusually high, or unusually low?
A share trades at a price-to-book ratio of 0.7. An analyst who forecasts an ROCE of 12 percent each year in the future, and sets the required equity return at 10 percent, recommends a hold position. Does his recommendation agree with his forecast?
A firm cannot maintain an ROCE less than the required return and stay in business indefinitely. True or false?
Look at the Case 3 valuation of Dell, Inc., in the chapter. Why are residual earnings increasing after 2002, even though return on common equity (ROCE) is fairly constant?
An advocate of discounted cash flow analysis says, "Residual earnings valuation does not work well for companies like Coca-Cola, Cisco Systems, or Merck, which have substantial assets, like brands, R&D assets, and entrepreneurial know-how off the books. A low book value must give you a low
When an analyst forecasts earnings, it must be comprehensive earnings. Why?
Comment On the following: "ABC Company is generating negative free cash flow and is likely to do so for the foreseeable future. Anyone willing to pay more than book value needs their head read."
The following are earnings and dividend forecasts made at the end of 2009 for a firm with $20.00 book value per common share at that time. The firm has a required equity return of 10 percent per year.a. Forecast return of common equity (ROCE) and residual earnings for each year, 2010-2012.b. Based
The following are ROCE forecasts made for a firm at the end of 2009.ROCE is expected to continue at the same level after 2012. The firm reported book value of common equity of $3.2 billion at the end of 2009, with 500 million shares outstanding. If the required equity return is 12 percent, what is

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