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financial statement analysis
International Financial Statement Analysis 2nd Edition Thomas R. Robinson, Elaine Henry, Wendy L. Pirie, Michael A. Broihahn, Anthony T. Cope - Solutions
18. Kirstin Kruse, a portfolio manager, has an important client who wants to alter the composition of her equity portfolio, which is currently a diversified portfolio of 60 global common stocks. The client wants a portfolio that meets the following criteria:• Stocks must be in the Dow Jones
17. Your value-oriented investment management company recently hired a new analyst, Bob Westard, because of his expertise in the life sciences and biotechnology areas. At the company’s weekly meeting, during which each analyst proposes a stock idea for inclusion on the company’s approved list,
16. Data for two hypothetical companies in the pharmaceutical industry, DriveMed and MAT Technology, are given in the table below. For both companies, expenditures in fixed capital and working capital during the previous year reflected anticipated average expenditures over the foreseeable
15. Define the major alternative cash flow concepts, and state one limitation of each.
14. Jorge Zaldys, CFA, is researching the relative valuation of two companies in the aerospace/defense industry, NCI Heavy Industries (NCI) and Relay Group International(RGI). He has gathered relevant information on the companies in the following table.EBITDA Comparisons (in ¤ millions except for
13. General Electric (NYSE: GE) is currently selling for $38.50, with trailing 12-month earnings and dividends of $1.36 and $0.64, respectively. P/E is 28.3, P/B is 7.1, and P/S is 2.9. The return on equity is 27.0 percent, and the profit margin on sales is 10.9 percent.The Treasury bond rate is
12. (Adapted from 2001 CFA Level II exam) John Jones, CFA, is head of the research department at Peninsular Research. Peninsular has a client who has inquired about the valuation method best suited for comparison of companies in an industry with the following characteristics:• Principal
11. Wilhelm M¨uller, CFA, has organized the selected data on four food companies that appear below (TTM stands for trailing 12 months):Hormel Foods Tyson Foods IBP Corp Smithfield Foods Stock price $25.70 $11.77 $23.65 $24.61 Shares out (1,000s) 138,923 220,662 108,170 103,803 Market cap ($ mil)
10. Avtech is a multinational distributor of semiconductor chips and related products to businesses. Its leading competitor around the world is Target Electronics. Avtech has a current market price of $10, 20 million shares outstanding, annual sales of $1 billion, and a 5 percent profit margin.
9. Discuss three types of stocks or investment problems for which an analyst could appropriately use P/B in valuation.
8. Tom Smithfield is valuing the stock of a food processing business. He has projected earnings and dividends to four years (to t = 4). Other information and estimates are• Required rate of return = 0.09• Average dividend payout rate for mature companies in the market = 0.45• Industry average
7. At a meeting of your company’s investment policy committee, Bill Yu presents a recommendation based on a P/E analysis. He presents the case for Connie’s Sporting Goods (CSG), a small chain of retail stores that receives almost no coverage by analysts.Yu begins by noting that CSG appeared to
6. (Adapted from 2000 CFA Level II exam) Christie Johnson, CFA, has been assigned to analyze Sundanci. Johnson assumes that Sundanci’s earnings and dividends will grow at a constant rate of 13 percent. Tables 4-25 and Tables 4-26 provide financial statements and other information for Sundanci.A.
5. A. Identify two significant differences between Yardeni’s model of stock market valuation and the Fed model.B. Suppose an analyst uses an equity index as a comparison asset in valuing a stock.Which price multiple(s) would cause concern about the impact of potential overvaluation of the equity
4. You are researching the valuation of the stock of a company in the food processing industry. Suppose you intend to use the mean value of the leading P/Es for the food processing industry stocks as the benchmark value of the multiple. That mean P/E is 18.0.The leading or expected EPS for the next
3. May Stewart, CFA, a retail analyst, is performing a P/E-based comparison of two jewelry stores as of early 2001. She has the following data for Hallwhite Stores (HS) and Ruffany(RUF).• HS is priced at $44. RUF is priced at $22.50.• HS has a simple capital structure, earned $2.00 per share in
2. An analyst plans to use P/E and the method of comparables as a basis for recommending one of two peer group companies in the personal digital assistant business.Data on the companies’ prices, trailing EPS, and expected growth rates in sales(five-year compounded rate) are given in the table
1. As of February 2002, you are researching Smith International (NYSE: SII), an oil field services company subject to cyclical demand for its services. You believe the 1997–2000 period reasonably captures average profitability. SII closed at $57.98 on February 2, 2002.2001 2000 1999 1998 1997 EPS
• Discuss alternative definitions of cash flow used in price multiples and explain the limitations of each.
• Calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model.
• Define and calculate the P/E-to-growth (PEG) ratio and explain its use in relative valuation.
• Discuss the importance of fundamentals in using the method of comparables.
• Evaluate a stock using the method of comparables.
• Define the benchmark value of a multiple.
• Calculate a predicted P/E given a cross-sectional regression on fundamentals and explain limitations to the cross-sectional regression methodology.
• Calculate the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and priceto-sales ratio (P/S) for a stock, based on forecasted fundamentals.
• Identify and discuss the fundamental factors that influence each price multiple and dividend yield.
• Explain and justify the use of earnings yield (E/P).
• Define normalized EPS, discuss the methods of normalizing EPS, and calculate normalized EPS by each method.
• Define underlying earnings, and calculate underlying earnings given earnings per share(EPS) and nonrecurring items in the income statement.
• Define and calculate each price multiple and dividend yield.
• Discuss possible drawbacks to the use of each price multiple and dividend yield.
• List and discuss rationales for each price multiple and dividend yield in valuation.
• Discuss the economic rationales for the method of comparables and the method based on forecasted fundamentals.
• Define a justified price multiple.
• Distinguish between the method of comparables and the method based on forecasted fundamentals as approaches to using price multiples in valuation.
Distinguish among types of valuation indicators.
17. Clay Cooperman has valued the operating assets of Johnson Extrusion at $720 million.The company also has short-term cash and securities with a market value of $60 million.The noncurrent investments have a book value of $30 million and a market value of$45 million. The company also has an
16. Lawrence McKibben is preparing a valuation of Tele Norte Leste Participacoes SA (NYSE:TNE), a telecom services company headquartered in Rio de Janeiro, Brazil. McKibben has decided to use a three-stage FCFE valuation model and the following estimates. The FCFE per share for the current year is
15. SK Telecom Co. is a cellular telephone paging and computer communication services company in Seoul, South Korea. The company is traded on the Korea, New York, and London stock exchanges (NYSE: SKM). Sol Kim has estimated the normalized FCFE for SK Telecom to be 1,300 Korean won (per share) for
14. (Adapted from CFA Level II exam, 2001) John Jones, CFA, is head of the research department of Peninsular Research. One of the companies he is researching, Mackinac Inc., is a U.S.–based manufacturing company. Mackinac has released its June 2001 financial statements, shown in Tables 3-18,
13. (Adapted from CFA Level II exam, 2000) The management of Telluride, an international diversified conglomerate based in the United States, believes that the recent strong performance of its wholly owned medical supply subsidiary, Sundanci, has gone unnoticed. To realize Sundanci’s full value,
12. Bron has earnings per share of $3.00 in 2002 and expects earnings per share to increase by 21 percent in 2003. Earnings per share are expected to grow at a decreasing rate for the following five years, as shown in the table below. In 2008, the growth rate will be 6 percent and is expected to
11. An aggressive financial planner who claims to have a superior method for picking undervalued stocks is courting one of your clients. The planner claims that the best way to find the value of a stock is to divide EBITDA by the risk-free bond rate. The planner is urging your client to invest in
10. Kenneth McCoin is valuing McDonald’s Corporation and performing a sensitivity analysis on his valuation. He uses a single-stage FCFE growth model. The ‘‘base case’’ values for each of the parameters in the model are given in the table below, along with possible‘‘low’’ and
9. Watson Dunn is planning to value BHP Billiton Ltd. (NYSE: BHP) using a single-stage FCFF approach. BHP Billiton, headquartered inMelbourne, Australia, provides a variety of industrial metals and minerals. The financial information Dunn has assembled for his valuation is as follows:• The
8. PHB Company currently sells for $32.50 per share. In an attempt to determine if PHB is fairly priced, an analyst has assembled the following information:• The before-tax required rates of return on PHB debt, preferred stock, and common stock are 7.0 percent, 6.8 percent, and 11.0 percent,
7. Do Pham is evaluating Phaneuf Accelerateur using the FCFF and FCFE valuation approaches. Pham has collected the following information (currency in euro):• Phaneuf has net income of 250 million, depreciation of 90 million, capital expenditures of 170 million, and an increase in working capital
6. Quinton Johnston is evaluating Taiwan Semiconductor Manufacturing Co., Ltd., (NYSE:TSM) headquartered in Hsinchu, Taiwan. In 2001, when Johnston is performing his analysis, the company—and indeed, the whole industry—is unprofitable. Furthermore, TSM pays no dividends on its common shares.
5. Proust Company has FCFF of $1.7 billion and FCFE of $1.3 billion. Proust’s WACC is 11 percent and its required rate of return for equity is 13 percent. FCFF is expected to grow forever at 7 percent and FCFE is expected to grow forever at 7.5 percent. Proust has debt outstanding of $15
4. The term ‘‘free cash flow’’ is frequently applied to cash flows that differ from the definition for FCFF that should be used to value a firm. Two such definitions of ‘‘free cash flow’’are given below. Compare the definitions given for FCF to FCFF.A. FCF = Net income +
3. For LaForge Systems, whose financial statements are given in Problem 2 above, show the adjustments from the current levels of CFO (which is 427), EBIT (605), and EBITDA(785) to find A. FCFF, and B. FCFE.
2. LaForge Systems, Inc., has net income of $285 million for the year 2003. Using information from the company’s financial statements below, show the adjustments to net income that would be required to find:A. FCFF, and B. FCFE.C. In addition, show the adjustments to FCFF that would result in
1. Indicate the effect on this period’s FCFF and FCFE of a change in each of the items listed below. Assume a $100 increase in each case and a 40 percent tax rate.A. Net income B. Cash operating expenses C. Depreciation D. Interest expense E. EBIT F. Accounts receivable G. Accounts payable H.
• Describe the characteristics of companies for which the FCFF model is preferred to the FCFE model.
• Discuss approaches for calculating the terminal value in a multistage valuation model.
• Explain how sensitivity analysis can be used in FCFF and FCFE valuations.
• Calculate the value of a company using the stable-growth, two-stage, and three-stage FCFF and FCFE models.
• Justify the selection of a stable-growth, two-stage, or three-stage FCFF or FCFE model given characteristics of the company being valued.
• List and discuss the assumptions of the stable-growth, two-stage, and three-stage FCFF and FCFE models.
• Describe the stable-growth, two-stage, and three-stage FCFF and FCFE models.
• Critique the use of net income and EBITDA as proxies for cash flow in valuation.
• Contrast FCFF with EBITDA.
• Explain how dividends, share repurchases, share issues, and changes in leverage may affect FCFF and FCFE.
• Contrast the recognition of value in the FCFE model with the recognition of value in dividend discount models.
• Discuss approaches for forecasting FCFF and FCFE.
• Calculate FCFF and FCFE given a company’s financial statements, prepared according to U.S. Generally Accepted Accounting Principles (GAAP) or International Accounting Standards (IAS).
• Discuss the appropriate adjustments to net income, earnings before interest and taxes(EBIT), earnings before interest, taxes, depreciation, and amortization (EBITDA), and cash flow from operations (CFO) to arrive at FCFF and FCFE.
• Contrast the appropriate discount rates for the FCFE and FCFF models.
• Contrast the ownership perspective implicit in the FCFE approach to the ownership perspective implicit in the dividend discount approach.
• Explain the strengths and limitations of the FCFE model.
• Describe the FCFF and FCFE approaches to valuation.
• Define and interpret free cash flow to the firm (FCFF) and free cash flow to equity (FCFE).
Discuss the choice of a free cash flow valuation approach.
21. (Adapted from 1998 CFA Level II exam) Janet Ludlow’s company requires all its analysts to use a two-stage DDM and the CAPM to value stocks. Using these models, Ludlow has valued QuickBrush Company at $63 per share. She now must value SmileWhite Corporation.A. Calculate the required rate of
20. (Adapted from 2001 CFA Level II exam) Peninsular Research is initiating coverage of a mature manufacturing industry. John Jones, CFA, head of the research department, gathers the information given in Table 2-19 to help in his analysis.TABLE 2-19 Fundamental Industry and Market Data Forecasted
19. (Adapted from 2000 CFA Level II exam) The management of Telluride, an international diversified conglomerate based in the United States, believes that the recent strong performance of its wholly owned medical supply subsidiary, Sundanci, has gone unnoticed. In order to realize Sundanci’s full
18. (Adapted from 1999 CFA Level II exam) Scott Kelly is reviewing MasterToy’s financial statements in order to estimate its sustainable growth rate. Using the information presented in Table 2-16, A. i. Identify the three components of the DuPont formula.ii. Calculate the ROE for 1999 using the
17. (Adapted from 1995 CFA Level II exam) Your supervisor has asked you to evaluate the relative attractiveness of the stocks of two very similar chemical companies: Litchfield Chemical Corp. (LCC) and Aminochem Company (AOC). AOC and LCC have June 30 fiscal year ends. You have compiled the data in
16. Hanson PLC (LSE: HNS) is selling for GBP 472. Hansen has a beta of 0.83 against the FTSE 100 index, and the current dividend is GBP 13.80. The risk-free rate of return is 4.66 percent, and the equity risk premium is 4.92 percent. An analyst covering this stock expects the Hanson dividend to
15. EB Systems is selling for $11.40 and is expected to pay a $0.40 dividend next year. The dividend is expected to grow at 15 percent for the following four years, and then at 7 percent annually after Year 5. If purchased at its current price, what is the expected rate of return on EB Systems?
14. FPR is expected to pay a $0.60 dividend next year. The dividend is expected to grow at a 50 percent annual rate for Years 2 and 3, at 20 percent annually for Years 4 and 5, and at 5 percent annually for Year 6 and thereafter. If the required rate of return is 12 percent, what is the value per
13. The CFO of B-to-C Inc., a retailer of miscellaneous consumer products, recently announced the objective of paying its first (annual) cash dividend of $0.50 in four years.Thereafter, the dividend is expected to increase by 7 percent per year for the foreseeable future. The company’s required
12. Dole Food (NYSE: DOL) has a current dividend of $0.40, which is expected to grow at 7 percent forever. Felipe Rodriguez has estimated the required rate of return for Dole using three methods. The methods and the estimates are as follows:Bond yield plus risk premium method r = 9.6%CAPM method r
11. R.A. Nixon put out a ‘‘strong buy’’ on DuPoTex (DPT). This company has a current stock price of $88.00 per share. The company has sales of $210 million, net income of $3 million, and 300 million outstanding shares. DPT is not paying a dividend.Dorothy Josephson has argued with Nixon
10. NiSource Preferred B (NYSE: NI-B) is a fixed-rate perpetual preferred stock paying a$3.88 annual dividend. If the required rate of return is 7.88 percent, what is the value of one share? If the price of this preferred stock were $46.00, what would be the yield?
9. Vicente Garcia is a buy-side analyst for a large pension fund. He frequently uses dividend discount models such as the Gordon growth model for the consumer noncyclical stocks that he covers. The current dividend for Procter & Gamble Co. (NYSE: PG) is $1.46, and the dividend eight years ago was
8. For five utility stocks, the table below provides the expected dividend for next year, the current market price, the expected dividend growth rate, and the beta. The risk-free rate is currently 5.3 percent, and the market risk premium is 6.0 percent.Dividend Price Dividend Growth Stock (D1) (P0)
7. The current market prices of three stocks are given below. The current dividends, dividend growth rates, and required rates of return are also given. The dividend growth rates are perpetual.Current Dividend Dividend Required Rate Stock Current Price (t = 0) Growth Rate of Return Que Corp. $25.00
6. BP PLC (NYSE: BP) has a current stock price of $50 and current dividend of $1.50.The dividend is expected to grow at 5 percent annually. BP’s beta is 0.85. The risk-free interest rate is 4.5 percent, and the market risk premium is 6.0 percent.A. What is next year’s projected dividend?B. What
5. General Motors (NYSE: GM) sells for $66.00 per share. The expected dividend for next year is $2.40. Use the single-period DDM to predict GM’s stock price one year from today. The risk-free rate of return is 5.3 percent, the market risk premium is 6.0 percent, and GM’s beta is 0.90.
4. The expression for the value of a stock given a single-period investment horizon has four variables: V0,D1, P1, and r. Solve for the value of the missing variable for each of the four stocks in the table below.Estimated Value Expected Dividend Expected Price Required Rate Stock (V0) (D1) (P1)
3. Newmont Mining (NYSE: NEM) has an estimated beta of −0.2. The risk-free rate of return is 4.5 percent, and the equity risk premium is estimated to be 7.5 percent. Using the CAPM, calculate the required rate of return for investors in NEM.
2. The estimated factor sensitivities of Terra Energy to the five macroeconomic factors in the Burmeister, Roll, and Ross (1994) article are given in the table below. The table also gives the market risk premiums to each of these same factors.Factor Sensitivity Risk Premium (%)Confidence risk 0.25
1. The estimated betas for AOL Time Warner (NYSE: AOL), J.P. Morgan Chase &Company (NYSE: JPM), and The Boeing Company (NYSE: BA) are 2.50, 1.50, and 0.80, respectively. The risk-free rate of return is 4.35 percent, and the market risk premium is 8.04 percent. Calculate the required rates of return
• Calculate the expected rate of return or implied dividend growth rate in the Gordon growth model, given the market price.
• Discuss the choice of growth rate in the Gordon growth model in relation to the growth rate of the economy.
• Calculate the value of a common stock using the Gordon growth model.
• Explain the assumptions of the Gordon growth model.
• Discuss the two major approaches to the dividend-forecasting problem.
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