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business
financial statement analysis
Financial Statement Analysis And Security Valuation 4th Edition Stephen H Penman - Solutions
34. As synergies go, projections of economies of scale in combinations of companies tend to be more plausible than economies____________ of scope purportedly available to companies in businesses.
33. In general, the the combining businesses are,____________ the it is that the hoped-for economies of scope____________.
32. If Company A generates external growth by acquiring Company B and neither Company nor its new subsidiary increases its profitability____________, then the merged companies is than the____________ sum of the two companies’ values.
31. Analysts need to distinguish between internal growth and external growth. ____________consists of sales increases generated from a company’s existing operations,____________ while represents incremental sales brought in through ____________.
30. A corporation can easily accelerate its sales growth by____________ and____________ . Creating genuine value for shareholders through is more difficult, although unwary investors sometimes fail to recognize the distinction.
29. One way to increase profitability through involves____________.
28. Management can through techniques that more properly fall into the category of____________ .
27. A comparatively ratio of PP&E____________ to or____________ is another sign of potential trouble.
26. An older, but not obsolete____________, device for beefing up reported income is____________.
25. Analysts must exercise judgment when considering pro forma earnings____________;however, they must make sure to examine____________ , instead of by relying solely on____________ .
24. In fact, analysts who hope to forecast____________ future financial results accurately must apply and set aside genuinely____________ .
23. Unlike operating income,____________ a concept addressed by FASB standards, is a number that subjectively many____________ that lack any standing under GAAP.
22. Computer software producers____________ got into the act by from the expenses considered in calculating____________ .
21. The purpose of providing pro forma results was to help analysts accurately when some event caused____________ to convey a misleading impression.
20. The most dangerous trap that ____________users of financial statements must avoid walking into, however,____________ is inferring that the term “restructuring” connotes____________.
19. Corporate managers commonly perceive that will be if they take (for sake of argument) a $1.5 billion writeoff____________ than if____________ . The benefit of exaggerating the damage is that in subsequent years, .
18. In recent years, has become a catchall for charges that companies wish analysts to consider____________ , but which do not qualify for____________ .
17. The accounting rules prohibit corporate officials from displaying certain hits to earnings “above the line,” that is,____________ , and____________ from using the label . Accordingly they employ designations such as or____________ . These terms have____________ , but the highlighted items
16. An extraordinary item is reported on an____________ basis____________, below the from continuing ____________operations.
15. One way ____________persuading investors that a major development that hurt earnings last year will affect earnings is to____________ suggest that any suffered by the company was somehow,____________ and,____________ by implication,____________ .
14. A company knows that creating ____________expectations about ____________can raise and lower____________.
13. An unusually low ratio of ____________to____________ with the ratios of its industry peers may indicate that management is being unrealistic in acknowledging the pace of wear and tear on fixed assets. Understatement of and ____________overstatement of____________ would result.
12. Along with____________ , another major expense category that can be controlled through is____________ .
11. On a retrospective basis, a surge or____________ may indicate that____________ .
10. Executives whose bonuses rise have a strong incentive not only____________ , but also to use____________ .
9. Analysts must take care not to mistake difference that is actually as evidence of ____________. A subtler explanation may be available at the modest cost of____________ .
8. The more widely diversified pharmaceutical manufacturers can be expected to have percentage____________ , as well____________ as percentage expenses, than industry peers that focus exclusively on____________ .
7. Costs as percentages of sales also vary among companies within an industry for than differences____________ .
6. In essence,____________ Peet’s is more of and Starbucks is more involved in____________ .
5. Percentage breakdowns are also helpful for comparing a single company’s performance with and for comparing on the basis of____________ .
4. Even within an industry, the breakdown of expenses can vary from company to ____________company as a function of ____________and ____________.
3. Besides facilitating comparisons between a company’s present and past results, the can highlight important facts____________.
2. In the____________ , each income statement item is expressed as (sales or revenues), which is represented as____________ .
1. Students of financial statements must keep up with of the past few years in transforming into____________.
17. Deterioration in a company’s financial position may catch investors by surprise because it____________ and is____________ .
16. Users of financial statements can process only____________ , and they do not always have____________ .
15. Historical-cost-based balance sheet figures ____________are the ones that matter in that a company will violate requiring____________.
14. Instead of striving for theoretical purity on the matter____________, analysts should adopt a____________ , using the measure of equity value____________.
13. A limitation of the peer-group approach to valuation is that____________ and ____________therefore one major benefit of using as a gauge of actual equity value.
12. Among the advantages of market capitalization as a measure of equity are:a.____________ b.____________ c.____________
11. Determining the cost of capital is a notoriously controversial subject in the financial field, complicated____________ by and____________.
10. A reasonable estimate of a low-profit company’s true equity value would be ____________.
9. Unlike____________ , goodwill is not an asset that can be readily to raise cash. Neither____________ can a company enter into a of its goodwill,____________ as it can with its plant and equipment.In short, goodwill is not that management can either or to extricate itself from a financial tight
8. Through stock-for-stock acquisitions, the sharp rise in equity prices during the late 1990s was transformed into____________ , despite the usual assumption that____________ .
7. If a company wrote off a billion dollars worth of goodwill, its ratio of assets to liabilities would____________ . Its ratio of____________ would not change, however.
6. Under the compromise embodied in SFAS 115, financial instruments are valued according to____________ by the company ____________.
5. Some financial assets are unaffected by the difficulties of evaluating physical assets because ____________in____________ markets.
4. Some of the distinct approaches that have evolved for assessing real property are:a.____________ b.____________ c.____________
3. In the examples in Question 2 there is no accounting event because ____________.
2. As noted by Baruch Lev of New York University, two examples of how traditional accounting systems are at a loss to capture most of what is going on today are:a.____________ b.____________
1. A study conducted on behalf of Big Five accounting firm Arthur Andersen showed that between ____________and ____________, book value fell from____________ percent to____________ percent of the stock market value of public companies in the United States.
14. Over a two-year period BGT paid L&H $35 million to develop translation software. L&H then bought BGT and the translation product along with it. The net effect was that instead____________ , L&H recognized____________ .
13. The ostensible purpose of financial reporting is ____________of a corporation’s earnings.
12. When the story used to sell stocks to individual investors originates among stockbrokers or even____________ , the zeal with which the story is disseminated may depend more ____________on than the____________.
11. Some of the stories used to sell stocks to individual investors are:a.____________b. A “play” in some current economic trend such as i.____________ ii.____________ c.____________
10. The analyst’s heightened awareness of legal risks are a result of bankruptcies associated with:a.____________ b.____________ c.____________
9. The surprise element in Manville Corporation’s 1982 bankruptcy was, in part, a function of____________ .
8.____________ is one of the ways that the notion of diversification as a means of maintaining____________ is revived from time to time.
7.____________ reached its zenith of popularity during the ____________movement of the 1960s. However, by the 1980s, the stock market had converted the ____________into a.
6. Some of the commonly heard rationalizations for declining growth are:a.____________ b.____________ c.____________
5. The following are some of the powerful limitations to continued growth faced by companies:a.____________ b.____________ c.____________
4. According to the____________ , reversals of the excess write-offs offer an artificial means of____________ in subsequent periods.
3. Corporations routinely____________ because the appearance of ____________receives a higher ____________multiple.
2. The true purpose of financial reporting is ____________.
1. Three ways that corporations can use financial reporting to enhance their value are:a.____________ b.____________ c.____________
Losses from Put Options: Household International (Hard)Household International (acquired by HSBC in 2003 and now known as HSBC Finance Corporation) is one of the largest U.S. lenders to consumers with poor credit histories, carrying receivables for auto loans, Mastercard and Visa credit card debt,
Ratio Analysis for the Equity Statement: Nike (Easy)Using the statement of shareholders’ equity in Exhibit 8.1, carry out a ratio analysis that highlights the information about Nike in that statement.
Reformulation of an Equity Statement with Hidden Losses: Dell, Inc. (Hard)The following is a condensed version of the statement of shareholders’ equity for Dell, Inc., for fiscal year ending January 31, 2003 (in millions of dollars):Other information:1. Dell’s tax rate is 35 percent.2. The
Conversion of Stock Warrants: Warren Buffett and Goldman Sachs (Easy)In September 2008, in the midst of the credit crisis on Wall Street, Goldman Sachs invited Warren Buffett, the legendary fundamental investor, to contribute much-needed equity capital to the firm. Buffett seemingly got a very good
Loss on the Conversion of Preferred Stock: Microsoft Corporation (Easy)In 1996, Microsoft issued 12.5 million convertible preferred shares carrying a dividend of 2.75 percent for $980 million. The shares were converted into common shares in December 1999, with each preferred share receiving 1.1273
Calculating Comprehensive Income to Shareholders:Intel Corporation (Medium)The following is adapted from the statement of shareholders’ equity for Intel Corporation for 2000 (in millions of dollars). Intel faces a 38 percent tax rate.Calculate comprehensive income to Intel’s shareholders for
Reformulation of an Equity Statement and Accounting for the Exercise of Stock Options: Starbucks Corporation (Hard)The statement of shareholders’ equity below for Starbucks Corporation, the retail coffee vendor, is for fiscal year 2007.a. Reformulate the statement to distinguish comprehensive
A Simple Reformulation: J.C. Penney Company (Easy)Reformulate the following statement of shareholders’ equity statement for J.C. Penney Company. Dividends paid consisted of $24 million in preferred dividends and $225 million in common dividends. J. C. PENNEY COMPANY, INC., AND SUBSIDIARIES
Reformulating an Equity Statement with Employee Stock Options (Medium)Reformulate the following statement of shareholder’s equity. The firm’s tax rate is 35%. Balance, end of fiscal year 2008 Share issues from exercised employee stock options Repurchase of 24 million shares Cash dividend Tax
Calculating the Loss to Shareholders from the Exercise of Stock Options (Easy)In 2004, an employee was granted 305 options on the stock of a firm with an exercise price of $20 per option. In 2009, after the options had vested and when the stock was trading at$35 per share, she exercised the
Using Accounting Relations that Govern the Equity Statement (Medium)The following is a statement of common shareholders’ equity with some numbers missing(in millions of dollars).a. The market value of the equity was $4,500 million at December 31, 2008, and $5,580 million at December 31, 2009. At
A Simple Reformulation of the Equity Statement (Easy)From the following information, prepare a reformulated statement of common shareholders’ equity for 2008. Amounts are in millions.The beginning and end-of-year balances include $200 million of preferred stock. Balance, December 31, 2007 Net
Calculating ROCE from the Statement of Shareholders’ Equity (Easy)From the following information, calculate the return on common equity for the year 2009(amounts in millions of dollars). There were no share repurchases. Common stockholders' equity, December 31, 2008 Dividends paid to common
Some Basic Calculations (Easy)a. A firm listed total shareholders’ equity on its balance sheet at $237 million. Preferred shareholders’ equity was $32 million. What is the common shareholders’ equity?b. From the following information, calculate the net dividend to shareholders and
In February 1999, Boots, the leading retail chemist in the United Kingdom, announced plans to reform its employee option compensation scheme. In the future, it said, the firm will purchase its own shares to provide shares to issue when options are exercised, and it will charge the difference
Cisco Systems, the networking equipment firm, reported a tax benefit from the exercise of stock options of $537 million in its fiscal 2004 shareholders’ equity statement. Over the previous years, the tax benefits had cut more than 25 percent off the firm’s tax bills. Commentators saw this tax
Before it found the practice to be too expensive, Microsoft (and a number of other firms) was in the habit of repurchasing some of the shares that it issued each year as employees exercised stock options. The rationale, according to commentators, was to avoid the dilution from shares issued to
The compensation vice president of General Mills was quoted in The Wall Street Journal on January 14, 1997, as saying that option programs are “very attractive for shareholders” because they cut fixed costs and boost profits. So, for General Mills’s 1996 year, selling, general, and
In accounting for the conversion of convertible bonds to common stock, most firms record the issue of shares at the amount of the book value of the bonds. The issue of the shares could be recorded at their market value, with the difference between the market value of the shares and the book value
Why can “value be lost” if an analyst works with reported net income rather than comprehensive income?
Accounting Relations for Kimberly-Clark Corporation (Medium)Below are summary numbers from reformulated balance sheets for 2007 and 2006 for Kimberly-Clark Corporation, the paper products company, along with numbers from the reformulated income statement for 2007 (in millions).a. Calculate the
Applying the Treasurer’s Rule: Microsoft Corporation (Medium)At the end of its June 30, 2008, fiscal year, Microsoft Corporation reported $23.7 billion in short-term interest-bearing investments and cash equivalents. The firm had no debt obligations. Subsequently, in September of that year, the
Inferences Using Accounting Relations (Hard)A firm with no financial assets or financial obligations generated free cash flow of$8.4 million in 2009. At the end of 2008 it had a market value of $224 million, or 1.6 times book value. At the end of 2009 it had a market value of $238 million, twice
Using Accounting Relations (Medium)Below are financial statements that have been reformulated using the templates in this chapter. Some items are missing; they are indicated by capital letters.a. Supply the missing numbers using the accounting relations laid out in this chapter.b. What were the
Using Accounting Relations (Medium)Below are a balance sheet and an income statement that have been reformulated according to the templates laid out in this chapter.a. How much was paid out in net dividends during 2009?b. What is free cash flow for 2009?c. What was the return on net operating
Balance Sheet and Income Statement Relations (Easy)a. A firm holding $432 million in interest-bearing financial assets and with financing debt of $1,891 million, reported shareholders’ equity of $597 million. What were its net financial assets? What were its net operating assets?b. The same firm
Applying the Treasurer’s Rule (Medium)a. A firm generated free cash flow of $2,348 million and paid net interest of $23 million after tax. It paid a dividend of $14 million and issued shares for $54 million. There were no share repurchases. What did the treasurer do with the remaining cash flow
Applying the Cash Conservation Equation (Easy)a. A firm generated $143 million in free cash flow and paid a net dividend of $49 million to shareholders. How much was paid to debtholders and debt issuers?b. A firm paid a dividend to shareholders of $162 million and repurchased stock for$53 million.
Free cash flow does not affect common shareholders’ equity. True or false?
If an analyst has reformulated balance sheets and income statements, she does not need a cash flow statement to calculate free cash flow. True or false?
Distinguish an operating liability from a financial liability.
Distinguish an operating asset from a financial asset.
How can a firm pay a dividend with zero free cash flow?
A firm has positive free cash flow and a net dividend to shareholders that is less than free cash flow. What must it do with the excess of the free cash flow over the dividend?
Why can free cash flow be regarded as a dividend, that is, as a distribution of value rather than the value created?
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