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financial statement analysis
Financial Statement Analysis And Valuation 5th Edition Peter D. Easton, Mary Lea McAnally, Gregory A. Sommers - Solutions
Determining ROE and Assessing Market Expectations The PB, trailing PE, and forward PE data follow for four companies. Determine the current ROE for each company. Which company do you believe the market expects to have the highest future ROE?Explain.Company PB Trailing PE Forward PE Apple . . . . .
Identifying Comparables and Valuation Using PB and PE Panera Bread Company’s book value per share is $27.18 and its forward earnings estimate per share is $6.68. The following information is also available for Panera and a peer group of companies from the restaurant sector.Ticker Market Cap ($
Identifying Comparables for Valuation Which would be a better comparable to use in valuing Hershey Co. using a PE ratio-based multiple:Synutra International Inc., Hillshire Brands, or Hormel Foods Corp.? Explain your answer without reference to the actual PE ratios.Company Estimated Earnings Growth
Identifying Comparables for Valuation Which would be a better comparable to use in valuing Bunge Limited using a PB ratio-based multiple:Fresh Del Monte Produce Inc. or Deere & Company? Explain your answer without reference to the actual PB ratios.5-Year Historical EPS Growth Rate ROE T4Q
Determining PB Ratio for Companies with Different Capitalization Assume that the present value of expected ROPI follows a perpetuity with growth g (Value ???? Amount/[r ???? g]). Determine the theoretically correct PB ratio for each of the following companies A and B.Company Net Operating Assets
Determining PB Ratio for Companies with Different Returns and Cost of Capital Assume that the present value of expected ROPI follows a perpetuity with growth g (Value ???? Amount/[r ???? g]). Determine the theoretically correct PB ratio for each of the following companies A and B.Company Net
Determining PB Ratio for Companies with Different Returns and Growth Assume that the present value of expected ROPI follows a perpetuity with growth g (Value ???? Amount/[r ???? g]). Determine the theoretically correct PB ratio for each of the following companies A and B.Company Net Operating
Determining PB Ratio for Companies with Different Returns Assume that the present value of expected ROPI follows a perpetuity with growth g (Value ???? Amount/[r ???? g]). Determine the theoretically correct PB ratio for each of the following companies A and B.Company Net Operating Assets Equity
Valuation Using an Income Statement Multiple Motorola Solutions Inc. was trading at $76.28 per share. Earnings estimates for the next 12 months were $5.04 per share. The industry average forward PE ratio is 15.44. Using the industry average forward PE, estimate the intrinsic value of Motorola’s
Valuation Using an Income Statement Multiple JAKKS Pacific Inc., a toy manufacturer, reports net income for the recent twelve months of $14.73 million. JAKKS’ has 20.05 million shares outstanding. The industry average PE (using the trailing twelve months earnings) for its competitors is 22.17.
Valuation Using a Balance Sheet Multiple Build-a-Bear Workshop Inc. reports a book value per share of $6.21. The industry average PB ratio for specialty retail is 6.67. Using the industry average PB ratio, estimate the intrinsic value of Build-a-Bear’s equity per share.
Valuation Using a Balance Sheet Multiple McDonald’s Inc. reports total book value of $640 million and common shares outstanding of 853.36 million. The average PB ratio for restaurant companies is 10.9. Using the industry average PB ratio, estimate the intrinsic value of McDonald’s equity.
Barron’s Online posted the following headline in early October 2007: Cisco: Goldman Ups Target On‘Stronger Multiple Outlook’. Explain what this headline means.
Referring to residual income, PE can be expressed in terms of cost of equity capital, the present value of expected changes in residual income, dividends, and earnings. Explain what a PE ratio of 11 implies about market growth expectations for a company with a cost of equity capital equal to 10%.
The “E” in the PE ratio can be determined in several ways. Identify at least three different variations in measuring earnings for the PE ratio.
Describe the factors that should be considered in choosing comparable companies for computation of the market multiples company-value-to-net-operating-assets and the price-to-book-value.
This module referred to the residual operating income model described in Module 14. Explain what a company-value-to-net-operating-assets ratio equal to 1 implies about future residual operating income.
Identify the disadvantages of valuation using market multiples compared to valuation using discounted cash flows or discounted residual operating income.
Identify the advantages of valuation using market multiples compared to valuation using discounted cash flows or discounted residual operating income.
Estimating Share Value Using the ROPI Model Following are forecasted sales, NOPAT, and NOA for Colgate-Palmolive Company for 2016 through 2019.$ millions Reported 2015 Forecast Horizon 2016 2017 2018 2019????ales???? ???? ???? ???? ???? ???? ???? ???? ???? ???? ???? ???? ???? ???? ????
Forecasting with the Parsimonious Method and Estimating Share Value Using the ROPI Model Following are the income statement and balance sheet for Nike Inc.NIKE INC.Consolidated Income Statement For Year Ended ($ millions)May 31, 2016 May 31, 2015 Revenues . . . . . . . . . . . . . . . . . . . . . .
Estimating Share Value Using the ROPI Model Following are forecasts of Texas Roadhouse’s sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of December 29, 2015.$ thousands Reported 2015 Forecast Horizon 2016 2017 2018 2019 Sales. . . . . . . . . . . . . . . .
Forecasting with Parsimonious Method and Estimating Share Value Using the ROPI Model Following are the income statement and balance sheet for Cisco Systems for the year ended July 30, 2016.CISCO SYSTEMS Consolidated Statements of Operations Year Ended ($ millions)July 30, 2016 July 25, 2015 Revenue
Reverse Engineering Valuation Model to Determine Assumptions Refer to Home Depot information in E14-22 to answer the requirements.a. Estimate the value of a share of Home Depot’s common stock using the residual operating income(ROPI) model as of January 31, 2016.b. Home Depot (HD) stock closed at
Quantify the Effects of Managerial Actions on ROPI and Components BCS Enterprises reports the following financial data just prior to its fiscal year ended June 30, 2017($ millions).BCS ENTERPRISES Balance Sheet Cash . . . . . . . . . . . . . . . . . . . . . . . . . $ 100 Accounts payable. . . . . .
Applying and Interpreting Value Driver Components of RNOA The net operating profit margin and the net operating asset turnover components of return on net operating assets are often termed ????alue dri????ers???? which refers to their positive influence on stock value by virtue of their role as
Explaining the Equivalence of Valuation Models and the Relevance of Earnings Module 13 focused on the discounted cash flow (DCF) model and Module 14 focused on the residual operating income (ROPI) model. The models focus on free cash flows to the firm and on residual operating income, respectively.
Estimating Share Value Using the ROPI Model Following are forecasts of Home Depot’s sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of January 31, 2016.$ millions Reported 2016 Horizon Period Terminal 2017 2018 2019 2020 Period Sales. . . . . . . . . . . . . . . .
Identifying and Computing Net Operating Profit after Tax (NOPAT)Following is the income statement for Home Depot Inc. for fiscal year 2015, ended January 31, 2016.????????????E ????E????????????Consolidated Income Statement For Fiscal Year Ended ($ millions) Jan. 31, 2016 Feb. 01, 2015 Net sales. .
Identifying and Computing Net Operating Assets (NOA) and Net Nonoperating Obligations(NNO)Following is the balance sheet for Home Depot Inc., for fiscal year 2015, ended January 31, 2016.???????????????? D????????????T ????????????????Consolidated Balance Sheet Fiscal Year End ($ millions, except
Estimating Share Value Using the ROPI Model Following are forecasts of sales, net operating profit after tax (NOPAT), and net operating assets (NOA)as of January 31, 2016, for Walmart Stores Inc.$ millions Reported 2016 Horizon Period Terminal 2017 2018 2019 2020 Period Sales. . . . . . . . . . . .
Estimating Share Value Using the ROPI Model Following are forecasts of Whole Foods’ sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of September 25, 2016.$ millions Reported 2016 Horizon Period Terminal 2017 2018 2019 2020 Period Sales. . . . . . . . . . . . . . .
Comparing Model Weights for DCF and ROPI Compare the valuation model information for General Mills from Review 14-2 (ROPI) with Review 13-2 (DCF). For each model, compute the relative proportion of the total estimated firm value that comes from the following components:???? Net operating
Computing Present Value of Terminal Residual Operating Income Use the following data to compute the present value of the terminal period ROPI for each of the four firms A through D. Assume a forecast horizon of four years.A ???? ???? ????Terminal period ROPI . . . . . . . . . . . . . . . . . . . .
Computing ROPI for Multiple Years Use the following data to compute ROPI for Under Armour Inc. for 2016 through the terminal period.Assume that the company’s weighted average cost of capital is 10%.$ thousands Actual 2015 Horizon period Terminal 2016 2017 2018 2019 Period Sales. . . . . . . . . .
Computing ROPI for Multiple Years Use the following data to compute ROPI for Intel Corporation for 2016 through the terminal period.Assume that the company’s weighted average cost of capital is 9%.$ millions Actual 2015 Horizon period Terminal 2016 2017 2018 2019 Period Sales. . . . . . . . . . .
Assess the Effects of Managerial Actions on ROPI and Components In its 2016 10-K report, Kellogg discussed its cost-cutting initiative, ????r????????ect????????.In November 2013, the Company announced a global four-year efficiency and effectiveness program(Project K). The successful implementation
Estimating Share Value Using the ROPI Model Following are forecasts of Target Corporation’s sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of January 30, 2016.$ millions Reported 2016 Horizon Period Terminal 2017 2018 2019 2020 Period Sales. . . . . . . . . . . .
Computing, Analyzing and Interpreting Residual Operating Income (ROPI)In its 2015 fiscal year annual report, Texas Roadhouse reports net operating income after tax (NOPAT)of $102,495 thousand. As of the beginning of fiscal year 2015 it reports net operating assets of $596,104 thousand.a. Did Texas
Computing Residual Operating Income (ROPI)Home Depot reports net operating profit after tax (NOPAT) of $7,483 million in 2016. Its net operating assets at the beginning of 2016 are $24,796 million. Assuming a 9% weighted average cost of capital(WACC), what is Home Depot’s residual operating
Interpreting Earnings Announcement Effects on Stock Prices On November 2, 2016, Facebook Inc. announced its 2016 third quarter results. Revenues were up nearly 50% from 2015 and earnings were up a whopping 180% ($5,944 million compared to $2,127 million.)Yet, in the ensuing days, Facebook’s stock
What is one way to refine equity valuation models for companies that have not achieved steady state?
Explain what is meant by the phrase “steady state” when applied to equity valuation models.
D13-23. Management Application: Cash Flow Improvement with Operating Decisions Assume that you are the CEO of a small publicly traded company. The company’s stock price has fallen recently and you believe that the market does not fully understand the company’s potential. You wonder about ways
Estimating Share Value Using the DCF Model Following are forecasted sales, NOPAT, and NOA for Colgate-Palmolive Company for 2016 through 2019.$ millions Reported 2015 Forecast Horizon 2016 2017 2018 2019????ales???? ???? ???? ???? ???? ???? ???? ???? ???? ???? ???? ???? ???? ???? ???? ????
Forecasting with Parsimonious Method and Estimating Share Value Using the DCF Model Following are the income statement and balance sheet for Nike Inc.NIKE INC.Consolidated Income Statement For Year Ended ($ millions)May 31, 2016 May 31, 2015 Revenues . . . . . . . . . . . . . . . . . . . . . . . .
Estimating Share Value Using the DCF Model Following are forecasts of Texas Roadhouse’s sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of December 29, 2015.Requireda. Assume the following forecasts for TXRH’s sales, NOPAT, and NOA for 2016 through 2019.
Forecasting with the Parsimonious Method and Estimating Share Value Using the DCF Model Following are the income statement and balance sheet for Cisco Systems for the year ended July 30, 2016.CISCO SYSTEMS Consolidated Statements of Operations Year Ended ($ millions)July 30, 2016 July 25, 2015
Estimating Share Value Using the DCF Model Following are forecasts of Target Corporation’s sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of January 30, 2016.$ millions Reported 2016 Horizon Period Terminal 2017 2018 2019 2020 Period????ales???? ???? ???? ????
Computing Present Value of Terminal Period FCFF Use the following data to compute the present value of the terminal period free cash flows to the firm for each of the four firms A, B, C, and D. The forecast horizon included four years.A B C D Terminal period free cash flow to the firm (FCFF) . . .
Computing Free Cash Flows to the Firm (FCFF)Use the following data to compute free cash flows to the firm for Under Armour Inc. for 2016 through the terminal period.$ thousands Actual 2015 Horizon period Terminal 2016 2017 2018 2019 Period Sales. . . . . . . . . . . . . . . . . $3,963,313
Computing Free Cash Flows to the Firm (FCFF)Use the following data to compute free cash flows to the firm for Intel Corporation for 2016 through the terminal period.$ millions Reported 2015 Horizon period Terminal 2016 2017 2018 2019 Period Sales. . . . . . . . . . . . . . . . . . . . . . . .
Computing Free Cash Flows to the Firm (FCFF)Home Depot reports net operating profit after tax (NOPAT) of $7,483 million in 2016. Its net operating assets at the beginning of 2016 are $24,796 million and are $25,415 million at the end of 2016. What are Home Depot’s free cash flows to the firm
Interpreting Earnings Announcement Effects on Stock Prices On November 2, 2016, Facebook Inc. announced its 2016 third quarter results. Revenues were up nearly 50% from 2015 and earnings were up a whopping 180% ($5,944 million compared to $2,127 million.)Yet, in the ensuing days, Facebook’s stock
D????????-5????. Sensitivity of Cost of Capital and Intrinsic Value Estimates At January 2016 (the end of its fiscal year 2015), analysts estimate Best Buy Co. Inc.’s beta at 1.54. The company is expected to pay $1.12 in annual dividends to its common shareholders in the foreseeable future.
D????????-4????. Interpreting ????arket Reactions to Accounting Information On December 11, 2007, AT????T Inc. announced that it would increase its dividend per share by 12.7%.At the same time the company announced a $15.2 billion stock buyback plan. The stock price of AT&T closed up 4.1% on that
D????????-4????. Applying the Gordon Growth DD????Refer to the information regarding AT????T Inc. in D12-46.Requireda. What amount of dividends (per share) did AT&T declare for its common shareholders in 2015?b. AT&T’s common stock was traded at $34.41 per share at the end of 2015. Use the Gordon
Assume that UPS is considering implementing certain transactions to hedge against potential fluctuations in gas and fuel costs and in exchange rates. It is estimated that such transactions would reduce UPS’s cash flow volatility and, thus, decrease the firm’s market beta from 0.99 to
Estimating Cost of Capital and the Effects of Hedging Refer to the information regarding United Parcel Service, Inc. in
Estimating Cost of Preferred Equity Capital and WACC The consolidated balance sheets of Dow Chemical show that the company has 4,000,000 shares of preferred stock outstanding at the end of 2015. That preferred stock has a book value of $1,000 per share.During fiscal 2015, the company declared $340
Estimating Cost of Capital Measures and Applying the DDM Model Procter and Gamble Company has a June fiscal year-end. On June 30, 2006, analysts expected the company to pay $1.41 dividends per share in fiscal year 2007, and its market beta was estimated to be 0.7. Assume that the risk-free rate is
Estimating WACC and Expected Growth in Dividend Discount Model United Parcel Service, Inc. was trading at $96.23 at December 31, 2015. Its dividend per share was$3.12, its market beta was estimated to be 0.99, its average pretax borrowing rate was 2.4%, and its assumed statutory tax rate was 37%,
Estimating Components of Both WACC and DDM An analyst estimates the cost of debt capital for Abbott Laboratories is ????.0% and that its cost of equity capital is 5.0%. Assume that ABT????s statutory tax rate is ????????%, the risk-free rate is 2.5%, the market risk premium is 5%, the ABT market
Estimating Market and Book Values and Cost of Capital Measures The December ????1, 2015, partial balance sheet of 3M Company follows (???? millions, except per share amounts). YCharts.com reported that the total market capitalization of ???????? was ????????4.14 billion and its stock price was
Estimating Cost of Capital Measures US Steel has $3.16 billion in total debt (which approximates its market value). Interest expense for the year was about $214.0 million. The company’s market capitalization is approximately $1.17 billion, its market beta is 2.65, and its assumed tax rate is 37%.
Estimating Market Capitalization from Public Disclosures YCharts.com reported that Procter and Gamble Company’s market capitalization was $217.78 billion and its stock price per share was $80.23 as of June 30, 2015. The equity section from Procter and Gamble’s June 30, 2015, balance sheet
Estimating the Market’s Expected Growth Rate in Dividends Mattel, Inc. was trading at a price of $27.17 per common share at December 31, 2015. Using the Gordon growth model, estimate the market’s expected growth in dividends that is required to yield the$27.17 price per common share. Assume
Assessing Terminal Dividend Assumptions for Intrinsic Value Estimates At December 31, 2015, Mattel, Inc. was trading at a price per common share of $27.17.Required a???? Explain how the assumption we make about a firm’s terminal dividend affects the intrinsic value we compute for the firm.b????
Estimating Intrinsic Share Value Using Dividend Discount Model Mattel, Inc. is expected to pay a $1.52 dividend per share annually. Estimate its intrinsic value per common share using the dividend discount model (DDM) under each of the following separate assumptions.(Assume that Mattel’s cost of
Sensitivity of Intrinsic Value Estimates Kellogg Company is expected to pay $2.00 in annual dividends to its common shareholders in the future. Our best estimate of the expected cost of equity capital is 5.0% and the expected growth rate in dividends is 2%.Requireda. Compute Kellogg’s intrinsic
Estimating Stock Value Using Dividend Discount Model with Increasing Perpetuity Kellogg pays $2.00 in annual per share dividends to its common stockholders, and its recent stock price was $82.50. Assume that Kellogg’s cost of equity capital is 5.0%.Required Estimate Kellogg’s expected growth
Estimating Stock Value Using Dividend Discount Model with Constant Perpetuity Kellogg pays $2.00 in annual per share dividends to its common stockholders, and its recent stock price was $82.50. Assume that Kellogg’s cost of equity capital is 5.0%.Requireda. Estimate Kellogg’s stock price using
After further research we find that beta estimates for Mattel reported on financial websites range from 0.85 to 1.13.Requireda. Estimate the range of cost of equity capital estimates for Mattel implied by the different beta estimates.b. What steps are necessary for business valuation due to the
Sensitivity of Cost of Equity Capital Estimates to Beta Refer to the information about Mattel, Inc. in
Estimating Weighted Average Cost of Capital Mattel, Inc. engages in the design, manufacture, and marketing of various toy products worldwide. At December 31, 2015, Mattel’s market value of equity was $9.2 billion, and its total market value was$11.3 billion. Mattel’s assumed statutory tax rate
Kellogg’s stock closed at $72.27 on December 31, 2015. On that same date, the company had 420,315,589 shares issued, of which 70,291,514 shares were in treasury.Requireda. What is Kellogg’s total market capitalization as of December 31, 2015?b. Use the information and results of E12-27 and
Estimating the Weighted Average Cost of Capital Refer to information about Kellogg Company in E12-27 and
Kellogg has an estimated market beta of 0.50.Assume that the expected risk-free rate is 2.5% and the expected market premium is 5%.Requireda. What does Kellogg’s market beta imply about its stock returns?b. Estimate Kellogg’s cost of equity capital.
Estimating the Cost of Equity Capital Refer to information about Kellogg Company in
Estimating the Cost of Debt Capital Kellogg Company manufactures cereal and other convenience food under its many well-known brands such as Kellogg’s®, Keebler®, and Cheez-It®. The company, with over $13.5 billion in annual sales worldwide, partially finances its operation through the issuance
Estimating Company Value Using DDM with Increasing Perpetuity Assume that a company paid $1.20 dividend per common share, its dividend per share is expected to grow at a constant rate of 2%, and its cost of equity capital is 5%. Estimate the company’s per share stock price.
Estimating Company Value Using DDM with Increasing Perpetuity Assume that a company’s dividends per share are projected to grow at 2% each year, its next year’s dividends per share is $1.20, and its cost of equity capital is 5%. Estimate the company’s per share stock price.
Applying DDM with Constant Perpetuity Assume that a company’s dividends per share are projected to remain at $1.10 in perpetuity, and that its per share stock price is $22. Estimate the company’s cost of equity capital.
Estimating Company Value Using DDM with Constant Perpetuity Assume that a company’s dividends per share are projected to remain at $1.20 each year, and that its cost of equity capital is 5%. Estimate the company’s per share stock price.
Estimating Weighted Average Cost of Capital Assume that a company has $1 billion in preferred stock and $3 billion in common stock. Also, it pays 6% dividends on preferred stock and its cost of equity capital is 7%. The company has no debt. Compute the company’s WACC.
Estimating Weighted Average Cost of Capital Assume that a company has $1.2 billion in debt, its cost of debt is 5%, it has $2 billion in equity, and its cost of equity capital is 7%. Compute the company’s WACC.
Estimating Cost of Debt Capital Assume that a company’s financial statements report that its average outstanding debt totals $1.6 billion, and its total interest expense equals $80 million. If its tax rate is 35%, compute its cost of debt capital.
Estimating Cost of Debt Capital Assume that the interest rate on a company’s debt is 6% and that the company’s tax rate is 35%. Compute the company’s cost of debt capital.
Estimating the Implied End-of-Year Share Price Assume that a company’s beginning-of-period price is $15 per common share, its dividends are $1 per share, and its expected cost of equity capital is 10%. What is the expected end-of-period price per common share?
Estimating the Implied Cost of Equity Capital Assume that a company’s beginning-of-period price is $10 per common share, its dividends are $0.25 per share, and its end-of-period price is $10.50 per common share. What is the company’s expected cost of equity capital?
Estimating Cost of Equity Capital Assume that the company’s market beta equals ????0.8, that the risk-free rate is 5%, and the market return equals 8%. Compute the company’s cost of equity capital.
Estimating Cost of Equity Capital Assume that a company’s market beta equals 0.8, the risk-free rate is 5%, and the market return equals 8%. Compute the company’s cost of equity capital.
Computing the Present Value of a Debt Security Compute the present value of a three-year bond with a face value of $5,000, an 8% annual coupon payment, and a 9% effective rate.
Computing the Present Value of a Debt Security Compute the present value of a five-year bond with a face value of $1,000, a 10% annual coupon payment, and an 8% effective rate.
Describe the circularity that occurs when beta is used to help estimate an intrinsic value for comparison to market prices.
Describe how to compute the present value of an increasing perpetuity.
What is a perpetuity? How is the present value of a perpetuity computed?
What are the three criteria for a series of payments to be considered an annuity?
What is a company’s cost of capital? Explain.
Explain what the market premium represents. Describe how to compute the cost of equity capital using beta, the risk-free rate, and the market premium.
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