Strategic Management A Competitive Advantage Approach 17th Edition Fred David - Solutions

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calculate and interpret free cash fl ow to the fi rm, free cash fl ow to equity, and performance and coverage cash fl ow ratios.
analyze and interpret both reported and common-size cash fl ow statements;
convert cash fl ows from the indirect to direct method;
describe the steps in the preparation of direct and indirect cash fl ow statements, including how cash fl ows can be computed using income statement and balance sheet data;
describe how the cash fl ow statement is linked to the income statement and the balance sheet;
distinguish between the direct and indirect methods of presenting cash from operating activities and describe arguments in favor of each method;
contrast cash fl ow statements prepared under International Financial Reporting Standards(IFRS) and US generally accepted accounting principles (US GAAP);
describe how non-cash investing and fi nancing activities are reported;
compare cash fl ows from operating, investing, and fi nancing activities and classify cash fl ow items as relating to one of those three categories given a description of the items;
calculate and interpret liquidity and solvency ratios.
convert balance sheets to common-size balance sheets and interpret common-size balance sheets;
describe the components of shareholders’ equity;
describe diff erent types of assets and liabilities and the measurement bases of each;
distinguish between current and non-current assets, and current and non-current liabilities;
describe alternative formats of balance sheet presentation;
describe uses and limitations of the balance sheet in fi nancial analysis;
describe the elements of the balance sheet: assets, liabilities, and equity;
describe other comprehensive income, and identify major types of items included in it.
describe, calculate, and interpret comprehensive income;
evaluate a company’s fi nancial performance using common-size income statements and fi nancial ratios based on the income statement;
convert income statements to common-size income statements;
distinguish between dilutive and antidilutive securities, and describe the implications of each for the earnings per share calculation;
describe how earnings per share is calculated and calculate and interpret a company’s earnings per share (both basic and diluted earnings per share) for both simple and complex capital structures;
distinguish between the operating and non-operating components of the income statement;
describe the fi nancial reporting treatment and analysis of non-recurring items (including discontinued operations, extraordinary items, unusual or infrequent items) and changes in accounting standards;
describe general principles of expense recognition, specifi c expense recognition applications, and implications of expense recognition choices for fi nancial analysis;
calculate revenue given information that might infl uence the choice of revenue recognition method;
describe general principles of revenue recognition and accrual accounting, specifi c revenue recognition applications (including accounting for long-term contracts, installment sales, barter transactions, gross and net reporting of revenue), and implications of revenue recognition principles for fi
describe the components of the income statement and alternative presentation formats of that statement;
analyze company disclosures of signifi cant accounting policies.
describe implications for fi nancial analysis of diff ering fi nancial reporting systems and the importance of monitoring developments in fi nancial reporting standards;
identify characteristics of a coherent fi nancial reporting framework and the barriers to creating such a framework;
compare key concepts of fi nancial reporting standards under IFRS and US generally accepted accounting principles (US GAAP) reporting systems;
describe general requirements for fi nancial statements under International Financial Reporting Standards (IFRS);
describe the International Accounting Standards Board’s conceptual framework, including the objective and qualitative characteristics of fi nancial statements, required reporting elements, and constraints and assumptions in preparing fi nancial statements;
describe the status of global convergence of accounting standards and ongoing barriers to developing one universally accepted set of fi nancial reporting standards;
describe roles and desirable attributes of fi nancial reporting standard-setting bodies and regulatory authorities in establishing and enforcing reporting standards, and describe the role of the International Organization of Securities Commissions;
describe the objective of fi nancial statements and the importance of fi nancial reporting standards in security analysis and valuation;
describe the use of the results of the accounting process in security analysis.
describe the fl ow of information in an accounting system;
describe the relationships among the income statement, balance sheet, statement of cash fl ows, and statement of owners’ equity;
describe the need for accruals and other adjustments in preparing fi nancial statements;
describe the process of recording business transactions using an accounting system based on the accounting equation;
explain the accounting equation in its basic and expanded forms;
explain the relationship of fi nancial statement elements and accounts, and classify accounts into the fi nancial statement elements;
describe the steps in the fi nancial statement analysis framework.
identify and describe information sources that analysts use in fi nancial statement analysis besides annual fi nancial statements and supplementary information;
describe the objective of audits of fi nancial statements, the types of audit reports, and the importance of eff ective internal controls;
describe the importance of fi nancial statement notes and supplementary information—including disclosures of accounting policies, methods, and estimates—and management’s commentary;
describe the roles of the key fi nancial statements (statement of fi nancial position, statement of comprehensive income, statement of changes in equity, and statement of cash fl ows) in evaluating a company’s performance and fi nancial position;
describe the roles of fi nancial reporting and fi nancial statement analysis;
E19.5. Tracking Credit Risk Measures: Toys "R" Us (Hard) Toys "R" Us, Inc., is the world's largest toy retailer, with sales of nearly $12 billion in 1999. It has been challenged in recent years, particularly in e-commerce, losing market share from 20.2 percent in 1993 to 16.8 percent in 1999. The
E16.4. Inventory Accounting, P/B, and P/E Ratios: Ford Motor Company (Medium) Ford Motor Company uses the last in, first out (LIFO) method for most of its inventories in its Automotive Division. The amounts of the LIFO reserve reported in footnotes for 1999 were UFO reserve 1999 $1.1 billion 1998
E9.10. Reformulation and Effective Tax Rates: Home Depot, Inc. (Medium) Home Depot is the largest home improvement retailer in the United States and one of the largest retailers Home Depot's income statements for 2003-2005 are below, along with an extract from its tax footnote. Reformulate the
E4.14. An Examination of Revenues: Microsoft (Medium) 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
Cl.9. Figure 1.2plots a price-to-value ratio (PIV) for the Dow Jones Industrial Average(DJIA) from 1979 to 1999. APN ratiois a metricthatcompares themarketprice(P)to anestimate of intrinsic value(V).Theintrinsic valueinthe figure isbasedontechniques that will be discussed in this book. Buthowit is
Chubb Corporation is a property andcasualty insurance holding company providing insurance through itssubsidiaries intheUnited States, Canada, Europe, andparts ofLatin America and Asia. Its subsidiaries include Federal, Vigilant, Pacific Indemnity, Great Northern, Chubb National, Chubb Indemnity,
E13.19. Stock Repurchases: Expedia, Inc. (Medium) In June 2007, the Web travel firm Expedia, Inc., announced that it would buy back as much as 42 percent of its shares, with the repurchase financed by new borrowings.a. What is the likely effect on earning per share and earnings per share growth?b.
E13.18. Valuation of Operations: Nike, Inc., 2005 (Medium) The following summary numbers (in millions of dollars) were calculated from Nike's 2005 balance sheet; Net operating assets Net financial assets 4,632 1,012 Common equity (261.1 million shares outstanding) 5.644 Analysts were forecasting
E13.17. Residual Operating Income Valuation, Nike, Inc., 2004 (Medium) At the end of its 2004 fiscal year, the 263.1 million outstanding shares of Nike, Inc., traded at $75 each. The following summary numbers are from the 2004 financial report (in millions of dollars) Balance Sheet Income Statement
E13.16. Calculating Residual Operating Income: Dell, Inc. (Medium) Dell, Inc., reported after-tax operating income of $2,618 million for fiscal year 2008, along with operating assets at the beginning of the year of $13,230 million and operating liabili ties of $20,439 million. Using a cost of
E13.15. Residual Operating Income and Enterprise Multiples: General Mills, Inc. (Easy) Reformulated balance sheets and income statements for General Mills's 2008 fiscal year are in Exhibits 9.5 and 9.11 in Chapter 9. The firm's 337.5 million outstanding shares traded at $60 each at the time the
E13.14. Enterprise Multiples for IBM Corporation (Easy) IBM's 1,385.2 million outstanding shares traded at $102 each when its 2007 financial state- ments were published. Those statements reported common shareholders' equity of $28,470 million and net financial obligations of $19,619 million.
E13.13. Using Market Values in the Balance Sheet: Pennzoil (Easy) Pennzoil (now PennzEnergy Corporation), the oil company, has a substantial holding of Chevron Corporation, another oil company. But the holding (of 7.1 million shares at the end of 1998) is less than 20 percent of Chevron. The
E13.12. The Quality of Carrying Values for Equity Investments: Sun Trust Bank (Easy) In 1993, SunTrust Bank of Atlanta reported investment securities on its balance sheet of $10,644 million, an increase over the $8,715 million reported for 1992. Footnotes revealed that most of the securities were
E13.11. Levered and Unlevered P/E Ratios (Medium) The following pro forma was prepared for a firm at the end of 2009 (in millions of dollars); 2009A 2010E 2011E 2012E Net operating assets 1,300 1,300 1,300 1,300 Net financial obligations 300 300 300 300 Common shareholders' equity 1,000 1,000 1,000
E13.10. Levered and Unlevered P/B and P/E Ratios (Easy) A firm has the following summary balance sheet and income statement (in millions): Net operating assets Net financial obligations Common equity Operating income Net financial expense $469 236 $233 $ 70 14 Earnings $56 The firm held the same
E13.9. Growth, the Cost of Capital, and the Normal P/E Ratio (Hard) Box 13.5 in this chapter demonstrated how stock repurchases and leverage changes can in- crease earnings-per-share growth. Answer the following questions regarding the effect of the stock repurchase.a. Why does the stock repurchase
E13.8. Abnormal Operating Income Growth Valuation (Easy) Using the forecasts in Exercise E13.7, forecast abnormal operating income growth and, from these forecasts, value the operations and the equity. The required retam for operations is 10.1 percent.
E13.7. Residual Operating Income Valuation (Easy) The following forecasts were made for a firm with net operating assets of $1,135 million and net financial obligations of $720 million at the end of 2005 (in millions of dollars): 2006E 2007E 2008E 2009E Operating income 187.00 200.09 214.10 229.08
E13.6. Calculating the Required Return for Equity (Medium) A firm with a required return of 10 percent for operations has a book value of net debt of $2,450 million with a borrowing cost of 8 percent and a tax rate of 37 percent. The finn's equity is worth $8,280 million. What is the required retum
E13.5. Cost of Capital Calculations (Easy) From the following data, calculate the cost of capital for operations (WACC). Use the capital asset pricing model to estimate the cost of equity capital. U.S. Government long-term bond rate Market risk premium Equity beta Per-share market price Shares
13.4. Residual Operating Income and Abnormal Operating Income Growth (Easy) Here are financial statements for a firm (in millions of dollars): Income Statement Balance Sheet, End of Year 2009 2008 2008 2007 Operating income 2,700 2,300 Net operating assets 20,000 18,500 Interest expense Net income
E13.3. Calculating Abnormal Operating Income Growth (Easy) Here are summary numbers from a firm's financial statements (in millions): 2006 2007 2008 2009 Operating income 187.00 200.09 214.10 229.08 Net operating assets 1,214.45 1,299.46 1,390.42 1,487.75 The required return for operations is 10.1
E13.2. Calculating Residual Operating Income and Its Drivers (Easy) Here are summary numbers from a firm's financial statements (in millions): Operating income Net operating assets 2006 2007 2008 2009 187.00 200.09 214.10 229.08 1,214.45 1,299.45 1,390,42 1,497.75 The required return for operations
E13.1. Residual Earnings and Residual Operating Income (Easy) Here are summary financial statements for a firm (in millions of dollars) Income Statement, 2009 Operating income Interest expense Net income Balance Sheet, End of 2008 1,400 Net operating assets 10,000 500 900 Financing debt 5,000
CI3.1S. Established firms, likeGeneral Electric, have lowbetarisk, lowearnings volatility, but consistently highearnings growth rates. These firms should have particularly high PIEratios. Correct?
C13.14. Doesan increase infinancial leverage increase ordecrease the(levered) PIE ratio?
e13.13. If an investor wants to buy a stock with high earnings growth but with low risk, shemustpay a highmultiple of earnings for it. Correct?
C13.12. During the 1990s and 2000s, many firms repurchased stockand borrowed to do so. What is the typical effect of stockrepurchases on earnings-per-share growth and return on common equity? Predict how a firm that excessively engaged in thesepractices would have fared in thedownturn in 2008.
e13.11. Levered price-to-book ratios are always higher than unlevered price-to-book ratios. Is thiscorrect?
C13.10. Anincrease infinancial leverage increases returnoncommon equity(if the operatingspread is positive), andthusincreases residual earnings. Thevalue ofequity is basedon forecasted residual earnings, yet it is claimed that thevalueof equity is not affected by a change in financial leverage. How
C13.8. What is wrong withtyingmanagement bonuses to earnings pershare? Whatmeasurewould youpropose as a management performance metric?vC13.9. Themanagement of a firmthattiesemployee bonuses toreturn oncommon equity repurchases some ofthe firm's outstanding shares. What is theeffect of
C13.7. A firmwithpositive net financial assets willtypically havea required returnfor equity that is greater thanthe required return for its operations. Is this correct?
C13.6. Explain whatis meant bya financing riskpremium in the equity cost of capital.When willa financing riskpremium be negative?
CllS. Canresidual operating income increase while, forthesameperiod, residual earningsdecrease?
C13.4. What drives growth in residual operating income?
C13.3. Whymight the market value of the assets of a pure investment fund that holds onlyequity securities notbe anindication of the fund's (intrinsic) value?
C13.2. If assets aremeasured at theirfair(intrinsic) value, theanalyst mustforecast that residual earnings fromthose assets will bezero.Is thiscorrect?
CI3.1. If assets are at fair market value in the balance sheet, the income reported from those assetsintheincome statement does notgiveanyinformation about thevalue of the assets. Is thiscorrect?
What does recent research reveal to be the most important component or activity in the strategic-management process?
Explain why both internal and external factors should be stated in specific terms (that is, using numbers, percentages, money ratios, and comparisons over time) to the extent possible.
Label the following as an opportunity, a strategy, or a strength.a. XYZ Inc. is hiring fifty more salespersons.b. XYZ Inc. has fifty salespersons.c. XYZ Inc.’s rival firm has only fifty salespersons.
Why it is not adequate simply to obtain competitive advantage?
Describe the content available at the Strategy Club website at www.strategyclub.com .
What is the fundamental difference between business strategy and military strategies in terms of basic assumptions?
List what you believe are the five most important lessons for business that can be garnered from The Art of War.
As cited in the chapter, famous businessman Edward Deming once said, “In God we trust. All others bring data.” What did Deming mean in terms of developing a strategic plan?
Why do many firms move too hastily from vision and mission development to devising alternative strategies?
How important do you believe “having an excellent game plan” is to winning a basketball or football game against your university’s major rival? Discuss.

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Strategic Management A Competitive Advantage Approach 17th Edition Fred David - Solutions

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