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financial statement analysis
The Analysis And Use Of Financial Statements 3rd Edition Gerald I. White, Ashwinpaul C. Sondhi, Haim D. Fried - Solutions
b. Based on your answer to parta, critique the statement in the press release regarding the effect of the acquisition.e. Describe how the pro forma statements would differ of Pep- siCo were required to use the purchase method of accounting for the merger with Quaker Oats. Assume the value of Pep-
Discuss whether that statement re- flects the economics of the transaction. 6. [Purchase Method Effect on Sales Trend] Boron Lepore [BLP], which provides marketing, educational, and sales ser-
9. Immediate write-off of goodwill] On October 11. 2000. China Mobile [941] announced that it would write off HKS242 billion of goodwill resulting from the acquisition of seven wire- less networks. The total purchase price of the acquisitions was HK$256 billion.a. Compare the impact of the
10. [Goodwill impairment] Safeco [SAFC | is a large U.S.-based insurance company whose eamings were depressed by heavy competition and disappointing results from a major acquisition. Iffective March 31, 2001. Safeco elected to change its account- ing policy for assessing goodwill from one based on
11. [Acquisitions and stock prices] The following extracts are taken from a story in the Financial Times on March 29, 2001. page 15 Cnco Puts New Acquisitions on Hold Cisco Systems, the largest networking equipment com- pany, has put an informal hold on making any more ac- quisitions as a result of
11. [Acquisitions and stock prices] The following extracts are taken from a story in the Financial Times on March 29, 2001. page 15 Cnco Puts New Acquisitions on Hold Cisco Systems, the largest networking equipment com- pany, has put an informal hold on making any more ac- quisitions as a result of
a. Explain why a drop in Cisco's share price would be expected to deter it from using shares for acquisitions.b. Explain why poor industry conditions would be expected to deter Cisco from making acquisitions, whether for cash or stock
12. [Derivation of acquisition data from cash flow statement] On June 24, 1992, Roadway Services [ROAD], a large U.S. motor carrier, acquired Cole Enterprises, a regional carrier. Ex- hibit 14P-4 contains the financial statement footnote describing the transaction. Elsewhere, Roadway states that
13. [Spinoff] In February 2001 Lucent [LU] set up Agere Sys- tems [AGR] as a separate company. On April 2, 2001, the fol- lowing took place: Agere sold 600 million shares in an initial public offering at a net price of $5.77 per share. Lucent sold 90 million shares of Agere at a net price of $5.77
l. Uc>cribe the dtffcrcnce between the two reportmgmethods used to account for c~changc rate changeswlth respect to the·Exchang~ rates used to tran~latc financial >latemen!data• Mea;urcmcnt of finn cxpo,ure to exchMge mtechanges• Disposition of translation gums and losses
1. [Zero-coupon debt; CFAC adapted] Compare the effect of issuing zero-coupon debt with that of issuing full-coupon debt with the same effective interest rate on a company'sa. C'ash flow from operations over the life of the debtb. Casa flow from financing in the year of issuance, the year of
2. [Variable vs fixed-rate debt; CFA adapted] Assuming that a firm has variable-rate debt and interest rates rise, describe the effect of the rise on: (i) Net income (ii) The market value of the firm's debt EXHIBIT 10P-1 Selected Balance Sheet Data, December 31, 1998 and 1999 (in $millions) AMR
3. [Current liabilities. customer advances] Exhibit 10P 1 con- tains selected balance sheet data for AMR (American Airlines) and US Airways [L] for 1998 and 1999.a. Calculate AMR's reported working capital and its current. quick, and cash ratios for both years.b. The air traffic liability primarily
4. [Zero-coupon bonds] The Null Company issued a zero- coupon bond on January 1. 2000, due December 31, 2004 The face value of the bond was $100,000. The bond was issued at an effective rate of 12% (compounded annually).a. Calculate the cash proceeds of the bond issue.
b. Complete the following table on a pretax basis, assuming that all interest is paid in the year it is due. 2000 2001 2002 2003 2004 Earnings before interest and taxes Cash flow from 550 000 $50 000 $50,000 $50,000 $50,000 operations before interest and taxes 60,000 60.000 60,000 60,000 60,000
c. Assume that Null had raised the same cash proceeds with a conventional bond issued at par. paying interest annual y and the principal at maturity Complete the following table, under the assumptions in part b: 2000 2001 2002 2003 2004 barungs before interest and taxes $50,000 $50 000 $50 000
5. [Zero-coupon bond; foreign currency debt] Roche has out- standing zero-coupon U.S. dollar notes. with a $2 15 billion face value duc 2010. that were issued with a 70 yield to maturity They are carried at the following amounts 12-31-98 12-31-99 Carrying amount (CHF millions) 1.282 1.618 Exchange
b. Explain the difference between your answer to part a and the $2 15 billion face amounts of the notes
c. Estimate the interest expense (in CHF) for these notes for 1999
d. Using your answer for parte and the December 31, 1998 car- rying value, estimate the carrying amount of the notes (in CF) at December 31, 1999c. Provide two possible explanations for the difference between your answer to part d and the actual carrying amount in Swiss francs at December 31,
6. [Understanding bond relationships; coupon versus effective interest] Th Walk & Field Co. has outstanding bonds originallyissued at a discount. During 2000, the unamortized bend dis- count decreased from $8,652 to $7,290 Annual interest paid was $7,200 The market rate of interest was 12% when the
7. [Fixed-rate versus variable-rate debt; effect of interest rate swap] Financial Federal [1] firances industrial and commer- cial equipment through installment sales and leasing pro- grams. FIF obtains funds from bank loans and bonds, which have the following interest rate characteristics (amounts
8. [Interest rate swaps extention of Problem 10-7] FIF's fis- cal 2000 annual report also discloses the following information regarding interest rate swaps Notional amount Weighted-average receive rate Weighted-average pay rate Weighted-average remaining term (in months) 1999 2000 $25,000 $25,000
9. [Foreign currency debt] Bristol-Myers [BMY] reported the following components of its long-term debt (in Smilhons) December 31 2 14 yen notes, due 2005 1 73% yen notes. due 2003 1998 1999 $55 $62 54 62 The SU.S. equaled 113.60 Japanese yen at December 31. 1998 and 102 51 at December 31, 1999a.
b. Compute the percentage change in the outstanding debt in yer during 1999 for both issues.
c. Assuming that no new bonds were issued, state one conclu- sion that can be drawn from your answers to parts a andb. d. State two possible motivations for Bristol-Myers, an Ameri- can company, to issue debt in Japanese yen
10. [Convertible debt] Note 5 of Takeda's annual report states that the company had convertible bonds outstanding at March 31, 1998 but none outstanding at March 31, 1999 From the statement of stockholders' equity and cash flow statement we can deduce that most of the ponds (more than 22 billion
11. [Foreign currency convertible debt] In April 2000, Roche 15- sued nearly 105 billion of deht, convertible into Roche sharesThe coupon was .25% with a maturity of 2005 The issuc price was 96.4% of par value (face amount) The conversion price was set at a premium of 25% above the market price of
12. [Zero-coupon convertible debt with put option! In February 1998, Network Associates (NET) issued $885 million principal amount of zero-coupon bonds. with a maturity of 2018. The bonds were issued at a price of 39.106 (percent of par) to yield 4.75% to maturity. The holders of the bonds have the
13. [Exchangeable debt] In May 2000. Munich Re [MUV2] 15- sued 1.15 billion of exchangeable notes due in 2005 Investors received an interest rate of 1% and the right to receive shares of Allianz instead of cash at maturity. The initial conversion pre- mium was 28%. The Financial Times reported
14. [Perpetual debt] In 1986. PepsiCo [PEP] issued 400 million Swiss franc bonds with no maturity date. At the end of each 10- year period, PepsiCo and the bondholders each have the right to cause redemption of the bonds If rot redeemed, the coupon rate is adjusted based on the yield of 10-year U.S
15. [Catastrophe bonds] In March 2000, Atlas Re, an affiliate of the French insurance company SCOR ISC O] issued three classes of three-year "catastrophe bonds The three classes have coupon rates ranging from 270 to 1400 basis points (2.7% to 14%) in excess of the LIBOR rate However, in the event
16. Prefened shares] Texaco's December 31. 1999 balance sheet shows $300 million of preferied shares outstanding The characteristics of these shares are reported in Note 13.a. State the appropriate classification for the preferred shares (debt or equity) and justify your choiceb. On page 26 of its
17. [Interest rate sensitivity] Wal-Mart [WMT] is the largest re- tailer in the world Its annual report for the year ended January 31. 2000 contains the following information about its debt Amounts in Smillions 1-31-99 1-31-00 Long-term, fixed-rate debt $7.808 $15.636 Pair value of long-term debt
18. [Interest rate swaps; extension of Problem 10-17] Wal-Mart also entered into interest rate swaps under which it received. fixed rates and paid variable rates.a. Discuss the likely motivation for entering into these swaps.b. Describe two risks that Wal-Mart assumed by entering into these
19. [Market value of debt versus book value; interest rate sensi- tivity] AMR [AMR] is the parent company of American Air- lines. Exhibit 10P-2 contains extracts from Note 6 of AMR'S 1999 annual reporta. Based on the fair value data, state whether the long-term rates used to determine fair value
1. Di;cuss the mottvatwn> for leasing assets as oppo:.ed to buying them and the mcentives for reporting the lease> as operalm!J leases rather than ca,~•talleases.
2. Compare the financtal sMement effects of operatmg leases and mpital lea«'< from both a lessee and lessor pcrspect•ve
J. Demonstrate how operating lea~e-. keep substantial portion~ of a firm's operating capacity and debt off the balance -.heet.
S. Discuss the similarity between OBS lea~es and other OBS activities such as wke-or-pay unJ throughput arrangements and adjust reported financial statement~and ratios for these activities.
6. t.xplam the impact of transfers of receivable;· on reported cash flow from operations and shol1-tenn debt and how to undot~ose effects.
7. Illustrate the adjustments required to reflect the OBS debt of the subsidiarie~ and affiliates of a finn.
8. Compare lessor financial reporting for sales-type leases and dtrect financing leases.
1. [Lease classification and financial statement effects; CFA adapted] On January 1, 2001, a company entered into a capital lease, recording a balance sheet obligation of $10,000, using an interest rate of 12%. The lease payment for 2001 was $1,300. Compute each of the following (i) Interest
2. [Off-balance-sheet financing techniques; CFA adapted] Describe each of the following and explain why they are consid- cred off-balance-sheet financing techniques: (i) Take-or-pay arrangements (i) Sales of receivables (iii) Joint ventures
3. [Leases; effect of interest rate] For assets under capital leases, lease expense has two components: interest and amortiza- tion (depreciation). Assume that a lease can be capitalized at ei- ther 9% or 10%. Compare the effects of this choice on the lessee in the first year and over the life of
4. [Analysis of lease terms] The Pallavi Company leases equipment (fair market value of $125,000) from Priyanka Corp. The lease contains a bargain purchase option and requires 14 annual minimum lease payments of $15,500 payable at the end of each year. The economic life of the equipment is 20
5. Analysis of lessce] The Tolrem Company has decided to lease an airplane on January 1, 2002. The firm and its lessor have not yet decided the terms of the lease. Assume that the terms canbe adjusted to permit Tolrem to either capitalize the lease or record it as an operating lease.a. State the
6. [Leases, tax effects, cash flows and deferred taxes] On Janu- ary 1, 2002, two identical companies, Caramino Corp. and Aglian ico, Inc., lease similar assets with the following characteristics: (i) Economic life is eight years. (ii) Lease term is five years. (iii) Lease payments of $10,000 per
b. Compule the deferred taxes resulting from the lease for each firm in the first year of the lease.
c. Compute the effect of the lease on the 2002 reported cash flow from operations for both firms. Explain the difference.
d. Compute the impact of the lease on the 2002 reported financ- ing cash flows of both firms. Explain the difference.e. Compute the impact of the lease on the 2002 reported cash flow for investing of both firms. Explain the difference.f. Using your answers to parts throughe, compute the effect of
7. [Lease capitalization] In 1999, Liberty Bancorp [LIBB] leased new property and accounted for the lease as a capital lease. Until 1999. it had reported all of its leased assets as op- erating leases. The following information with respect to the capital lease was obtained from the company's 1999
b. The company states that it amortizes its capital leases over the term of the lease. Determine the amortization expense for 1999 and the term of the lease. Compute the total expense for 1999 as a result of the capital lease.
c. Explain how the capital lease affected the 1999 cash flow statement.
d. Describe the adjustment to the company's 1999 free cash flows that should be made for the capital lease.e. Assuming that the lease was reported as an operating lease, determine. (i) Lease expense for 1999 (ii) The effect on the cash flow statementf. Estimate the interest rate that Liberty used
8. [Effect of lease capitalization on ratios] Exhibit 11P-1 pre- sents selected 1999 financial data provided by The Limited [LTD]. (Note. Use 6% as the appropriate interest rate for pre- sent-value calculations.)a. In its 10-K filing, The Limited provides an adjusted "carnings to fixed charge
11. [Take-ot-pay agreement: follow-up to Problem 11-101 BASH also reports long-term purchase agreements for raw mate- rials, with the following required payments (in millions): 2000 2001 2002 Capital lease MLPs 1,718 1,740 1,433 2003 2004 Thereafter Capital lease MLPs 1 292 1,370 12,128a. Compute
12. [Sale of receivables; cash flow effects] The following footnote appeared in Arkla Inc.'s March 31, 1995 10-Q in- terim report Under a March 1994 agreement (the "Agreement"), the Company sells an undivided interest (currently limited to a maximum of $235 million) in a designated pool of accounts
13. [Sale of receivables: ratio effects] Pennzoil-Quaker State [PZL] sells certain of its accounts receivable through its wholly owned subsidiary, Pennzoil Receivables Company, a special limited-purpose corporation The company's net accounts re- cervables sold under this facility totaled $153.1,
14. [Sale of receivables; ratio and cash flow effects] Foster Wheeler [FWC] entered into arrangements to sell receivables in 1998 and 1999. The accounts receivable footnote in the firm's 1999 Annual Report noted that As of December 31, 1999 and December 25, 1998, $50 million and $38.4 million,
15. [Sale of receivables] Nash-Finch [NAFC] began selling re- ceivables through its subsidiary, Nash-Finch Funding (Funding), in 1997 Funding sells most of these receivables to an outside purchaser. Nash-Finch reported the following year-end balances (Sthousands): 1997 1998 1999 Receivables
16. [Take-or-pay agreements] The following paragraphs were extracted from an article in the Financial Times on March 4, 1903 Brazilians Cannot Afford to Cut Aluminum Losses Any hopes that Brazil will this year relieve the pressure of oversupply on the languishing aluminum market by cutting its
17. [Sales of receivables and investment in affiliates; extension of Lucent example] As noted in chapter footnote 16 and Exhibit 11-3, in creating the QSPE to sell its receivables, Lucent trans- ferred $700 million in receivables to the QSPE as collateral for the receivables sold. These receivables
18. [Off-balance-sheet obligations; CFAC adapted] Extracts from The Bowie Company's December 31, 2001. balance sheet and income statement are presented in the following schedule, along with its interest coverage ratio: Debt Equity Interest expense Times interest earned $12 million 20 5.0X The Bowie
c. Discuss the reasons (both financial and operating) why Bowie may have entered into these arrangements.
d. Describe the additional information required to fully evaluate the impact of these commitments on Bowie's current finan- cial condition and future operating trends (Problems 11-19 to 11-22 are based on Sears Roebuck Problems 11-20 to 11-22 require data from the company's .999 annual report)
19. [Capitalization of operating leases] Leasing is prevalent among department stores. The following information with re- spect to operating and capital leases was taken from the 1999 an- nual reports of Sears Roebuck and JC. Penney (JCP]. Note that JCP discloses the present value (ard interest
b. Estimate the interest rate that Sears Roebuck uses to discount its capital leases.
c. Compare the rate estimated in part b with the rate used by JC Penney.
d. Use the rate determined in part b to estimate the present value of Sears's operating leases.
20. [Effect of leases; extension of Problem 11-19] Using infor- mation from the Scars financial statements and your answers to Problem 11-19. adjust the company's assets and debt for its op- erating lease obligations and recompute its 1999 (1) Current ratio (ii) Debt-to-equity ratio (iii) Pretax
21. [Securitization of receivables] Sears engages in securitiza- tion of its credit card receivables. (Sec MDA "Analysis of Con- solidated Financial Position") Calculate the effect of its securitization program on its 1999. (i) Current ratio (ii) Ratio of CFO to current liabilities (iii)
22. [Off-balance-sheet adjustments; extension of Problems 11-19 to 11-21] Use your answers to Problems 11-19 to 11-21 to calcu- late the combined effects of Sear's credit card securitizations and operating leases on its current and debt-to-equity ratios.
23. [Capitalization of operating leases] Texaco reports a guaran- tee of $336 million in its "Commitments and Contingencies" footnote (see Exhibit 11-6) relating to the 1999 operating leases of its 44%-owned affiliate, Equilon. Equilon's minimum lease payments as of December 31, 1999 for its
b. Compare this rate to the rates calculated for Texaco in the chapter.
e. Explain why these rates would differ.
24. [Analysis of lessor] Carignane Corp., a manufacturer/lessor, enters into a sales-type lease agreement with Mourvedre, Inc., as lessee. The lessor capitalizes the lease rather than reporting it as an operating lease. Describe the effect (lower, higher, or none) of this choice on the following
25. [Analysis of lessor and lessee] On January 1, 2001, the Mal- bec Company leases a Willmess winepress to the Baldes Group under the following conditions: (i) Annual lease payments are $20,000 for 20 years. (ii) At the end of the lease term, the press is expected to have a value of $5,500 (iii)
b. Assume that Baldes capitalizes the lease. List the financial statement accounts affected (at January 1, 2001) by that deci- sion and calculate each effect.
1. Differentiate between defined benefit and defined contribution pension plans.
2. Examine the components of pension cost, determine their significance. and forecast their trend.
3. Compute the funded status of a defined benefit pen- sion plan and explain why the balance sheet does not fully report that status.
4. Compute the balance sheet adjustments required to reflect the actual plan status,
5. Explain how the provisions of SFAS 87 and IAS 19 smooth the financial reporting of defined benefit pension plans.
6. Define the key assumptions used in the accounting for defined benefit plans and explain how the choice of assumptions affects the reported plan status, pen- sion cost, and the accrued benefit liability.
7. Explam how pension plans are affected by curtail- ments and settlements and how these effects are re- ported in the financial statements.
8. Explain how acquisitions and divestitures affect pension plans.
9. Discuss the significant differences between JAS 19 and SFAS 87.
10. Explain the similarities and differences between de- fined benefit pension plans and postretirement med- ical and life insurance plans.
11. Discuss the importance of the health care cost trend rate to the accounting for and analysis of postretire- ment health care plans.
12. Discuss the accounting for stock compensation plans and how the pro forma data required by SFAS 123 can be used for analysis.
1. [Effect of pension plan assumptions, CFAO adapted] Chalker Industries maintains a defined benefit pension plan cov- erung all its U.S. employeesa. Discuss the effect of an increase in the discount rate on: (i) The projected benefit obligation in the year of the change (ii) Pension cost in the
b. Discuss the effect of an increase in the assumed rate of com- pensation growth on: (i) The projected benefit obligation in the year of the change (1) Pension cost in the year of the change (iii) Pension cost in the year following the change
c. Discuss the effect of an increase in the expected rate of return on plan assets on. (i) The projected benefit obligation in the year of the change (ii) Pension cost in the year of the change (ili) Pension cost in the year following the change
2. LAnalysis of pension plan disclosures. Westvaco] Use Note M of Westvaco's 1999 financial state- ments to answer the following questions:a. State the most likely reason for the actuarial loss (gain) in 1998 (1999).
b. Explain why the amortization of prior service cost rose from 1997 to 1999.
c. Explain the change in the unrecognized actuarial gain during 1999. calculating each componentd. Compute the actual rate (%) of return on assets for 1998 and 1999 and compare it to the expected return.
e. Explain why service cost rose in 1998 although the number of employees declinedf. Estimate the effect on 1999 pension cost of the changes in the expected return on plan assets in 1998 and 1999.
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