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financial statement analysis

Financial Statement Analysis And Security Valuation 4th International Edition Penman-Stephen-H, Steven Penman - Solutions

C17.17. Matching costs to revenue-the matching principle-c-is seenas producing "good quality" earnings numbers. Why?
C17.16. Therealization principle, which recognizes revenues at pointof sale,is saidto be an accounting principle thatimproves thequality of reporting. Companies cannot estimate theirfuture revenues; rather they must have a firm customer before they can recognize revenue. Do you see the realization
CI7.l5. In July 1999, Federal Reserve Chairman Alan Greenspan stated that corporate profits intheUnited States were understated, particularly in thetechnology sector.Towhat do youthink hewasreferring?
C17.14. Some firms suggest that investors focus on"pro forma" earnings rather than reportedearnings.Theirproforma earnings usually exclude amortizations of goodwill andshares oflossesin subsidiaries. Is thisgood advice?
C17.l3. A firm has a capital expenditure-to-depreciation ratio of 1.6 overthree years.What might youinferfrom thisratio?
C17.12. If yousawa deferred tax liability from depreciation increase significantly overa year, what might youconclude?
C17.11. Shares of Pitney Bowes dropped 10 percent after it announced earnings per sharefromcontinuing operations of $0.70 forits September quarterof 1999, up from $0.49 in the same quarter in the year before. Revenues also increased 8 percent.Analysts raised concerns about thequality of
CI7.IO. Excite signed a pactwithNetscape in 1999 underwhich it paid$86.1 million to sharerevenues from co-branded search-and-directory services. It wrote off twothirds ofthe cost-cor $56.8 million-against income immediately.Analysts objected. Why should they?
CI7.9. IBM reported a 3 percent increase in income for its first quarter of 2000, beating analysts' estimates. But it also reported a decline in revenue. Its stock price dropped in response to the report.What explanations would yougive forthe dropin stockpriceon an earnings increase?What is your
C17.8. Why should an analyst view an increase in deferred taxes from bad debt allowances suspiciously?
CI7.7. Why should an analyst view a large merger charge suspiciously?
C17.6. Why do analysts compare cashflow from operations with earnings to assess the quality of theearnings?
C17.5. Whyis a change intheassetturnover anindicator of future profitability?
C17.4. Increasing profit margins by underestimating expenses creates net operating assets. Is thiscorrect?
CI7.3. Adecrease in warranty liabilities increases net sales. Is thiscorrect?
C17.2. Low depreciation charges forecast losses in future income statements. Is this correct?
CI7.1. Afirm cancreate future income bytemporarily increasing itsbaddebtallowance. Exercises Is thiscorrect?
E18.5. Constructing a Value-at-Risk Profile: Nike Inc. (Medium) For fiscal year 2004, Nike reported after-tax core profit margins of 7.84 percent on an asset turnover of 2.759. An analyst forecasts that this margin and turnover will persist in the fu- ture on a sales growth rate of 5.1 percent per
E18.4. Analyzing Risk (Hard) Two firms, Firm A and Firm B, have $1,000 million invested in net operating assets in the same line of business. Firm A has $25 million in net financial obligations while Firm B has $600 million in net financial obligations. Both firms face a statutory tax rate of 36
E18.3. Ranking Firms on Risk (Medium) Below are income statements and balance sheets for three firms. Rank these firms on what you perceive to be the relative riskiness of their equity from these statements. What features in the statements determined your ranking? All numbers are in millions of
E18.2. Income Statements and Risk (Medium) The statements below are for two firms in the same line of business (in millions of dollars). FIRM A Sales Expenses $1,073 Labor and materials $536 Administration 121 Depreciation 214 Selling expenses 84 Interest expense Income before taxes Income taxes
E18.1. Balance Sheets and Risk (Easy) Below are balance sheets for two firms with similar revenues. Amounts are in millions of dollars. Which firm looks more risky for shareholders? Why? FIRM A Assets Liabilities and Equity Cash $ 17 Accounts payable $14 Accounts receivable 43 Long-term debt 200
CI8.11. Explain thedifference between Scenario AandScenario Binvesting andtherisks involved in each.
Cl8.10. Suppose one calculated the intrinsic value of two firms using residual earnings techniques withtherisk-free rateasa discount rate. Theprice-to-value (PIV) ratio of these twofirms, so calculated, should be the same if theyhave the same risk characteristics. Is thisso?
CI8.9. Should firms manage riskon behalfof theirshareholders?
CI8.8. Why mightstock returns have greater riskthanisjustified bythefundamentals of thefinn'sbusiness activities?
CI8.? Airlines aresaidtohave highoperating risk. Why?
C18.6. Explain assetturnover risk.
C18.5. Why aregrowth stocks often seen as highrisk?
C18.4. Why doesoperating liability leverage increase operating risk?
CI8.3. Canyouexplain why diversification lowers risk?
C18.2. Comment on the following statement. The challenge in measuring the required return for investing is to measure the sizeof the riskpremium over the risk-free rate, but the capita! asset pricing model largely leaves this measurement as a guessing game.
CI8.1. Why might thenormal distribution ofreturns notcharacterize theriskofinvesting in a business?
Fruit of the Loom Ltd. fared poorly from 1997 to 1999. Between April 1997 and October. 1999, its stock price dropped from $38 to $3, a 92 percent loss in market value. Fruit of the Loom manufactures men's and boys' underwear. It had an estimated 32 percent share of the US. market in 1999, second
E19.6. Credit Scoring for a Firm with a Ratings Downgrade: Maytag Corporation (Medium) Maytag Corporation is the established manufacturer of washing machines, dryers, dish- washers, and other home appliances-including the venerable Hoover vacuum cleaner. But in 2004 and 2005, the firm faced
E19.4. Z-Scoring (Easy) Below are ratios for some of the firms that have appeared in this book, for their 1998 fiscal year. Working Retained Capital Earnings Earnings before Interest and Taxes Market Value of Equity Sales Total Total Total Book Value Total Firm Assets Assets Assets of Liabilities
E19.3. Yield-to-Maturity and Required Bond Returns (Easy) After analyzing the default risk for a five-year bond with a maturity value of $1,000 and an 8 percent annual coupon, an analyst estimates the required return for the bond at 7 percent per year. The bond has just been issued at a price of
E19.2. Pro Forma Analysis and Default Points (Medium) A firm has the following balance sheet and income statement (in millions of dollars): Operating cash Receivables Inventories Plant and equipment Operating bes Long-term debt (8%) Stockholders' equity Revenues Operating expenses Operating income
E19.1. Credit Scoring: A Decline in Credit Quality? (Medium) The following numbers are extracted from the financial statements for a firm for 2008 and 2009. Amounts are in millions of dollars. 2008 2009 Sales 4,238 3,276 Earnings before interest and taxes 154 (423) Current assets 1,387 976 Current
C19.1 O. Explain thedanger posed byspecial-purpose entities.
CI9.9. What is a default strategy?
CI9.8. Why might a deferred taxliability beconsidered nota liability forcredit scoring?
C19.7. How doesproforma analysis of financial statements helpincreditanalysis?
e19.6. What is a default point?
C19.5. Distinguish a Type I errorin predicting default from a Type II error.
CI9.4. Whatis the"moral-hazard" problem withbusiness debt?
CI9.3. Describe off-balance-sheet financing.
CJ9.2. Whatis the objective in reformulating financial statements for credit analysis?How does the reformulation for credit analysis differ from that for equity analysis?
C19.1. Explain what a default premium is.
New businesses take time to get established, and the new Internet firms of the late 1990s were no exception. Internet portal firms and e-commerce firms traded at high multiples of sales on the promise of large profits, but most of them were generating losses from their sales In statements to the
E16.9. The Quality of Forecasted Residual Operating Income and Free Cash Flow (Medium) A start-up begins operations in 2009 by investing $400 million in plant and equipment. It expects to increase investment by $40 million each year, indefinitely, depreciating it straight-line over two years. The
E16.8. Research and Development Expenditures and Valuation (Medium) A new pharmaceutical firm has patented a technology and has committed to spending $350 million annually for the next five years to develop further products from the technol ogy. The program is currently spending $350 million on
E16.6. Depreciation Methods, Profitability, and Valuation (Hard) A start-up firm embarks on an investment program in 2009 to manufacture and market a new switching device to be used in communications. The program requires an initial in- vestment of $600 million in plant and equipment, increasing by
E16.5. The Accounting for Research and Development and Economic Profit Measures (Medium) Many consultants recognize that expensing R&D investments gives a poor indication of the performance of a firm or its managers because investing in R&D results in lower in- come. So they adjust GAAP accounting
E16.3. Valuation of a Going Concern under Different Accounting Methods (Medium) An entrepreneur develops a business plan that requires an initial investment of $2,200 mil- lion with a further investment of $2,200 million each year on an ongoing basis, Investment is expected to yield sales revenue
E16.2. Valuation of a Project under Different Accounting Methods (Easy) Here are some details of an investment in a project with a two-year life and a required return of 9 percent per year. Dollar amounts are in millions. Initial investment in equipment Initial investment in advertising Total
E16.1. A Simple Demonstration of the Effect of Accounting Methods on Value (Easy) You invest $100 (at time 0) and expect to receive $115 in cash in one year. Your required return is 9 percent.a. Calculate the value of your investment at time 0 using discounted cash flow techniques.b. Calculate the
CI6.15. Expensing research anddevelopment costsraisesaccounting qualityissuessimilar to thoseraised in cashaccounting. Explain.
CI6.14. OnJanuary 29, 1999, TheWall Street Journal reported: "Sears,Roebuck &Co.is moving toward moreconservative accounting methods usedbycompeting creditcardissuers, which willboostitsloanlosses byabout$200million during thenext 5 quarters." Whateffectshouldthisnewpolicy havehad on future
CI6.13. In the United Kingdom, firms revalue tangible assets upward and recognize the valueof brands on the balance sheet.Tn the UnitedStates,this accounting is not permitted. In which country would you expect the average return on common equityfor firms to be higher?
C16.12. Whatis meant by"steady state"?
C16.11. Whatis a "hidden reserve"? Whatdoesit mean to "releasehidden reserves"?
CI6.10. Firms with anticipated earnings-per-share growthare worth more. Is this statementalways correct?
CI6.9. A firm usingLIFO accounting for inventory is likely to havea lower inventory turnover ratiothanone usingFIFO. Is thiscorrect?
CI6.8. A finn thatusesUFO accounting for inventory in timesof risinginventory costs will always report lower profit margins than if it usedFIFO. Is this correct?
CI6.7. Howis it thataccounting policies affectthe measurement of residual income but the value calculated using residual income methods may not be affected by accounting policies?
C16.6. Consultants talkof "economic profit," or"economic valueadded." Whatis it?Can it be observed?
C16.5. Explain howintrinsic PIE ratiosare affected byconservative accounting (suchas expensing R&D expenditures).
CI6.4. Doesconservative accounting resultin higheror lower accounting ratesofretum?
CI6.3. Explain how intrinsic price-to-book (PIB) ratios are affected by conservative accounting (suchas expensing R&D expenditures).
CI6.2. Whyare LIFO accounting andthe expensing ofR&Dexpenditures referred to as conservative accounting policies?
C16.1. Firmswith a return on net operating assets(RNOA) that is higher than the requiredreturn on operations areaddingvaluewiththeir investments andso should tradeat a premium overtheir bookvalue. Isthisstatementcorrect?
Understanding the Business Through Reformulated Financial Statements: Chubb Corporation Chubb Corporation is a property and casualty insurance holding company providing insur- ance through its subsidiaries in the United States, Canada, Europe, and parts of Latin America and Asia, Its subsidiaries
Formed in 1837 by William Procter and James Gamble as a small family-operated soap and candle company, Procter & Gamble Co. is now a leading consumer products company with over $83 billion in revenues. Headquartered in Cincinnati, Ohio, the firm's products are sold in more than 180 countries. P&G's
E9.9. Financial Statement Reformulation for Starbucks Corporation (Medium) (This exercise builds on Exercise E8.8 in Chapter 8, but can be worked independently) Below are comparative income statements and balance sheets for Starbucks Corpora tion, the retail coffee vendor, for fiscal year ending
E9.8. Analysis of an Income Statement: Pepsico, Inc. (Easy) Pepsico, Inc. reported the following income statement for 1999 (in millions of dollars): Net sales Operating expenses Restructuring charge Operating profit Gain on asset sales Interest expense Interest income 20,367 (17,484) (65) 2,818
E9.7. Price of "Cash" and Price of the Operations: Realnetworks, Inc. (Easy) In October 2008, the 142,562 outstanding shares of Realnetworks, Inc., traded at $3.96 each. The most recent quarterly balance sheet reported $454 million in net financial assets and S876 million in ccmmon shareholders'
E9.5. Reformulation of a Balance Sheet, Income Statement, and Statement of Shareholders' Equity (Medium) The following financial statements were reported for a firm for fiscal year 2009 (in millions of dollars): Balance Sheet 2009 2008 2009 2008 Operating cash 60 50 Accounts payable 1,200 1,040
E9.4. Reformulation of a Balance Sheet and Income Statement (Easy) Reformulate the following balance sheet and income statement for a manufacturing concem. Amounts are in millions. The firm bears a 36 percent statutory tax cate. Balance Sheet Assets Operating cash Liabilities and Equity $23
E9.3. Tax Allocation: Top-Down and Bottom-Up Methods (Easy) From the following income statement (in millions), calculate operating income after tax, using both the top-down and bottom-up methods. Use a tax rate of 37 percent. Revenue Cost of goods sold Operating expenses Interest expense Income
E9.2. Tax Allocation (Easy) A firm reported $818 million of net income in its income statement after $140 million of net interest expense and income tax expense of $402 million. Calculate operating income after tax and net financial expense after tax, using a statutory tax rate of 35 percent.
E9.1. Basic Calculations (Easy)a. The following numbers were extracted from a balance sheet (in millions): Operating assets Financial assets Total Liabilities $547 145 322 Of the total liabilities, $190 million were deemed to be financing liabilities. Prepare a reformulated balance sheet that
C9.7. Whatdoesanoperating profitmargin reveal?
C9.6. 'When cana fum losethetax benefit of debt?
C9.5. 'What is meantbysaying thatdebtprovides a taxshield?
C9.4. From the pointof viewof the common shareholders, minority interest is a financial obligation. Correct?
C9.3. Classify each of the following as a financial liability, an operating liability, or neither:a. Accrued compensation.b. Deferred revenues.c. Preferred stock.d Deferred taxliability.e. Lease obligations.f. Interest-bearing notepayable.
C92. Classify eachofthe following as a financial assetor an operating asset:a. Cashina checking accountusedto paybills.b. Accounts receivable.c. Finance receivables foran automobile firm.d. Cashin 90-day interest-bearing deposits (cashequivalents).e. Debtinvestments heldto maturity.f Short-term
C9.1. Why are reformulated statements necessary to discover operating profitability?
On May 19, 2005, Maytag Corporation (MYG), the home appliance manufacturer, agreed to be acquired by Ripplewood Holdings for $1.13 billion in cash or $14 per share, a 21 per- cent premium over the closing price of $11.56 the day before. Maytag is a manufacturer of washing machines, dryers,
We are committed to managing and operating our business in a responsible and sustainable manner around the globe. This includes our commitment to environmental responsibility in all areas of our business. In June 2007, we announced an ambitious long-term goal to be the "greenest technology company
Dell's 2008 annual 10-A report begins with the following introduction to the company that explains the main features of it business model. Dell listens to customers and delivers innovative technology and services they trust and vale As a leading technology company, we offer a broad range of product
This is the final installment in a series of cases on Procter & Gamble Co. that began in Minicase 9.1 with the reformulation of financial statements and continued with a financial statement analysis in Minicases 11.1 and 12.1. Minicase 14.1 carried out a valuation of the firm, using only
E15.14. Evaluating an Acquisition: PPE, Inc. (Hard) PPE, Inc. is considering an acquisition. The acquisition, to be completed within one year, will bring the acquired firm onto PPE's balance sheet using the purchase method. Manage meat has prepared the following pro forma, which anticipates this
E15.13. A Valuation from Operating Income Growth Forecasts: Nike, Inc. (Medium) Box 15.3 in this chapter values Nike's shares using residual operating income methods.a. Modify the pro forma in Box 15.3 to forecast abnormal operating income growth, and value the shares from these forecasts.b. Apply
E15.12. One-Stop Residual Operating Income Calculation: Coca-Cola Company (Easy) The Coca-Cola Company reported an after-tax profit margin of 20.0 percent on its sales of $24,088 million in 2006. It also reported $102 million of other core income, mainly from equity investments in its battling
E15.11. Pro Forma Analysis and Valuation: Nike, Inc. (Medium) At the end of fiscal year 2008, Nike reported $5,806 million in net operating assets and common shareholders' equity of $7,797 million. Develop a pro forma and valuation at the end of fiscal year 2008 with the following forecasts. Then
E15.10. Forecasting and Valuation for General Mills, Inc. (Easy) The following are from the financial statements for General Mills (in millions): 2008 2007 Net operating assets $12,847 $12,297 Common equity 6,216 5,319 Sales 13,652 Core operating income (after tax) 1,560 At the end of fiscal year
E15.9. Comprehensive Analysis and Valuation (Hard) This exercise comes in two parts. Part I involves an analysis of a set of financial statements and Part II involves forecasting and valuation based on those financial statements. Part I: Analysi The following is a comparative balance sheet for a
E15.8. Integrity of Pro Formas (Hard) An analyst developed the following set of pro forma financial statements as an input into a valuation:(in millions of dollars) 2009A 2010E 2011E 2012E Sales 454.0 481.2 510.8 Operating expenses 408.6 433.1 459.1 Operating income 45.4 48.1 51,0 Net financial

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