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financial statement analysis

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

15.7. Valuing a Property-Casualty Insurer (Hard) The following summarizes the balance sheet and income statement for a property-casualty insurer. Numbers are in millions of dollars. Balance Sheet 2009 2008 Operating assets associated with underwriting $2,450 $2,300 Unpaid daims and unearned
E15.6. Forecasting and Valuation (Medium) The reformulated balance sheet and income statement for a firm's 2009 fiscal year are given below Sales Comprehensive Income Statement Operating expenses Of before stock compensation Stock option compensation Operating income Interest expense Interest
E15.5. Evaluating a Marketing Plan (Medium) A firm with a current return on net operating assets of 15 percent anticipates growth in sales of 6 percent per year from its current net operating asset base of $498 million. It also anticipates that sales will deliver 7.5 percent after-tax profit
E15.4. Analysis of Value Added (Medium) A firm has the following summary balance sheet (in millions of dollars):Net operating assets Net financial obligations Common shareholders' equity 441 52 389 The firm is currently earning a return on net operating assets (RNOA) of 14 percent from sales of
E15.3. Forecasting Free Cash Flows and Residual Operating Income, and Valuing a Firm (Medium) The following forecasts were prepared in 2008 for a firm with a cost of capital for its oper- ations of 12 percent. Amounts are in millions of dollars. Year 2009E 2010E 2011E 2012E 2013E Dividends 70 75 75
E15.1. A One-Stop Forecast of Residual Operating Income (Easy) An analyst predicted the following: 1. Sales of $1,276 million. 2. Core profit margin of 5 percent. 3. 4. Asset turnover of 2.2. Core other operating income and unusual items are zero. The firm's required return for operations is 9
C15.l0. Why might the shares of the acquiring finn in an acquisition decline on announcement of the acquisition?
C15.9. "When mightmanagement of a firm consider a leveraged buyout?
CI5.8. "Why musttheeffectof'a merger or acquisition onshareholder valuebe calculated ona per-share basis?
CIS.7. Whatis an unarticulated strategy?
C15.6. Whatis a red-flag indicator?
C15A. Whatis meantby the"integrity" of a pro forma?CIS.5. Forecasted dividends affectforecasted shareholders' equitybut do not affectthe value calculated fromforecasted financial statements. Why?
C15.2. Explain why a fade diagram is helpful for forecasting.CIS.3. Whatfactors determine the rate at whichhigh operational profitability declines over time?
CIS.l. "Why is it important to understand the "business concept" before valuing a firm?
In an article in Barron's on April 21, 2008, a commentator remarked, "As one of the world's largest makers of bathroom tissue and baby diapers, Kimberly-Clark knows a thing or two about bottuma. Lately, however, shares of the venerable household-products company, whose Kleenex brand is virtually
PepsiCo, Inc. (PEP) is a global snack and beverage company operating in nearly 200 coun tries. It is organized into four divisions: Frito-Lay North America, PepsiCo Beverage North America, PepsiCo International, and Quaker foods. Products include convenience snacks, sweet and grain-based snacks,
Cisco Systems, Inc. (CSCO), manufactures and sells networking and communications equipment for transporting data, voice, and video and provides services related to that equip- ment. Its products include routing and switching devices, home and office networking equipment, Internet protocol,
E5.18. Impairment of Goodwill (Hard) A firm made an acquisition at the end of 2008 and recorded the acquisition cost of $428 million on its balance sheet as tangible assets of $349 million and goodwill of $79 million. The firm used a required return of 10 percent as a hurdle rate when evaluating
E5.17. Residual Earnings Valuation and Accounting Methods (Hard) Refer back to the valuation in Exercise 5.3. In that pro forma, an analyst forecast $388 mil- lion of earnings for 2010 on a book value at the end of 2009 of $4,310 million, that is, a return on common equity of 9 percent. The
E5.16. Valuing Dividends or Return on Equity: General Motors Corp (Easy) In April 2005, General Motors traded at $28 per share on book value of $49 per share. Analysts were estimating that GM would earn 69 cents per share for the year ending December 2005. The firm was paying an annual dividend at
E5.15. The Expected Return for the S&P 500 (Medium) On January 1, 2008, the S&P 500 index stood at 1468 with a price-to-book ratio of 2.6. Expected earnings for the index for calendar year 2008 were 72.56. These earnings estimates, compiled from analysts' consensus earnings forecasts for the 500
E5.14. Reverse Engineering Growth Forecasts for the S&P 500 Index (Medium) With the S&P price index at 1270 in early 2006, the S&P 500 stocks traded at 2.5 times book value. On most recent (2005) annual earnings, the stocks in the index earned a weighted average return on their common equity of 18
E5.13. Building Blocks for a Valuation: General Electric Co. (Medium) General Electric Co. reported a per-sbare book value of $10.47 in its balance sheet on December 31, 2004. In early 2005, analysts were forecasting consensus earnings per share of $1.71 for 2005 and $1.96 for 2006.a. Calculate the
E5.12. Sellers Wants to Buy (Medium) Mark Sellers, a hedge fund manager with Sellers Capital in Chicago, wrote a piece in the Financial Times on September 9, 2006, arguing that Home Depot, the warehouse retailer, was worth $50 per share. Home Depot traded at $34 per share at the time. Analysts were
E5.11. Valuing Dell, Inc. (Easy) In September 2008 the shares of Dell, Inc., the computer maker, traded at $20.50 each. An- alysts were forecasting earnings per share of $1.47 for fiscal year 2009 and $1.77 for 2010. Refer to Dell's balance sheet in Exhibit 2.1 in Chapter 2 to calculate its book
E5.10. Residual Earnings Valuation: Black Hills Corp (Easy) Black Hills Corporation is a diversified energy corporation and a public utility bolding com- pany. The following gives the firm's earnings per share and dividends per share for the years 2000-2004. 1999 2000 2001 2002 2003 2004 EPS 2.39
E5.9. Reverse Engineering (Easy) A share traded at $26 at the end of 2009 with a price-to-book ratio of 2.0. Analysts are forecasting earnings per share of $2.60 for 2010. The required equity return is 10 percent. What is growth in residual earnings that the market expects beyond 2010? Applications
E5.8. Creating Earnings and Valuing Created Earnings (Medium) The prototype one-period project at the beginning of the chapter was booked at its historical cost of $400. Suppose, instead, that the accountant wrote down the investment to $360 on the balance sheet at the beginning of the period. See
E5.7. Using Accounting-Based Techniques to Measure Value Added for a Going Concern (Medium) A new firm announces that it will invest $150 million in projects each year forever. All projects are expected to generate a 15 percent rate of return on its beginning-of-period book value each year for five
E5.5. Residual Earnings Valuation and Return on Common Equity (Medium) A firm with a book value of $15.60 per share and 100 percent dividend payout is expected to have a return on common equity of 15 percent per year indefinitely in the future. Its cost of equity capital is 10 percent.a. Calculate
E5.4. Residual Earnings Valuation and Target Prices (Medium) The following forecasts of earnings per share (EPS) and dividend per share (DPS) were made at the end of 2009 for a firm with a book value per share of $22.00: EPS DPS 2010E 2011E 2012 2013E 2014E 3.90 3.70 3.31 3.59 3.90 1.00 1.00 1.00
E5.3. A Residual Earnings Valuation (Easy) An analyst presents you with the following pro forma (in millions of dollars) that gives her forecast of earnings and dividends for 2010-2014. She asks you to value the 1,380 million shares outstanding at the end of 2009, when common shareholders' equity
E5.2. ROCE and Valuation (Easy) The following are ROCE forecasts made for a firm at the end of 2009. 2010 2011 2012 Return of common equity (OCE) 12.0% 12.0% 12.0%ROCE is expected to continue at the same level after 2012. The firm reported book value of common equity of $3.2 billion at the end of
E5.1. Forecasting Return on Common Equity and Residual Earnings (Easy) The following are earnings and dividend forecasts made at the end of 2009 for a firm with $20.00 book value per common share at that time. The firm has a required equity return of 10 percent per year. 2010 2011 2012 EPS DPS 3.00
C5.9. Comment On the following: "ABC Company is generating negative free cashflow andis likelyto doso forthe foreseeable future. Anyone willing to paymore than book value needs theirheadread."
C5.8. When an analyst forecasts earnings, it mustbe comprehensive earnings. Why?
C5.7. Anadvocate ofdiscounted cashflow analysis says, "Residua! earnings valuation does notwork wellforcompanies likeCoca-Cola, Cisco Systems, or Merck, which have substantial assets, like brands, R&D assets, andentrepreneurial know-how off the books. Alowbookvalue mustgive youa low valuation."
C5.6. Look attheCase 3 valuation ofDell, Inc., inthechapter. Why areresidual earnings increasing after2002, even though return oncommon equity (RaCE)isfairly constant?
C5.5. Afirm cannot maintain anROCE lessthantherequired return andstayinbusiness indefinitely. Trueor false?
C5.4. Asharetradesat a price-to-book ratioof 0.7.Ananalyst whoforecasts an ROCE of 12 percent each year in the future, and sets the required equity return at 10percent, recommends a hold position. Doeshis recommendation agree with his forecast?
C5.3. Telesoft Corp.traded ata price-to-book ratioof 0.98 inMay1999 afterreporting an RaCE of 52.2 percent. Does the market regard this ROCE as normal, unusually high, or unusually low?
C5.2. Jetform Corporation traded at a price-to-book ratioof 1.01 in May 1999.1ts most recently reported ROCE was 10.1 percent, andit isdeemed to have a required equity returnof 10percent. What is yourbestguess as to theROCE expected forthe next fiscal year?
C5.1. Information indicates thata firm willearna return oncommon equity above itscost of equity capital in all years in the future, but its shares trade below bookvalue.Those shares mustbe mispriced. Trueor false?
Financial statements for the Procter & Gamble Co. are presented in Exhibit 9.15 in Chap- ter 9. If you worked Minicase 9.1, you will have reformulated the statements in preparation for financial statement analysis. If not, do so now. Proceed to carry out a comprehensive profitability analysis for
E11.10. Operating Profitability Analysis: Home Depot, Inc. (Medium) Comparative balance sheets and income statements for fiscal year ended 2005 are given below for the warehouse retailer Home Depot. Amounts are in millions, except per-share data.a. Reformulate the 2005 and 2004 income statements
E11.9. Financial Statement Reformulation and Profitability Analysis for Starbucks Corporation (Medium) Refer to the financial statements for Starbucks, the coffee vendor, in Exercise E9.9 in Chapter 9. Be sure to read the notes under the financial statements.a. Prepare a reformulated income
E11.8. A What-If Question: Grocery Retailers (Medium) In the late 1990s, many grocery supermarkets shifted from regular storewide sales to issuing membership in discount and points programs, much like frequent flyer programs run by the airlines. A supermarket chain with $120 million in annual sales
E11.6. Profitability Measures for Kimberly-Clark Corporation (Easy). 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). 2007 2006
E11.5. Profit Margins, Asset Turnovers, and Return on Net Operating Assets: A What-If Question (Medium) A firm earns a profit margin of 3.8 percent on sales of $435 million and employs net oper-1 ating assets of $150 million to do so. It considers adding another product line that will earn a 4.8
E11.4. Relationship between Rates of Return and Leverage (Medium) &. A firm has a return on common equity of 13.4 percent, a net after-tax borrowing cost of 4.5 percent, and a return of 11.2 percent on net operating assets of $405 million. What is the firm's financial leverage?b. The same firm has
E11.3. Reformulation and Analysis of Financial Statements (Medium) This exercise continues Exercise 9.5 in Chapter 9. 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
E11.2. First-Level Analysis of Financial Statements (Easy) A firm whose shares traded at three times their book value on December 31, 2008, had the accompanying financial statements. Amounts are in millions of dollars. The firm's marginal tax rate is 33 percent. There are no dirty-surplus income
E11.1. Leveraging Equations (Easy) The following information is from reformulated financial statements (in millions of dollars): 2008 2007 Operating assets $2,000 $2,700 Short-term debt securities 400 100 Operating liabilities (100) (300) Bonds payable 11,400) (1,300) Book value $900 1,200 Sales
C11.12. Lowprofit margins always imply low return onnetoperating assets. Trueor false?
CII.II. Return on total assets (ROA) isa common measure of profitability. Thehistorical average is about 7.0 percent. The historical yield on corporate bonds is about 6.6 percent. Why is the ROA so low? Would not investors expect more than a 0.4 percent higher return on risky operations?
e11.10. Some retail analysts use a measure called "inventory yield," calculated as gross profit-to-inventory. What doesthismeasure tell you?
CII.9. Why might operating losses increase after-tax borrowing cost?
C11.8. A firm states that one of its goals is to earn a return on common equity of 17-20percent. What is wrong withsettinga goalintermsof returnon common equity?
CII.7. A reduction in the advertising expense ratioincreases return on common equity andshare value. Correct?
C11.6. Afirm should always purchase inventory andsupplies On creditratherthanpaying cash. Correct?
C11.5. Explain why operating liabilities might lever upthereturn onnetoperating assets.
CllA. Explain why borrowing mightlever up thereturn oncommon equity.
C11.3. Statewhether the following measures drive return on common equity (ROCE)positively, negatively, or depending on thecircumstances:a. Gross margin.b. Advertising expense ratio.c. Netborrowing cost.d. Operating liability leverage.e. Operating liability leverage spread.f. Financial leverage.g.
C11.2. Underwhat conditions would a firm's return on net operating assets (RNOA) be equalto its return on operating assets (ROOA)?
Cll.1. Under what conditions would a firm's return oncommon equity (RaCE)beequal to its return on netoperating assets (RNOA)?
E7.8. 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).Operating
E7.7. 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,
E7.6. 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,
E7.5. 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. Income Statement Six Months to June 30, 2009 Revenues A Pperating expenses Cost of sales 2,453
E7.4. Using Accounting Relations (Medium)Beloware a balancesheetandan income statement thathavebeenreformulated according to the templates laidout in this chapter.Balance Sheet Assets Liabilities and Equity 2009 2008 2009 2008 Operating assets Financial assets 205.3 189.9 Operating liabilities 40.6
E7.3. Balance Sheet and Income Statement Relations (Easy)a. AfirmholdingS432 million in interest-bearing financial assetsandwithfinancing debt of $1,891 million, reported shareholders' equity of $597 million. Whatwere its net financial assets? Whatwereits net operating assets?b. The same finn
E7.2. Applying the Treasurer's Rule (Medium)a. Afinn generated freecash flow of $2,348 million andpaid net interest of $23million after tax. It paid a dividend of $14 million and issuedshares for $54 million. There wereno sharerepurchases. Whatdid the treasurer do withthe remaining cashflow and
E7.1. Applying the Cash Conservation Equation (Easy)a. Afinn generated $143million in freecashflow and paida net dividend of $49million to shareholders. Howmuchwaspaidto debtholders anddebtissuers?b. A finn paid a dividend to shareholders of $162 million and repurchased stock for$53million.
C7.l L Freecashflowdoesnot affectcommonshareholders' equity. Trueor false?
C7.10. Whatdrives net financial obligations?
C7.9. Whatdrivesnet operatingassets?
C7.8. Whatdrivesdividends?
C7.7. Whatdrivesfree cashflow?
C7.6. If an analyst has reformulated balancesheetsand income statements, shedoesnot needa cash flow statement to calculatefreecash flow. Trueor false?
C7.5. Distinguish an operating liabilityfroma financial liability.
C7.4. Distinguish an operating asset froma financial asset.
C7.3. Howcan a firm paya dividend withzerofree cash flow?
C7.2. A firm has positive free cash flow and a net dividend to shareholders that is less than free cash flow. Whatmust it do withthe excessof the free cash flow overthe dividend?
C7.1. Whycan freecash flow be regarded as a dividend, that is, as a distribution of value ratherthan the valuecreated?
Valuation models can be dangerous if used naively: An analyst can plug in any growth rate or required return estimate to get a desired valuation. Indeed, a valuation model can be a vehicle to build speculation into the valuatico: Choose a speculative growth rate-or speculative near-term
PepsiCo, Inc. (PEP), is a global snack and beverage company operating in nearly 200 coun- tries. It is organized into four divisions: Frito-Lay North America, PepsiCo Beverage North America, PepsiCo International, and Quaker foods. Products include convenience snacks, sweet and grain-based snacks,
Cisco Systems, Inc. (CSCO), manufactures and sells networking and communications equip- ment for transporting data, voice, and video and provides services related to that equip- ment. Its products include routing and switching devices, home and office networking equipment; and Internet protocol,
E6.17. Is a Normal Forward P/E Ratio Appropriate? Maytag Corporation (Easy) A share of Maytag Corp., another appliance manufacturer, traded at $28.80 in January 2003. Analysts were forecasting earnings per share of $2.94 for 2003 and $3.03 for 2004, with dividends per share of 72 cents indicated
E6.16. Abnormal Earnings Growth Valuation and Accounting Methods (Hard) Refer back to the valuation in Exercise E5. 3. In the pro forma there, an analyst forecasted earnings of $388 million for 2010. The forecast was made at the end of 2009 based on pre- liminary reports from the firm.. When the
E6.15. Using Earnings Growth Forecasts to Challenge a Stock Price: Toro Company (Medium) Toro Company, a lawn products maker based in Minnesota, traded at $55 per share in October 2002. The firm had maintained a 20 percent annual EPS growth rate over the pre- vious five years, and analysts were
E6.14. Inferring Implied EPS Growth Rates: Kimberly-Clark Corporation (Medium) In March 2005, analysts were forecasting consensus earnings per share for Kimberly Clack (KMB) of $3.81 for fiscal year ending December 31, 2005, and $4.14 for 2006, up from $3.64 for 2004. KMB traded at $64.81 per share
E6.13. Valuation of Microsoft Corporation (Medium) In 2006, some fundamental investors believed that Microsoft, after being overpriced in the stock market for many years, was now a firm to bay. Microsoft's shares traded at $27.20 on September 26, 2006, down from a peak of $60 (split-adjusted) in
E6.12. Challenging the Level of the S&P 500 Index with Analysts' Forecasts (Medium) The S&P 500 index stood at 127] in early 2006. Based on analysts' consensus EPS fore- casts for calendar year 2006, the forward P/E ratio for the index was 15.0 at the time. Those same analysts were giving the S&P
E6.11. Plotting Earnings Implied Growth Rates for the S&P 500 (Medium) This exercise extends the reverse engineering example for the S&P 500 in this chapter. At the end of 2003, the S&P 500 index stood at 1000. The chief economist of a leading Wall Street investment bank was forecasting 2004
E6.10. A Normal P/E for General Electric? (Easy) In early 2008, General Electric (GE) shares were trading at $26.75 each. Analysts were forecasting $2.21 in EPS for 2008 and $2.30 for 2009. A dividend of $1.24 was indicated for 2008. Use a required return of 9 percent for the questions below. 2.
E6.9. Residual Earnings and Abnormal Earnings Growth: IBM (Medium) Consider the following pro forma for International Business Machines (IBM) based on analysts' forecasts in early 2003. 2003E 2004E Next Three Years Earnings per share 4.32 5.03 Growth at 11% Dividends per share 0.60 0.67 Growth at
E6.8. Calculating Cum-Dividend Earnings: General Mills (Easy) General Mills reported earnings and paid dividends from 2004 to 2008 as follows: 2004 2005 2006 2007 2008 Basic EPS 2.82 DPS 334 3.05 3.30 3.86 1.10 1.24 1.34 144 1.57 Calculate cum-dividend earnings for General Mills for each year,
E6.7. Calculating Cum-Dividend Earnings Growth Rates Nike (Easy) In early fiscal year 2009, analysts were forecasting $3.90 for Nike's earnings per share for the fiscal year ending May 2009 and $4.45 for 2010, with a dividend per share of 92 cents expected for 2009. Compare the cum-dividend
6.6. Normal P/E Ratios (Easy) Prepare a schedule that gives the normal trailing and forward P/E ratios for the following levels of the cost of equity capital: &, 9, 10, 11, 12, 13, 14, 15, and 16 percent. Applications
E6.5. Dividend Displacement and Value (Medium) Two firms, A and B, which have very similar operations, have the same book value of 100 at the end of 2009 and their cost of capital is 11 percent. Both are forecast to have earnings of $16.60 in 2010. Firm A, which has 60 percent dividend payout, is

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