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financial statement analysis

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

E6.4. Abnormal Earnings Growth 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: 2010E 2011E 2012E 2013E 2014E EPS 3.90 3.70 3.31 3.59 3.90 DPS 1.00 1.00 1.00 1.00 1.00 The firm has an equity cost of
E6.3. Valuation From Forecasting Abnormal Earnings Growth (Easy) An analyst presents you with the following pro forma (in millions of dollars). The pro forma gives her forecasts of earnings and dividends for 2010-2014. She asks you to value the 1,380 million shares outstanding at the end of 2009.
E6.2. P/E Ratios for a Savings Account (Easy) Suppose you own a savings account that earned $10 over the past year. Your only transac tion in the account has been to withdraw $3 on the last day of this 12-month period. The account bears an interest rate of 4 percent per year.a. What is the value of
E6.1. Forecasting EarningsGrowth and AbnormalEarningsGrowth (Easy)The following are earnings anddividend forecasts madeat the endof2008.The firm has a required equityreturnof 10percentper year.2009 2010 2011 EPS 3.00 3.60 4.10 DPS 0.25 0.25 0.30 Forecast the ex-dividend earnings growth rate and the
C6.14. Cana firmincrease its earnings growth yet notaffectthevalueof its equity?
C6.13. Whymightan analyst refer to a leading (forward) PIEratio ratherthan a trailing PIEratio?
C6.12 The earnings-to-price ratio for theS&P500stocksdeclined significantly from the late 1970s to the late 1990s. As this ratio is a "return" per dollar of price, some claimed thatthe decline indicated thatthe required returnfor equityinvesting had declined, andtheyattributed the increase in
C6.ll. Lookat Figure2.3in Chapter 2, which tracksmedian PIEratiosfrom 1963 to 2003.Explain why PIE ratioswerelowin the 1970s andhigh in the 1960s and 1990s.
C6.1O. Howdo youinterpret a PEGratio?
C6.9. In anequityresearch report,ananalyst calculates a forward earnings yieldof 12percent.Noting that this yield is considerably higher than the 7 percentyield on a 1If-year Treasury, she headsher reportwitha buy recommendation. Couldshe be makinga mistake?
C6.8. APIEratiofor a bondis always lessthanthatfor a stock.Correct?
C6.7. Abnormal earnings growthis always equalto growthof (change in) residual eamings.Correct?
C6.6. Explain why, for purposes of equityvaluation, earnings growth forecasts must be for cum-dividend earnings growth, yetneithercum-dividend growthratesnor valuationare affected by expected dividends.
C6.5. The normal forward PIE andthe normal trailing PIEalways differby 1.0.Explain the difference.
C6.4. A firm's earnings areexpected togrow ara rateequal to therequired rateof return for its equity, 12percent. Whatis the trailing PIE ratio? Whatis the forward PIE ratio?
C6.3. The following formula is oftenused to valueshares,whereEarn, is forward earnings, r is the costof capital,andg isthe expected earnings growth rate.Y I f. Earn, a ue0 equity =-r-g Explain whythisformula can leadto errors.
C6.2. The historical earnings growthrate for the S&P 500 companies has been about 8.5 percent. Yetthe required growth rate for equity investors is considered to be about 12percent. Canyouexplain the inconsistency?
C6.1. Explain whyanalysts'forecasts of earnings-per-share growth typically underestimatethegrowththat an investor values if a firmpaysdividends.
By any stretch of the imagination, Cisco Systems (CSCO) has been a strong growth company. A darling of the Internet boom of the late 1990s, it was one of the few technol- ogy companies tied to the Internet and telecommunications that prospered during that era. Its products built the infrastructure
Cisco Systems, Inc. (CSCO), manufactures and sells networking and communications equipment for transporting data, voice, and video and provides services related to that equipment. Its products include routing and switching devices; home and office network- ing equipment; and Internet protocol,
E14.14. Valuation Grid and Reverse Engineering for Home Depot, Inc. (Medium) 2. Using the information in Exercise 14.13, calculate the implied growth rate in residual operating income that is implicit in the market price of $42 per share. If you forecast that the growth rate in residual earnings
E14.13. Comparing Simple Forecasts with Analysts' Forecasts: Home Depot, Inc. (Medium) Home Depot, the warehouse retailer, traded at $42 per share when its 2005 financial state- ments were published. Analysts were forecasting $2.59 earnings per share for 2006 and $2.93 for 2007. There were 2,185
E14.12. A Simple Valuation with Short-Term and Long-Term Growth Rates: Cisco Systems (Easy) In late 2002, analysts were forecasting fiscal 2003 and 2004 eanings per share for Cisco Systems of $0.54 and $0.61, respectively. Cisco's shares traded at $15 at the time. Assuming the long-term growth rate
E14.10. Reverse Engineering for Starbucks Corporation (Medium) In January 2008, the 738.3 million outstanding shares of Starbucks Corporation traded at $20 each. Analysts' consensus carning-per-share estimates of $1.03 for the fiscal year end- ing September 30, 2008, gave the firm a forward P/E of
E14.9. Simple Valuation for the Coca-Cola Company (Medium) In early 2006, the 2,369 million outstanding shares of the Coca Cola Company traded at $48.91 each. The price-to-book ratio was 6.3 and the forward P/E was 19.3 based on ana- lysts' consensus EPS forecast for 2007. An analyst extracted the
E14.8. Simple 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 Core operating income (after tax) 1,560 There were 337.5 million shares outstanding at the
E14.7. Simple Forecasting and Valuation (Medium) An analyst uses the following summary balance sheet to value a firm at the end of 2009 (in millions of dollars): Net operating assets Net financial obligations Common shareholders' equity 2009 2008 4,572 3,941 1,243 1,014 3,329 2,927 The analyst
E14.6. Simple Valuation with Sales Growth Rates (Medium) An analyst forecasts that the current core return on net operating assets of 15.5 percent will continue indefinitely in the future with a 5 percent annual sales growth rate. She also forecasts that the current asset turnover ratio of 2.2 will
E14.5. Reverse Engineering with Two-stage Growth Rates (Medium) An analyst develops the following pro forma at the end of 2009 (in millions): 2009A 2010E 2011E Operating income $ 782 $ 868 Net operating assets $6,400 6,848 7,190 Net financial obligations 756 Common equity $5,644a. Forecast the
E14.4. Reverse Engineering (Easy) A firm reports $3,721 million of net operating assets and $560 million of net financial obligations at the end of 2008. Its 105 million shares outstanding trade at $53 each. You expect its current core RNOA of 18.6 percent to continue at the same level in the
E14.3. Two-Stage Growth Valuation (Easy) An analyst develops the following pro forms at the end of 2009 for a firm that uses a 9 per- cent burdle rate for its operations (in millions); 2009A 2010E 2011E Operating income $ 782 $ 868 Net operating assets $6,400 6,848 7,190 Net financial obligations
E14.2. An SF3 Forecast and a Simple Valuation (Easy) An analyst prepares the following reformulated balance sheet (in millions of dollars): Net operating assets Net financial obligations Common shareholders' equity 2009 2008 $9,682 $9,400 1.987 1,876 $7,695 $7,524 Core operating income (after tax)
E14.1. An SF2 Forecast and a Simple Valuation (Easy) An analyst calculates residual operating income of $35.7 million from financial statements for 2009, using a required return for operations of 10 percent. She also forecasts residual operating income at the same level for 2010 and years after on
C14.7. Thehigherthe anticipated return onnetoperating assets(RNOA) relative to theanticipated growth in net operating assets, the higher will be the unlevered priceto-book ratio. Is this correct?
CI4.6. Would youcalla firm thatisexpected to have a highsalesgrowth rateagrowthfinn?
CI4.5. Whenis the forecasted growthrate in residual operating income the sameas the forecasted growth ratein sales?
CI4.4. An analyst forecasts that nextyear'scoreoperating income for a firm will be the sameas the currentyear'score operating income. Underwhat conditions is this a goodforecast?
C14.3. What is thedifference between anSF2andan SF3 forecast?
C14.2. Avaluation thatsimply capitalizes a forecast of operating income forthenextyear implicitly assumes that residual operating income willcontinue as a perpetuity. Is this correct?
CJ4.1. Why is a simple forecast of operating income based on book value usually not a goodforecast? When might such a forecast be a goodforecast?
International Business Machines Corporation (IBM) was once the dominant computer manufacturer intheworld and, from 1960 to 1980, the leading growth company. Indeed, in those years IBM became the verypersonification of a growth company. However, withthe advent of decentralized computing
By 2005, Microsoft Corporation, the premier software firm of the computer age, had ma- tared into an established firm. Maturity, however, often brings slower growth and many ob- servers claimed that Microsoft was beginning to show such symptoms. Outside its core business centered around the Windows
This case continues the financial statement analysis of Procter & Gamble Co. begun in Minicase 9.1 and developed further in Minicase 11.1. This final installment covers issues in dealing with core income. Financial statements for Procter & Gamble are presented in Exhibit 9.15 in Chapter 9. If you
E12.11. Analysis of Effects of Operating Leverage: US Airways (Medium) Refer to the 1998 income statement for US Airways Group in Exercise E12.10 above. Of the total $7,674 million in operating expenses, suppose the following are fixed costs (in millions): Personnel Aircraft rent Other rent
$7,712 Cargo and freight 168 181 Other 694 621 Total operating revenues 8.688 8,514 Operating expenses Personnel costs Aviation fuel Commissions Aircraft rent Other rent and landing fees Aircraft maintenance Other selling expenses Depreciation and amortization Other Total operating expense
E12.10. Explaining Changes in Income: US Airways (Hard) US Airways Group, the holding company for US Airways, reported the following income statements for 1997 and 1998 (in millions of dollars): 1998 1997 Operating revenues Passenger transportation $7,826
E12.9. Analysis of Changes in Operating Profitability: Home Depot, Inc. (Medium) Comparative income statements and balance sheets for the warehouse retailer Home Depot are given in Exercise E11.10 in Chapter 11 for fiscal year 2005. Reformulate those state- ments and explain what determined the
E12.8. Identification of Core Operating Income and Margins for Starbucks Corporation (Medium) The consolidated statement of earnings for Starbucks Corporation for 2007 is given in Exercise 19.9 in Chapter 9. The firm's statutory tax rate is 38.4 percent. Note 4 on "net in- terest and other income,"
E12.7. Core Income and Core Profitability for The Coca Cola Company (Easy) A student in your study group prepared the following reformulated income statement for the Coca Cola Company for 2007 (in millions): Sales Cost of sales Gross margin Advertising expenses General and administrative expenses
E12.6. Analysis of Growth in Common Equity for a Firm with Constant Asset Turnover (Easy) An analyst summarizes the following information for a firm (dollar amounts in millions): 2009 2008 2007 Common shareholders' equity 4,725 4.394 4,124 Net financial obligations 2,193 2,193 2,193 Net operating
E12.5. Explaining a Change in Profitability (Medium) Consider the following financial information: Summary Balance Sheets at December 31 2009 2008 2007 Cash $ 100 $ 100 $ 120 Short-term investments 300 300 330 Accounts receivable 900 1,000 1,250 Inventory 2,000 1,900 1,850 Property, plant, and
E12.4. Calculating Core Profit Margin (Easy) A firm reports operating income before tax in its income statement of $73.4 million on sales of $667.3 million. After net interest expense of $20.5 million and taxes of $18.3 mil- lion, its net income is $34.6 million. The following items are included as
E12.3. Analyzing the Growth in Shareholders' Equity (Easy) The following numbers were calculated from the financial statements for a firm for 2009 and 2008:2009 2008 Return on common equity (ROCE) Return on net operating assets (NOA) Sales (milions) Average net operating assets (milions) 15.2%
E12.2. Analyzing a Change in Return on Common Equity (Easy) The following numbers were calculated from the financial statements for a firm for 2009 and 2008: 2009 2006 Return on common equity (ROCE) 15.2% 13.3% Return on net operating assets (NOA) 11.28% 12.75% Net borrowing cost (NBC) 2.9% 3.2%
E12.1. Analyzing a Change In Core Operating Profitability (Easy) The following numbers were calculated from the financial statements for a firm for 2009 and 2008: 2009 2008 Core profit margin Asset turnover 4.7% 5.1% 2.4 2.5 Calculate core return of net operating assets (core RNOA) and show how
e12.15. Firmswith high unsustainable earnings should havelow (trailing) PIE ratios. Is this correct?
C12.14. Cana firmhavea highPIE ratioyeta lowP/Bratio? Howwould youcharacterize the growth expectations forthis firm?
C12.13. Fora firmwitha normal trailing PIE ratio,expected future residual earnings must bethesameas currentresidual earnings. Correct?
eI2.12. Afirmcanhavea hightrailing PIE ratio,yethaveanexpected cum-dividend earningsgrowth rateaftertheforward yearthat is lessthantherequired rate.Is thisso?
Cl2.11. Whatdetermines growth in equityinvestment ina finn?
C12.10. Would you see a high profit margin of, say, 6 percent for a groceryretailer as sustainable?
eI2.9. The highera firm's contribution margin ratio, the moreleverage it gets fromincreasing sales. Correct?
eI2.8. Distinguish operating leverage fromoperating liability leverage.
Cl2.? Are unrealized gains and losses on financial assets persistent or transitory income?
C12.6. Whataretransitory earnings? Givesomeexamples.
C12.5. Why would an analystwishto distinguish the part of earnings that is sustainable?
e12A. Whatfeatures in financial statements wouldyou look for to identify a firmas a growth company?
C12.3. Whatmeasure tellsyouthata firmis a no-growth firm?
CI2.2. In analyzing growth, should the analyst focus on residual earnings, abnormal earnings growth, or both?
I2.1. Whatis a growthfirm?
At various points inthisbook, Dell,Inc.,thecomputer manufacturer, hasbeenhighlighted.The firm's 2008 financial statements are reproduced in Exhibit 2.1 in Chapter 2 and its reformulated balance sheets and income statements appear in Exhibits 9.4 and 9.10 in Chapter 9. Reported cashflows for2008
E10.10. Free Cash Flow for Kimberley-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). 2007 2006
E10.9. Method 1 Calculation of Free Cash Flow for General Mills, Inc. (Easy) Refer to the reformulated balance sheets and income statements for General Mills, Inc., in Exhibits 9.5 and 9.11 in Chapter 9. Calculate free cash flow for 2008 from these statements.Real World Connection Coverage of
E10.8. Free Cash Flow and Financing Activities: General Electric Company (Easy) The following summarizes free cash flows generated by General Electric from 2000-2004 (in millions of dollars). 2000 Cash from operations Cash investments Free cash flow 2001 30,009 39,398 37,699 40,308 (7.690) 2002
E10.7. Applying Cash Flow Relations (Medium) An analyst prepared reformulated balance sheets for the years 2009 and 2008 as follows. (in millions of dollars): Operating assets 2009 $640 Financial assets 250 890 Financial debt 170 Operating abilities Common equity 20 700 $890 2008 The firm reported
E10.6. Applying Cash Flow Relations (Easy) A firm reported free cash flow of $430 million and operating income of $390 million.a. By how much did its net operating assets change during the period?b. The firm invested $29 million cash in new operating assets during the period. What were its
E10.5. Free Cash Flow for a Net Debtor (Easy) The following information is for a firm that has net debt on its balance sheet (in millions of dollars). Common shareholders' equity, December 31, 2007 Common dividends, paid December 2008 Common shareholders' equity, December 31, 2008 sue of common
E10.4. Free Cash Flow for a Pure Equity Firm (Easy) The following information is from the financial report of a pure equity company (one with no net debt). In millions of dollars. Common shareholders' equity, December 31, 2008 Common dividends, paid December 2009 Issue of common shares on December
E10.3. Analyzing Cash Flows (Medium) Consider the following comparative balance sheets for the Liquidity Company: Operating cash December 31 2008 2007 $ 435,000 $ 50,000 40,000 -0- 100,000 400,000 200,000 -0- 800,000 200,000 (100,000) -0- Inventories Accounts receivable Land (unamortized cast)
E10.2. Calculation of Free Cash Flow from the Balance Sheet and Income Statement (Easy) A firm reported comprehensive income of $376 million for 2009, consisting of $500 mil- lion in operating income (after tax) less $124 million of net financial expense (after tax). It also reported the following
E10.1. Classification of Cash Flows (Easy) State whether the following transactions affect cash flow from operations, free cash flow, financing flows, or none of them.a. Payment of a receivable by a customerb. Sale to a customer on creditc. Expenditure on plantd. Expenditure on research and
CIO.I0. Consider the following quote from the CFOof Lear Corp. (in The Wall Street Journal, May8, 2002, p. Cl): "Sales of receivables andoperating cashflows are entirely separate events. We see sales of receivables as a low-cost financing method; it shouldn'tgenerate operating cashflow." Doyouagree?
CIO.9. Whatfactors produce growth in freecashflow?
CIO.8. Why mightan analyst notputmuchweight ona firm's currentfreecashflow as an indication of future freecashflow?
C1O.7. Why is freecashflow sometimes referred to as a liquidation concept?
CIO.6. GAAPcash flow statements treat interest capitalized duringconstruction as in.vestment in plant.Doyouagreewiththis practice?
CI0.5. Do you consider the direct method to be more informative than the indirect method of presenting cashflow from operations?
C10A. Byinvesting in short-term securities to absorb excesscash,a finn reduces itscash flow after investing activities in its published cashflow statement. Whatis wrong withthis picture?
CI0.3. Fora pure equity finn (withno net debt), howis freecash flow disposed of?
CI 0.2. Forwhatpurposes mightforecasting cashflows be an analysis tool?
CIO.l. Why mightcashflow analysis be important for valuing firms?
Outstanding Options Range of Exercise Prices Remaining Weighted-Average Shares Life (Years) Price $ 0.56-$5.97 133 2.1 $4.57 5.98-13.62 104 3.0 10.89 13.63-29.80 135 3.7 14.99 29.81- 43.62 96 4.5 32,08 43.63-83.28 198 7.3 63.19 83.29-119.13 166 8.6 89.91 The weighted average Black-Scholes value of
A. What was the net cash paid out to shareholders during the nine months? B. What was Microsoft's comprehensive income for the nine months? C. Discuss your treatment of the $472 million from "proceeds from sale of put warrants." Why would Microsoft sell put warrants? How does GAAP account for put
Income before income taxes Provision for income taxes Net income Earnings per share: Basic Diluted Nine Months Ended March 31, 2000 10,624 3,612 5 7,012 5 1.35 $ 1.27 Stockholders' Equity Statement (in millions) (Unaudited) Nine Months Ended March 31, 2000 Common stock end paid-in capital Balance,
Microsoft has undoubtedly been the most successful software firm ever. Between 1994 and 2000, the firm's revenues increased from $2.8 billion to $23.0 billion, and its earnings from $708 million to $9.4 billion. Over the two year 1998 to 2000, its stock price increased from $36 per share to almost
E8.14. Losses from Put Options: Household International (Hard) Household International (acquired by HSBC in 2003 and now known as HSBC Finance Corporation) is one of the largest U.S. lenders to consumers with poor credit histories, car- rying receivables for auto loans, Mastercard and Visa credit
E8. 13. Ratio Analysis for the Equity Statement: Nike (Easy) Using the statement of shareholders' equity in Exhibit 8.1, carry out a ratio analysis that highlights the information about Nike in that statement.
E8.12. Reformulation of an Equity Statement with Hidden Losses: Dell, Inc. (Hard) The following is a condensed version of the statement of shareholders' equity for Dell, Inc., for fiscal year ending January 31, 2003 (in millions of dollars): Balance at February 1, 2002 Net income Unrealized gain on
E8.11. Conversion of Stock Warrants: Warren Buffett and Goldman Sachs (Easy) In September 2008, in the midst of the credit crisis on Wall Street, Goldman Sachs invited Warren Buffett, the legendary fundamental investor, to contribute much-needed equity cap- ital to the firm. Buffett seemingly got a
E8.10. Loss on the Conversion of Preferred Stock: Microsoft Corporation (Easy) In 1996, Microsoft issued 12.5 million convertible preferred shares carrying a dividend of 2.75 percent for $980 million. The shares were converted into common shares in Decem- ber 1999, with each preferred share

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