Boston Scientific, a medical device manufacturer, reported net income (amounts in millions) of $1,062 on sales of $5,624 during Year 4. Interest expense totaled $64. The income tax rate was 35%. Average total assets were $6,934.5, and average common shareholders’ equity was $3,443.5. The firm did not have preferred stock outstanding or non-controlling interest in its equity. a. Compute the rate of ROA. Disaggregate ROA into profit margin for ROA and assets turnover components. b. Compute the rate of ROCE. Disaggregate ROCE into profit margin for ROCE, assets turnover, and capital structure leverage ratio components. c. Calculate the amount of net income to common shareholders derived from the excess return on creditors’ capital and the amount from the return on common shareholders’ capital.
> Most economists describe three determinants of the interest rates on a borrower’s debt: a real interest rate, which is a charge for using capital; an adjustment for expected inflation to insure that debt is repaid in dollars having the same purchasing po
> A firm had the following values for the four debt ratios discussed in the chapter: Liabilities to Assets Ratio: less than 1.0 Liabilities to Shareholders’ Equity Ratio: equal to 1.0 Long-Term Debt to Long-Term Capital Ratio: less than 1.0 Long-Term Debt
> The use of the term reserve in the title of a financial statement account is not acceptable in the United States, primarily because its purpose is often too vague. However, informal use of the term by chief financial officers, analysts, and the media is
> All leases for financial reporting purposes are treated as either capital (finance) leases or operating leases. The effects of the two reporting techniques on the financial statements differ substantially. From the perspective of the lessee, prepare a ch
> Alfa Romeo incurs direct cash costs of $30,000 in manufacturing a red convertible automobile during 2009. Assume that it incurs all of these costs in cash. Alfa Romeo sells this automobile to you on January 1, 2010, for $45,000. You pay $5,000 immediatel
> Assume that Motorola, Inc., issues bonds with a face value of $10,000,000 for $9,200,000. The bonds have detachable warrants that may be traded in for shares of common stock. Assume that immediately after issue, bonds with warrants detached trade for $9,
> ARTL Company issued 3%, 10-year convertible bonds on January 1, 2013, at their par value of $500 million. Each $1,000 bond is convertible into 40 shares of ARTL’s $1 par value common stock. Use the template below to show the financial s
> Assume that John Deere Co. issues 2,000 shares of $100 par, 6% convertible preferred stock for $105 per share. Shareholders have the right to exchange each share of convertible preferred stock for five shares of $10 par common stock. Use the template bel
> Determine and compare the financial reporting (debt versus equity classification) of redeemable preferred stock with the following characteristics under U.S. GAAP and IFRS. a. Redemption will occur at a specific time or upon a specific event (for example
> Assume that Great Beef Co. owes Bank of America $5,000, 000 on a 3-year, 9% note originally issued at par. After one year of making scheduled payments, the firm faces financial difficulty. At the end of the second year, Great Beef owes Bank of America $5
> Assume that Circuit City owes Synovus Bank $1,000, 000 on a 4-year, 7% note originally issued at par. After one year of making scheduled payments, Circuit City faces financial difficulty. At the end of the second year, Circuit City owes Synovus $1,000,00
> Define earnings management. Discuss why it is difficult to discern whether a firm does in fact practice earnings management.
> Under U.S. GAAP, the statement of cash flows classifies cash expenditures for interest expense as an operating activity but classifies cash expenditures to redeem debt as a financing activity. Explain this apparent paradox.
> Exhibit 7.17 includes a footnote excerpt from the annual report of The Coca-Cola Company for 2004. The beverage company offers stock options to key employees under plans approved by stockholders. REQUIRED Review Exhibit 7.17 and answer the following que
> While a firm’s sales and net income have been steady during the last three years, the firm has experienced a decrease in its accounts receivable and inventory turnovers and an increase in its accounts payable turnover. What is the likely direction of cha
> Some retailing companies own their own stores or acquire their premises under capital leases. Other retailing companies acquire the use of store facilities under operating leases, contracting to make future payments. An analyst comparing the capital stru
> Exhibit 1.25 presents common-size income statements and balance sheets for seven firms that operate at various stages in the value chain for the pharmaceutical industry. These common- size statements express all amounts as a percentage of sales revenue.
> The concept of accounting quality has several dimensions, but two characteristics often dominate: the accounting information should be a fair representation of performance for the reporting period, and it should provide relevant information to forecast e
> Firms such as Deere & Company and Macy’s, Inc., often sell their receivables as a means of obtaining financing. Should firms selling receivables remove the receivables from the balance sheet, or should the receivables remain on the balance sheet? Should
> Diviney Company wants to raise $50 million cash but for various reasons does not want to do so in a way that results in a newly recorded liability. The firm is sufficiently solvent and profitable, so its bank is willing to lend up to $50 million at the p
> On June 24, Year 4, a major airline entered into a revolving accounts receivable facility (Facility) providing for the sale of $489 million of a defined pool of accounts receivable (Receivables) through a wholly owned subsidiary to a trust in exchange fo
> Loss contingencies may or may not give rise to accounting liabilities. Financial reporting requires firms to recognize a loss contingency when two criteria are met. Describe the two criteria and provide an example in which applying the criteria would tri
> Nestle´ Group, a multinational food products firm based in Switzerland, recently issued its financial statements. The auditor’s opinion attached to the financial statements stated the following: ‘‘In our opinion, the financial statements for the year end
> Financial accounting rules require firms to assess whether they will recover carrying amounts of long-lived assets and, if not, to write down the assets to their fair value and recognize an impairment loss in income from continuing operations. Impairment
> A firm has experienced an increasing current ratio but a decreasing operating cash flow to current liabilities ratio during the last three years. What is the likely explanation for these results?
> Firms often enter into transactions that are peripheral to their core operations but generate gains and losses that must be reported on the income statement. Provide an example in which a gain generated from the sale of an equity security may be labeled
> Delta Air Lines, Inc., is one of the largest airlines in the United States. It has operated on the verge of bankruptcy for several years. Exhibit 5.18 presents selected financial data for Delta Air Lines for each of the five years ending December 31, 200
> Refer to the profitability ratios of Coca-Cola in Problem 4.26. Exhibit 5.17 presents risk ratios for Coca-Cola for 2006–2008. As we did within the chapter for PepsiCo, we utilize Coca-Cola’s footnote disclosures to ex
> Checkpoint Systems is a leading provider of source tagging, handheld labeling systems, retail merchandising systems, and bar-code labeling systems. In a press release, Checkpoint stated the following: GAAP reported net loss for the fourth quarter of 2004
> Refer to the financial statement data for Abercrombie & Fitch in Problem 4.25. Exhibit 5.16 presents risk ratios for Abercrombie & Fitch for fiscal Year 3 and Year 4. Financial statement data for Abercrombie & Fitch from Problem 4.25 REQUIR
> Refer to the financial statement data for Hasbro in Problem 4.24 in Chapter 4. Exhibit 5.15 presents risk ratios for Hasbro for Year 2 and Year 3. Financial statement data for Hasbro from Problem 4.24 REQUIRED a. Calculate the amounts of these ratios f
> Ford Motor Credit Company discloses the following information with respect to finance receivables (amounts in millions). Notes to Financial Statements The Company periodically sells finance receivables in securitization transactions to fund operations a
> ‘‘The accrual basis of accounting creates the need for a statement of cash flows.’’ Explain.
> Exhibit 5.25 presents balance sheets for 2007 and 2008 for Whole Foods Market, Inc.; Exhibit 5.26 presents income statements for 2006–2008. REQUIRED a. Prepare the standard decomposition of ROCE into margin, turnover, and leverage. Us
> Exhibit 5.24 presents selected financial data for The Tribune Company and The Washington Post Company for fiscal 2006 and 2007. The Washington Post Company is an education and media company. It owns, among others, Kaplan, Inc.; Cable ONE Inc.; Newsweek m
> Exhibit 5.23 presents selected financial data for ABC Auto, and XYZ Comics, for fiscal Year 5 and Year 6. ABC Auto manufactures automobile components that it sells to automobile manufacturers. Competitive conditions in the automobile industry in recent y
> Exhibit 5.22 presents selected financial data for Best Buy Co., Inc., and Circuit City Stores, Inc., for fiscal 2008 and 2007. Best Buy and Circuit City operate as specialty retailers offering a wide range of consumer electronics, service contracts, prod
> Sun Microsystems, Inc., develops, manufactures, and sells computers for network systems. Exhibit 5.21 presents selected financial data for Sun Microsystems for each of the five years ending June 30, 2005, to June 30, 2009. The company did not go bankrupt
> VF Corporation is an apparel company that owns recognizable brands like Timberland, Vans, Reef, and 7 For All Mankind. Exhibit 5.19 and 5.20 present balance sheets and income statements, respectively, for 2011– 2012. (VF Corporation pre
> Access the investor relations or corporate information section of the websites of Dollar General (www.dollargeneral.com) and Macy’s Inc. (www.macysinc.com). Study the strategies of each firm. Examine the following common-size income sta
> Define financial leverage. Explain how financial leverage works to the benefit of the common shareholders.
> Rock of Ages, Inc., is the largest integrated granite quarrier, manufacturer, and retailer of finished granite memorials in North America. The firm reported a net loss for 2004 of $3.2 million. In 2004, the firm reported a pretax litigation settlement lo
> Assume Southern Copper Corporation (PCU) acquired mining equipment for $100,000 cash on January 1, 2009. The equipment had an expected useful life of four years and zero salvage value. PCU calculates depreciation using the straight-line method over the r
> Describe the difference between the profit margin for ROA and the profit margin for ROCE. Explain why each profit margin is appropriate for measuring the rate of ROA and the rate of ROCE, respectively.
> Three years of combined data for two firms follows (in millions). One of these firms is eBay, an online retailer with a three-year growth in sales of 337.3%, and the other is TJX Companies, Inc., a specialty retail store with a three-year growth in sales
> Firms often provide supplemental disclosures that report and discuss income figures that do not necessarily equal bottom-line net income from the income statement. Discuss the merits and shortcomings of this managerial practice.
> Firm A reports an increase in earnings per share; Firm B reports a decrease in earnings per share. Is this unconditionally informative about each firm’s performance? If not, why is earnings per share so commonly discussed in the financial press?
> Common-size analysis is a simple way to make financial statements of different firms comparable. What are possible shortcomings of comparing two different firms using common-size analysis?
> Valero Energy, a petroleum company, reported net income of $1,803.8 on revenues of $54,618.6 for Year 4. Interest expense totaled $359.7, and preferred dividends totaled $12.5. Average total assets for Year 4 were $17,527.9. The income tax rate is 35%. A
> TJX, Inc., an apparel retailer, reported net income (amounts in thousands) of $609,699 for Year 4. The weighted average of common shares outstanding during Year 4 was 488,809 shares. TJX, Inc., subtracted interest expense net of tax saving on convertible
> Phillips-Van Heusen, an apparel manufacturer, reported net income (amounts in thousands) for Year 4 of $58,615 on sales of $1,460,235. It declared preferred dividends of $21,122. Preferred shareholders’ equity totaled $264,746 at both the beginning and e
> Nucor, a steel manufacturer, reported net income for 2008 of $1,831 million on sales of $23,663 million. Interest expense for 2008 was $135 million, and non-controlling interest was $314 million for 2008. The income tax rate is 35%. Total assets were $9,
> Part A. Floral Delivery, Inc. (FD) acquired a fleet of vans on January 1, 2013, by issuing a $500,000, 4-year, 4% fixed rate note, with interest payable annually on December 3. FD has the option to repay the note prior to maturity at the note’s fair val
> Access the investor relations or corporate information section of the websites of Apple Computer (www.apple.com) and Dell (www.dell.com). Study the strategies of each firm. Examine the following common-size income statements and indicate which firm is li
> The chapter discusses eight items that occur infrequently but that can have a large impact on financial statements. What criteria should an analyst employ to assess whether to include or eliminate items from the financial statements related to these topi
> Apply Porter’s five forces to the air courier industry. Industry participants include such firms as FedEx, UPS, and DHL. (Hint: Access Gale’s Business & Company Resource Center, Global Business Browser, or Standard & Poor’s Industry Surveys to obtain th
> Analysts can compare ROCEs across companies but should not compare basic EPSs despite the fact that both ratios use net income to the common shareholders in the numerator. Explain.
> Explain the intuition of residual income. Distinguish between net income available to the common shareholders and residual income.
> The intuition behind the benefits of financial leverage is that a firm can borrow funds that bear a certain interest rate but invest those funds in assets that generate returns in excess of that rate. Why would firms with high ROAs not keep leveraging up
> A company president remarked, ‘‘The operations of our company are such that we can take advantage of only a minor amount of financial leverage.’’ Explain the likely reasoning the company president had in mind to support this statement.
> Selected data for General Mills for 2007, 2008, and 2009 appear below (amounts in millions). REQUIRED a. Compute the rate of ROCE for 2007, 2008, and 2009. b. Compute basic EPS for 2007, 2008, and 2009. c. Interpret the changes in ROCE versus EPS over t
> Selected financial data for Georgia-Pacific Corporation, a forest products and paper firm, appear in Exhibit 4.28. REQUIRED a. In which years did financial leverage work to the advantage of the common shareholders? In which years did it work to their di
> JCPenney operates a chain of retail department stores, selling apparel, shoes, jewelry, and home furnishings. It also offers most of its products through catalog distribution. During fiscal Year 5, it sold Eckerd Drugs, a chain of retail drugstores, and
> Exhibit 7.19 summarizes the information disclosed by a large conglomerate regarding its stock option plans for Years 2–4. Assume an income tax rate of 35%. REQUIRED a. The average option price per share and market price per share at ti
> Texas Instruments (TI) designs and manufactures semiconductor products for use in computers, telecommunications equipment, automobiles, and other electronics-based products. The manufacturing of semiconductors is highly capital-intensive. Hewlett-Packard
> Nucor and AK Steel are steel manufacturers. Nucor produces steel in mini-mills. Mini-mills transform scrap ferrous metals into standard sizes of rolled steel, which Nucor then sells to steel service centers and distributors. Its steel falls on the lower
> Dell produces computers and related equipment on a made-to-order basis for consumers and businesses. Sun Microsystems designs and manufactures higher-end computers that function as servers and for use in computer-aided design. Sun Microsystems sells prim
> Three years of combined data for two firms follows (in millions). One of these firms is FedEx, a relatively high-growth firm that provides courier services, and the other is Kellogg Company, a more mature consumer foods processor. Identify each firm and
> Recent years have witnessed some of the most significant accounting scandals in history. For each scandal listed in Exhibit 6.17, identify how balance sheet quality and earnings quality were impaired. Exhibit 6.17 Accounting Scandals (Problem 6.17)
> Access the investor relations or corporate information section of the websites of American Airlines (www.aa.com), Intel (www.intel.com), and Disney (http://disney.com). Study the business strategies of each firm. Examine the financial ratios below and in
> The Apollo Group is one of the largest providers of private education, and runs numerous programs and services, including the University of Phoenix. Exhibit 3.25 provides the statement of cash flows for 2012. REQUIRED Discuss the relations between net i
> Montgomery Ward operates a retail department store chain. It filed for bankruptcy during the first quarter of Year 12. Exhibit 3.24 presents a statement of cash flows for Montgomery Ward for Year 7 to Year 11. The firm acquired Lechmere, a discount reta
> Sunbeam Corporation manufactures and sells a variety of small household appliances, including toasters, food processors, and waffle grills. Exhibit 3.23 presents a statement of cash flows for Sunbeam for Year 5, Year 6, and Year 7. After experiencing dec
> Sirius XM Radio Inc. is a satellite radio company, formed from the merger of Sirius and XM in 2008. Exhibit 3.22 presents a statement of cash flows for Sirius XM Radio for 2006, 2007, and 2008. Sirius XM and its predecessor, Sirius, realized revenue grow
> Exhibits 7.17 and 7.18 provide footnote excerpts to the financial reports of The Coca-Cola Company and Eli Lilly and Company that discuss the stock option grants given to the employees of the two firms. Each firm uses options extensively to reward employ
> How are balance sheet quality and earnings quality related? Provide a specific example of a management judgment, estimate, or choice that could decrease both balance sheet and earnings quality. Be specific as to how the judgment decreased quality in each
> Refer to the projected financial statements for Massachusetts Stove Company (MSC) prepared for Case 10.2. The management of MSC wants to know the equity valuation implications of not adding gas stoves versus adding gas stoves under the best, most likely,
> Abercrombie & Fitch sells casual apparel and personal care products for men, women, and children through retail stores located primarily in shopping malls. Its fiscal year ends January 31 of each year. Financial statements for Abercrombie & Fitch
> An equity buyout group intends to acquire Wedgewood as of the beginning of Year 8. The buyout group intends to finance 40% of the acquisition price with debt bearing a 10% interest rate and 60% with common equity. The income tax rate is 40%. The cost of
> At the end of Year 5, Experian Information Solutions, Inc. (Experian) has total assets of $555,443, long-term debt of $1,839, and common equity at book value of $402,759 (amounts in thousands). Suppose an equity buyout group is planning to acquire Experi
> Henry Company is a marketer of branded foods to retail and foodservice channels. Exhibit 6.18 presents Henry’s income statements for Year 10, Year 11, and Year 12. Notes to the financial statements reveal the following information: 1. G
> May Department Stores Company (May) operates retail department store chains throughout the United States. Assume that at the end of Year 2, May’s balance sheet reports debt of $4,658 million and common shareholders’ equity at book value of $3,923 million
> Explain why analysts and investors use risk adjusted expected rates of return as discount rates in valuation. Why do investors expect rates of return to increase with risk?
> At a cost of $200,000, Assume In-N-Out Burger acquired a tract of land for a restaurant site. It paid attorneys $7,500 to conduct a title search and to prepare the required legal documents for the purchase. State real estate transfer taxes totaled $2,500
> Conceptually, why should an analyst expect the dividends-based valuation approach to yield equivalent value estimates to the valuation approach that is based on free cash flows available to be distributed to common equity shareholders?
> Explain the theory behind the dividends-based valuation approach. Why are dividends value-relevant to common equity shareholders?
> The chapter describes how the dividends-based valuation approach measures value-relevant dividends to encompass various transactions between the firm and the common shareholders. What transactions should you include in value relevant dividends for the pu
> The chapter asserts that dividends are value relevant even though the firm’s dividend policy is irrelevant. How can that be true? What is the key assumption in the theory of dividend policy irrelevance?
> Hasbro is a leading firm in the toy, game, and amusement industry. Its promoted brands group includes products from Playskool, Tonka, Milton Bradley, Parker Brothers, Tiger, and Wizards of the Coast. Sales of toys and games are highly variable from year
> Three years of combined data for two firms follows (in millions). The two firms experienced similar growth rates in revenues during the three-year period. One of these firms is Accenture Ltd., a management consulting firm, and the other is Southwest Airl
> Why is the dividends based valuation approach applicable to firms that do not pay periodic (quarterly or annual) dividends?
> Why do investors typically accept a lower risk-adjusted rate of return on debt capital than equity capital? Suppose a stable, financially healthy, profitable, tax-paying firm that has been financed with all equity now decides to add a reasonable amount o
> Identify the types of firm-specific factors that increase a firm’s non diversifiable risk (systematic risk). Identify the types of firm-specific factors that increase a firm’s diversifiable risk (nonsystematic risk). Why do models of risk-adjusted expect
> Empirical research cited in the text indicates that firms with an operating cash flow to current liabilities ratio exceeding 0.40 portray low short-term liquidity risk. Similarly, firms with an operating cash flow to total liabilities ratio exceeding 20%
> The CAPM computes expected rates of return using the following model: E[REj] = E[RF] + βj × {E[RM] – E[RF]} Explain the role of each of the three components of this model.
> Royal Dutch Shell is a petroleum and petrochemicals company. It engages primarily in the exploration, production, and sale of crude oil and natural gas and the manufacture, transportation, and sale of petroleum and petrochemical products. The company ope
> Whirlpool manufactures and sells home appliances under various brand names. IBM develops and manufactures computer hardware and offers related technology services. Target operates a chain of general merchandise discount retail stores. The data in the fol
> Refer to Problem 2.12. Assume that Walmart has accounted for the value of the land at acquisition cost and sells the land on December 31, 2011, for a two-year note receivable with a present value of $180,000 instead of for cash. The note bears interest a
> The data in Exhibit 11.3 on industry median betas suggest that firms in the following three sets of related industries have different degrees of systematic risk. Median Beta during 2003–2012 Utilities versus Petroleum and Natural Gas..............
> Problem 10.16 projected financial statements for Walmart for Years +1 through +5. The following data for Walmart include the actual amounts for 2012 and the projected amounts for Years þ1 through +5 for comprehensive income and common shar
