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?
> 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
> 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 shar
> 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
> 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
> Selected data for The Hershey Company for 2010–2012 appear in Exhibit 4.29. REQUIRED a. Compute ROA and its decomposition for 2010–2012. Assume a tax rate of 35%. b. Compute ROCE and its decomposition for 2010â&
> Refer to the financial statement forecasts for Massachusetts Stove Company (MSC) prepared for Case 10.2. The management of MSC wants to know the equity valuation implications of adding gas stoves under the best, most likely, and worst-case scenarios. Fi
> Suppose you are analyzing a firm that is successfully executing a strategy that differentiates its products from those of its competitors. Because of this strategy, you project that next year the firm will generate 6.0% revenue growth from price increase
> Suppose a firm has generated 10.25% revenue growth in the past two years, consisting of 5.0% growth in sales volume compounded with 5.0% growth in prices. Describe one firm-specific strategic factor, one industry-specific factor, and one economy-wide fac
> The chapter encourages analysts to develop forecasts that are realistic, objective, and unbiased. Some firms’ managers tend to be optimistic. Some accounting principles tend to be conservative. Describe the different risks and incentives that managers, a
> Suppose an analyst reformulates financial statements to prepare the alternative decomposition of ROCE for a firm with no debt. The analyst determines that the company holds excess cash as large marketable equity securities. The result will be net financi
> The chapter states that forecasts of financial statements should rely on the additivity within financial statements and the articulation across financial statements to avoid internal inconsistencies in forecasts. Explain how the concepts of additivity an
> For this exercise, use the preceding data for Schwartz Company. Now assume that Schwartz pays common shareholders a dividend of $25 in Year +1. Also assume that Schwartz uses long-term debt as a flexible financial account, increasing borrowing when it ne
> The following data for Schwartz Company represent a summary of your first-iteration forecast amounts for Year +1. Schwartz uses dividends as a flexible financial account. Compute the amount of dividends you can assume that Schwartz will pay in order to b
> The chapter describes how firms must use flexible financial accounts to maintain equality between assets and claims on assets from liabilities and equities. Chapter 1 describes how some firms progress through different life-cycle stages—from introduction
> Assume Walmart acquires a tract of land on January 1, 2009, for $100,000 cash. On December 31, 2009, the current market value of the land is $150,000. On December 31, 2010, the current market value of the land is $120,000. The firm sells the land on Dece
> Effective financial statement analysis requires an understanding of a firm’s economic characteristics. The relations between various financial statement items provide evidence of many of these economic characteristics. Exhibit 1.24 pres
> Use the following hypothetical data for Walgreens in Years 11 and 12 to project revenues, cost of goods sold, and inventory for Year þ1. Assume that Walgreens’s Year þ1 revenue growth rate, gross profit mar
> AK Steel is an integrated manufacturer of high-quality steel and steel products in capital-intensive steel mills. AK Steel produces flat-rolled carbon, stainless and electrical steel products, and carbon and stainless tubular steel products for automotiv
> Intel is a global leader in manufacturing microprocessors, which is very capital-intensive. The production processes in microprocessor manufacturing require sophisticated technology, and the technology changes rapidly, particularly with each new generati
> The Home Depot is a leading specialty retailer of hardware and home improvement products and is the second-largest retail store chain in the United States. It operates large warehouse-style stores. Despite declining sales and difficult economic condition
> Walmart Stores, Inc. (Walmart) is the largest retailing firm in the world. Building on a base of discount stores, Walmart has expanded into warehouse clubs and Supercenters, which sell traditional discount store items and grocery products. Exhibits 10.11
> Effective financial statement analysis requires an understanding of a firm’s economic characteristics. The relations between various financial statement items provide evidence of many of these economic characteristics. Exhibit 1.23 (pag
> Partial forecasts of financial statements for Watson Corporation appear in Exhibit 10.8 (income statement), Exhibit 10.9 (balance sheet), and Exhibit 10.10 (statement of cash flows). Selected amounts have been omitted, as have all totals (indicated by XX
> Barnes & Noble sells books, magazines, music, and videos through retail stores and online. For a retailer like Barnes & Noble, inventory is a critical element of the business, and it is necessary to carry a wide array of titles. Inventories const
> Hasbro designs, manufactures, and markets toys and games for children and adults in the United States and in international markets. Hasbro’s portfolio of brands and products contains some of the most well-known toys and games under famo
> Sony Corporation manufactures and markets consumer electronics products. Assume the following are selected income statement data for 20X1 and 20X2 (amounts in billions of yen): REQUIRED a. Estimate the variable cost as a percentage of sales for the cost
> Visa Inc., a credit card company, reported income tax expense of $1,648 million for Year 1, comprising $1,346 million of current taxes and $302 million of deferred taxes. The balance sheet showed income taxes payable of $122 million at the beginning of Y
> Software companies often bundle upgrades and technical support services with their software. Assume that a software company promises to automatically deliver upgrades for two years when a customer purchases software costing $100. Describe how the softwar
> Using the analytical framework, indicate the effect of each of the three independent sets of transactions described next. (1) a. January 15, 2014: Purchased marketable equity securities for $100,000. b. December 31, 2014: Revalued the marketable securi
> The notes to a firm’s financial statements reveal that the obligations for postretirement health care benefits at the end of 2014 total $2.1 billion. The fair value of plan assets for these benefits at the end of 2014 is reported at zero, with an unrecog
> Pension expense typically consists of five components. Answer the following questions related to each component. a. Service cost: Is it possible for the service cost component to reduce pension expense for the year? Explain your answer. b. Interest cost:
> Using the following key, identify the effects of the following transactions or conditions on the various financial statement elements: I ¼ increases; D ¼ decreases; NE ¼ no effect. Note that the questions per
> Given the following information, compute December 31, 2014, projected benefit obligation (PBO) and fair market value (FMV) of plan assets for Lee Company. What amount of asset or liability will be reported on the balance sheet at December 31, 2014? Pri
> Obtain the latest Form 10-K for Facebook, Inc. (www.investor.fb.com). Locate and describe the significant risks the company identifies. Are any of these unexpected based on your previous familiarity with the company?
> The weighted-average cost-flow assumption is a common technique used to value inventory and determine cost of goods sold. It falls between LIFO and FIFO as to the differential effect on inventory and cost of goods sold amounts, although normally it is mo
> What is a LIFO layer liquidation? How does it affect the prediction of future earnings?
> The acquisition cost of inventory remaining at the end of a period is measured using LIFO, FIFO, or average cost. a. Rank cost of goods sold, gross profit, and ending inventory from highest to lowest under the three cost-flow assumptions when input price
> Assume Boeing sold a 767 aircraft to American Airlines on January 1, 2009. The sales agreement required American Airlines to pay $10 million immediately and $10 million on December 31 of each year for 20 years, beginning on December 31, 2009. Boeing and
> Using the following key, identify the effects of the following transactions or conditions on the various financial statement elements: I ¼ increases; D ¼ decreases; NE ¼ no effect. Assets Liabilities Shareh
> Provide three examples of expense recognition justified by (a) A direct relation with revenue (cause and effect) and (b) An indirect relation with revenue (the consumption of an asset or an increase in a liability during a period in which revenue is re
