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accounting

Questions and Answers of Accounting

Universal Auto is a large multinational corporation headquartered in the United States. For segment reporting purposes, the company is engaged in two businesses: production of motor vehicles and
Adams’s research report continued as follows: “With a business recovery already under way, the expected profit surge should lead to a much higher price for Universal Auto stock. We strongly
Janet Ludlow is preparing a report on U.S.-based manufacturers in the electric toothbrush industry and has gathered the information shown in Tables B and C. Ludlow€™s report concludes that
As a securities analyst you have been asked to review a valuation of a closely held business, Wigwam Autoparts Heaven, Inc. (WAH), prepared by the Red Rocks Group (RRG). You are to give an opinion on
a. Based on historical data and assuming less-than-full employment, periods of sharp acceleration in the growth rate of the money supply tend to be associated initially with:i. Periods of economic
In what circumstances would you choose to use a dividend discount model rather than a free cash flow model to value a firm?
In what circumstances is it most important to use multistage dividend discount models rather than constant-growth models?
If a security is underpriced (i.e., intrinsic value > price), then what is the relationship between its market capitalization rate and its expected rate of return?
Deployment Specialists pays a current (annual) dividend of $1.00 and is expected to grow at 20% for 2 years and then at 4% thereafter. If the required return for Deployment Specialists is 8.5%, what
Jand, Inc., currently pays a dividend of $1.22, which is expected to grow indefinitely at 5%. If the current value of Jand’s shares based on the constant-growth dividend discount model is $32.03,
A firm pays a current dividend of $1.00 which is expected to grow at a rate of 5% indefinitely. If current value of the firm’s shares is $35.00, what is the required return applicable to the
Tri-coat Paints has a current market value of $41 per share with earnings of $3.64. What is the present value of its growth opportunities (PVGO) if the required return is 9%?
a. Computer stocks currently provide an expected rate of return of 16%. MBI, a large computer company, will pay a year-end dividend of $2 per share. If the stock is selling at $50 per share, what
a. MF Corp. has an ROE of 16% and a plowback ratio of 50%. If the coming year’s earnings are expected to be $2 per share, at what price will the stock sell? The market capitalization rate is 12%.b.
The market consensus is that Analog Electronic Corporation has an ROE 5 9%, has a beta of 1.25, and plans to maintain indefinitely its traditional plowback ratio of 2/3. This year’s earnings were
The FI Corporation’s dividends per share are expected to grow indefinitely by 5% per year.a. If this year’s year-end dividend is $8 and the market capitalization rate is 10% per year, what must
The stock of Nogro Corporation is currently selling for $10 per share. Earnings per share in the coming year are expected to be $2. The company has a policy of paying out 50% of its earnings each
The risk-free rate of return is 8%, the expected rate of return on the market portfolio is 15%, and the stock of Xyrong Corporation has a beta coefficient of 1.2. Xyrong pays out 40% of its earnings
The Digital Electronic Quotation System (DEQS) Corporation pays no cash dividends currently and is not expected to for the next 5 years. Its latest EPS was $10, all of which was reinvested in the
Recalculate the intrinsic value of Honda in each of the following scenarios by using the three stage growth model of Spreadsheet. Treat each scenario independently.a. ROE in the constant-growth
Recalculate the intrinsic value of Honda shares using the free cash flow model of Spreadsheet under each of the following assumptions. Treat each scenario independently.a. Honda€™s P/E
The Duo Growth Company just paid a dividend of $1 per share. The dividend is expected to grow at a rate of 25% per year for the next 3 years and then to level off to 5% per year forever. You think
The Generic Genetic (GG) Corporation pays no cash dividends currently and is not expected to for the next 4 years. Its latest EPS was $5, all of which was reinvested in the company. The firm’s
The MoMi Corporation’s cash flow from operations before interest and taxes was $2 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the
Chiptech, Inc., is an established computer chip firm with several profitable existing products as well as some promising new products in development. The company earned $1 a share last year, and just
At Litchfield Chemical Corp. (LCC), a director of the company said that the use of dividend discount models by investors is “proof” that the higher the dividend, the higher the stock price.a.
Helen Morgan, CFA, has been asked to use the DDM to determine the value of Sundanci, Inc. Morgan anticipates that Sundanciâ€™s earnings and dividends will grow at 32% for 2 years and 13%
Abbey Naylor, CFA, has been directed to determine the value of Sundanciâ€™s stock using the Free Cash Flow to Equity (FCFE) model. Naylor believes that Sundanciâ€™s FCFE will grow at 27%
Christie Johnson, CFA, has been assigned to analyze Sundanci using the constant dividend growth price/earnings (P/E) ratio model. Johnson assumes that Sundanciâ€™s earnings and dividends will
Dynamic Communication is a U.S. industrial company with several electronics divisions. The company has just released its 2010 annual report. Tables C and D present a summary of Dynamic€™s
Mike Brandreth, an analyst who specializes in the electronics industry, is preparing a research report on Dynamic Communication. A colleague suggests to Brandreth that he may be able to determine
Peninsular Research is initiating coverage of a mature manufacturing industry. John Jones, CFA, head of the research department, gathered the following fundamental industry y and market data to help
Janet Ludlowâ€™s firm requires all its analysts to use a two-stage dividend discount model (DDM) and the capital asset pricing model (CAPM) to value stocks. Using the CAPM and DDM, Ludlow has
Rio National Corp. is a U.S.-based company and the largest competitor in its industry. Tables F-I present financial statements and related information for the company. Table J presents relevant
While valuing the equity of Rio National Corp. (from the previous problem), Katrina Shaar is considering the use of either cash flow from operations (CFO) or free cash flow to equity (FCFE) in her
Shaar (from the previous problem) has revised slightly her estimated earnings growth rate for Rio National and, using normalized (underlying) EPS, which is adjusted for temporary impacts on earnings,
What is the major difference in approach of international financial reporting standards and U.S. GAAP accounting? What are the advantages and disadvantages of each?
If markets are truly efficient, does it matter whether firms engage in earnings management? On the other hand, if firms manage earnings, what does that say about management’s view on efficient
What financial ratios would a credit rating agency such as Moody’s or Standard & Poor’s be most interested in? Which ratios would be of most interest to a stock market analyst deciding whether
The Crusty Pie Co., which specializes in apple turnovers, has a return on sales higher than the industry average, yet its ROA is the same as the industry average. How can you explain this?
Firm A and firm B have the same ROA, yet firm A’s ROE is higher. How can you explain this?
Use the DuPont system and the following data to find return on equity.Leverage ratio (assets/equity) ......... 2.2Total asset turnover ............. 2.0Net profit margin ............. 5.5%Dividend
Recently, Galaxy Corporation lowered its allowance for doubtful accounts by reducing bad debt expense from 2% of sales to 1% of sales. Ignoring taxes, what are the immediate effects on (a), Operating
Labor officials believe that the management of Hatfield is attempting to understate its net income to avoid making any concessions in the labor negotiations. Which of the following actions by
Hatfield has begun recording all new equipment leases on its books as operating leases, a change from its consistent past use of capital leases, in which the present value of lease payments is
The SEC due diligence team is searching for the reason behind Hatfield’s inventory build-up relative to its sales growth. One way to identify a deliberate manipulation of financial results by
A firm has an ROE of 3%, a debt-to-equity ratio of .5, a tax rate of 35%, and pays an interest rate of 6% on its debt. What is its operating ROA?
A firm has a tax burden ratio of .75, a leverage ratio of 1.25, an interest burden of .6, and a return on sales of 10%. The firm generates $2.40 in sales per dollar of assets. What is the firm’s
Use the following cash flow data for Rocket Transport to find Rocket’sa. Net cash provided by or used in investing activities.b. Net cash provided by or used in financing activities.c. Net increase
The information in the following exhibit comes from the notes to the financial statements of QuickBrush Company and SmileWhite Corporation:Determine which company has the higher quality of earnings
Scott Kelly is reviewing MasterToyâ€™s financial statements in order to estimate its sustainable growth rate. Consider the information presented in the following exhibit.MasterToy, Inc.: Actual
This problem should be solved using the following data:Cash payments for interest ............$(12)Retirement of common stock ............ (32)Cash payments to merchandise suppliers ........
Janet Ludlow is a recently hired analyst. After describing the electric toothbrush industry, her first report focuses on two companies, QuickBrush Company and SmileWhite Corporation, and
a. On the basis of the data shown in Tables C and D, calculate each of the five ROE components for Eastover and Southampton in 2010. Using the five components, calculate ROE for both companies in
a. Mulroney recalled from her CFA studies that the constant-growth discounted dividend model was one way to arrive at a valuation for a company€™s common stock. She collected current
In addition to the discounted dividend model approach, Mulroney decided to look at the price€“ earnings ratio and price€“book ratio, relative to the S&P 500, for both Eastover and
Mulroney previously calculated a valuation for Southampton for both the constant-growth and two-stage DDM as shown below:Constant-Growth Approach Two-Stage Approach$29 .................. $35.50Using
In reviewing the financial statements of the Graceland Rock Company, you note that net income increased while cash flow from operations decreased from 2010 to 2011.a. Explain how net income could
A firm has net sales of $3,000, cash expenses (including taxes) of $1,400, and depreciation of $500. If accounts receivable increase over the period by $400, what would be cash flow from operations?
A company’s current ratio is 2.0. Suppose the company uses cash to retire notes payable due within 1 year. What would be the effect on the current ratio and asset turnover ratio?
Jones Group has been generating stable after-tax return on equity (ROE) despite declining operating income. Explain how it might be able to maintain its stable after-tax ROE.
The DuPont formula defines the net return on shareholdersâ€™ equity as a function of the following components:â€¢ Operating margin.â€¢ Asset turnover.â€¢ Interest burden.â€¢
We said that options can be used either to scale up or reduce overall portfolio risk. What are some examples of risk-increasing and risk-reducing options strategies? Explain each.
What are the trade-offs facing an investor who is considering buying a put option on an existing portfolio?
What are the trade-offs facing an investor who is considering writing a call option on an existing portfolio?
Why do you think the most actively traded options tend to be the ones that are near the money?
Turn back to Figure, which lists prices of various IBM options. Use the data in the figure to calculate the payoff and the profits for investments in each of the following January expiration options,
Suppose you think Walmart stock is going to appreciate substantially in value in the next 6 months. Say the stock€™s current price, S0, is $100, and the call option expiring in 6 months has
The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, and you are convinced it is going to break far out of that range in the next 3 months. You do
The common stock of the C.A.L.L. Corporation has been trading in a narrow range around $50 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of
You are a portfolio manager who uses options positions to customize the risk profile of your clients. In each case, what strategy is best given your client’s objective?a. • Performance to date:
An investor purchases a stock for $38 and a put for $.50 with a strike price of $35. The investor sells a call for $.50 with a strike price of $40. What is the maximum profit and loss for this
Imagine that you are holding 5,000 shares of stock, currently selling at $40 per share. You are ready to sell the shares but would prefer to put off the sale until next year for tax reasons. If you
In this problem, we derive the put-call parity relationship for European options on stocks that pay dividends before option expiration. For simplicity, assume that the stock makes one dividend
a. A butterfly spread is the purchase of one call at exercise price X1, the sale of two calls at exercise price X2, and the purchase of one call at exercise price X3. X1 is less than X2, and X2 is
A bearish spread is the purchase of a call with exercise price X2 and the sale of a call with exercise price X1, with X2 greater than X1. Graph the payoff to this strategy and compare it toFigure.
Joseph Jones, a manager at Computer Science, Inc. (CSI), received 10,000 shares of company stock as part of his compensation package. The stock currently sells at $40 a share. Joseph would like to
Use the spreadsheet from the Excel Application boxes on spreads and straddles to answer these questions.a. Plot the payoff and profit diagrams to a straddle position with an exercise (strike) price
The agricultural price support system guarantees farmers a minimum price for their output. Describe the program provisions as an option. What is the asset? The exercise price?
In what ways is owning a corporate bond similar to writing a put option? A call option?
An executive compensation scheme might provide a manager a bonus of $1,000 for every dollar by which the company’s stock price exceeds some cutoff level. In what way is this arrangement equivalent
Consider the following options portfolio. You write a January expiration call option on IBM with exercise price 130. You write a January IBM put option with exercise price 125.a. Graph the payoff of
Consider the following portfolio. You write a put option with exercise price 90 and buy a put option on the same stock with the same expiration date with exercise price 95.a. Plot the value of the
A Ford put option with strike price 60 trading on the Acme options exchange sells for $2. To your amazement, a Ford put with the same maturity selling on the Apex options exchange but with strike
Assume a stock has a value of $100. The stock is expected to pay a dividend of $2 per share at year-end. An at-the-money European-style put option with one-year maturity sells for $7. If the annual
You buy a share of stock, write a 1-year call option with X = $10, and buy a 1-year put option with X = $10. Your net outlay to establish the entire portfolio is $9.50. What is the risk-free interest
You write a put option with X = 100 and buy a put with X = 110. The puts are on the same stock and have the same expiration date.a. Draw the payoff graph for this strategy.b. Draw the profit graph
Joe Finance has just purchased a stock index fund, currently selling at $400 per share. To protect against losses, Joe also purchased an at-the-money European put option on the fund for $20, with
You write a call option with X = 50 and buy a call with X = 60. The options are on the same stock and have the same expiration date. One of the calls sells for $3; the other sells for $9.a. Draw the
Devise a portfolio using only call options and shares of stock with the following value (payoff) at the option expiration date. If the stock price is currently 53, what kind of bet is the
You are attempting to formulate an investment strategy. On the one hand, you think there is great upward potential in the stock market and would like to participate in the upward move if it
Using the IBM option prices in Figure, calculate the market price of a riskless zero-coupon bond with face value $125 that matures in January on the same date as the listedoptions.
Demonstrate that an at-the-money call option on a given stock must cost more than an at-the money put option on that stock with the same maturity. The stock will pay no dividends until after the
Donna Donie, CFA, has a client who believes the common stock price of TRT Materials (currently $58 per share) could move substantially in either direction in reaction to an expected court decision
Martin Bowman is preparing a report distinguishing traditional debt securities from structured note securities. Discuss how the following structured note securities differ from a traditional debt
Suresh Singh, CFA, is analyzing a convertible bond. The characteristics of the bond and the underlying common stock are given in the following exhibit:Convertible Bond CharacteristicsPar value
Rich McDonald, CFA, is evaluating his investment alternatives in Ytel Incorporated by analyzing a Ytel convertible bond and Ytel common equity. Characteristics of the two securities are given in the
We showed in the text that the value of a call option increases with the volatility of the stock. Is this also true of put option values? Use the put-call parity theorem as well as a numerical
Would you expect a $1 increase in a call option’s exercise price to lead to a decrease in the option’s value of more or less than $1?
Is a put option on a high-beta stock worth more than one on a low-beta stock? The stocks have identical firm-specific risk.

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