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financial reporting financial statement analysis and valuation

Questions and Answers of Financial Reporting Financial Statement Analysis And Valuation

An airline operator signs an agreement to lease an aircraft for twenty years. Annual lease obligations, payable at the beginning of the year, are $4.7 million. What are the financial statement
Assess the company’s future prospects, given your insights from questions 1 and 2 and the information in the case about the company’s turnaround strategy.AppendixLO1
What do you think are the motives of Harnischfeger’s management in making the changes in its financial reporting policies? Do you think investors will see through these changes?AppendixLO1
Identify all the accounting policy changes and accounting estimates that Harnischfeger made during 1984. Estimate, as accurately as possible, the effect of these on the company’s 1984 reported
A fund manager states, “I refuse to buy any company that makes a voluntary accounting change, since it’s certainly the case that its management is trying to hide bad news.” Can you think of any
The conservatism principle arises because of concerns about management’s incentives to overstate the firm’s performance. Joe Banks argues, “We could get rid of conservatism and make accounting
a. If management reports truthfully, what economic events are likely to prompt the following accounting changes?• Increase in the estimated life of depreciable assets• Decrease in the
Many firms recognize revenues at the point of shipment. This provides an incentive to accelerate revenues by shipping goods at the end of the quarter. Consider two com-panies, one of which ships its
Bill Simon says, “We should get rid of the FASB and SEC, since free market forces will make sure that companies report reliable information.” Do you agree? Why or why not?AppendixLO1
Fred argues, “The standards that I like most are the ones that eliminate all management discretion in reporting—that way I get uniform numbers across all companies and don’t have to worry about
A finance student states, “I don’t understand why anyone pays any attention to accounting earnings numbers, given that a ‘clean’ number like cash from operations is readily available.” Do
The cigarette industry is subject to litigation for health hazards posed by its products. In the United States, the industry has been negotiating a settlement of these claims with state and federal
Tesco plc is one of the world’s largest food retailers. Fiscal year 2014 (the year ended February 28, 2015) was a rocky year for the retailer. The company’s sales and margins had come under
Exhibit P2 displays a selected set of financial ratios for the years 2015–2017 of three fashion retailers: USbased Gap, UK-based Next, and Japan-based Uniqlo (Fast Retailing). Using this set of
In 2009, following the worldwide credit crisis, several US-based car manufacturers, such as Chrysler and General Motors, approached bankruptcy and needed to be bailed out by the US government and
On June 24, 2015, two grocery retailers, Netherlandsbased Ahold and Belgium-based Delhaize, announced their intention to engage in a merger of equals. By merging their activities, the two companies
GlaxoSmithKline is one of the largest pharmaceutical firms in the world, and over an extended period of time in the recent past, it consistently earned higher ROEs than the pharmaceutical industry as
An analyst claims, “It is not worth my time to develop detailed forecasts of revenue growth, profit margins, etcetera, to make earnings projections.I can be almost as accurate, at virtually no
How would the following events (reported this year) affect your forecasts of a firm’s future profit or loss?● An asset write-down.● A merger or acquisition.● The sale of a major division.●
An investment banker states, “It is not worth my while to worry about detailed long-term forecasts. Instead, I use the following approach when forecasting cash flows beyond three years. I assume
On April 12, 2017, UK-based retailer Tesco plc presented its financial statements for the fiscal year ending on February 28, 2017, announcing its first annual increase in like-for-like sales in seven
Jonas Borg, an analyst at EMH Securities, states: “I don’t know why anyone would ever try to value profits. Obviously, the market knows that profits can be manipulated and only values cash
Analysts reassess Manufactured Earnings’ future performance as follows: growth in book value increases to 12 percent per year, but the ROE of the incremental book value is only 15 percent.What is
Hugo Boss AG is a German designer, manufacturer, and distributer of men’s and women’s clothing, operating in the higher end of the clothing retail industry.During the period 2004–2017, the
Germany-based Adidas is one of the world’s largest producers of sportswear. On March 15, 2018, one day after the publication of Adidas’s 2017 financial statements, an analyst produces a set of
A spreadsheet containing Hennes & Mauritz’s actual and forecasted financial statements as well as the valuation described in this chapter is available on the companion website of this book.How
Calculate H&M’s cash payouts to its shareholders in the years 2018–2027 that are implicitly assumed in the projections in Table 8.3. TABLE 8.3 Forecasted financial statements for Hennes &
How will the abnormal profit calculations in Table 8.4 change if the cost of equity assumption is changed to 10 percent? TABLE 8.4 Performance forecasts for Hennes & Mauritz Fiscal year 2018 2019
How will the terminal values in Table 8.6 change if the revenue growth rate in years 2028 and beyond is 4 percent, and the company keeps forever its abnormal returns at the same level as in fiscal
Under the competitive equilibrium assumption, the terminal value in the discounted cash flow model is the present value of the end-of-year book value of equity in the terminal year. Explain.
Under the competitive equilibrium assumption, the terminal value in the discounted abnormal profit growth model is the present value of abnormal profit in the terminal year times minus one,
What will be H&M’s cost of equity if the equity market risk premium is 6 percent?
Assume that H&M changes its capital structure so that its market value weight of debt to capital increases to 45 percent, and its after-tax interest rate on debt at this new leverage level is 4
Nancy Smith says she is uncomfortable making the assumption that H&M’s dividend payout will vary from year to year. If she makes a constant dividend payout assumption, what changes does she have to
1 The analyst following Hugo Boss estimates a target price of €77 per share. Under the assumption that the company’s profit margins, asset turnover, and capital structure remain constant after
In November 2008 the Belgian InBev S.A. completed the acquisition of US-based Anheuser-Busch. The brewer acquired Anheuser-Busch for close to €40 billion, of which it classified approximately €25
Betty Li, the finance director of a company applying for a new loan, states, “I will never agree to a debt covenant that restricts my ability to pay dividends to my shareholders because it reduces
A bank extends three loans to the following companies: an Italy-based biotech firm; a France-based car manufacturer; and a UK-based food retailer. How may these three loans differ from each other in
Private equity firms have become an important player in the acquisition market. These private investment groups offer to buy a target firm, often with the cooperation of management, and then take the
Kim Silverman, finance director of the First Public Bank, notes: “We are fortunate to have a cost of capital of only 10 percent. We want to leverage this advantage by acquiring other banks that
The Munich Beer Company plans to acquire Liverpool Beer Co. for £60 per share, a 50 percent premium over the current market price. Jan Höppe, the financial director of Munich Beer, argues that this
You have been hired by GS Investment Bank to work in the merger department. The analysis required for all potential acquisitions includes an examination of the target for any off-balance sheet assets
At the end of 2017, the Rolls-Royce Group reported in its footnotes that its plant and equipment had an original cost of £5,035 million and that accumulated depreciation was £2,984. Rolls-Royce
Car manufacturers Renault and Fiat Chrysler disclosed the following information in their 2017 financial statements:Purely based on the companies’ deferred tax liabilities, which of the two
On December 31, 2017, Belgian-Dutch food retailer Ahold-Delhaize disclosed the following information about its operating lease commitments:Ahold-Delhaize’s operating lease expense in 2017 amounted
What would be the value of Sanofi’s R&D asset at the end of fiscal years 2016 and 2017 if the average expected life of its R&D investments is only three years?
Under IFRS Standards, firms can capitalize development outlays, whereas under US GAAP such outlays must be expensed as incurred. In its 2016 IFRS Standards-based financial statements, Philips
What approaches would you use to estimate the value of brands? What assumptions underlie these approaches? As a financial analyst, what would you use to assess whether the brand value of £8.3
On December 31, 2016 and 2017, Deutsche Telekom AG had net trade receivables in the amount of €9,179 million and €9,553 million, respectively. The following proportion of the receivables was past
Discuss the components of the pension expense. In your opinion, is it reasonable to exclude some components of the change in the unfunded obligation from earnings? Is the calculation of the pension
Some argue that (1) because estimating the value of contingent claims (such as executive stock options) is surrounded with uncertainty and (2) the claims do not represent a cash outlay, the value of
Consider the acquisitions by Germany-based media company EM.TV & Merchandising AG of the Jim Henson Company, creator of The Muppet Show, and Speed Investments Ltd., co-owner of the commercial rights
Car manufacturers Audi, BMW Group, and Skoda Auto spend considerable amounts on research and development and capitalize a proportion of these amounts each year. Each manufacturer systematically
Hennes & Mauritz (H&M) and Inditex are publicly listed apparel retailers. The following information is taken from their financial statements for the fiscal years ending on November 30, 2017,
Sven Broker, an analyst with an established brokerage firm, comments: “The critical number I look at for any company is operating cash flow.If cash flows are less than earnings, I consider a
In 2018 Dutch-Belgian food retailer Ahold-Delhaize had a return on equity of 12 percent, whereas France-based Groupe Casino’s return was only 2 percent. Use the decomposed ROE framework to provide
On this book’s companion website, there is a spreadsheet containing the financial statements of the following:a Vodafone plc for the fiscal year ended March 31, 2018.b The Unilever Group for the
Consider the following companies.Juventus F.C. S.p.A. is an Italian publicly listed football club. The club’s primary sources of revenue are:a Season and single ticket sales.b Television, radio,
In their 2017 financial statements, five international fashion retailers – that is, Burberry, Esprit, French Connection, Inditex, and Next – explicitly discussed their “key accounting
Euro Disney S.C.A. is a holding company, holding 82 percent of the shares of Euro Disney Associés S.C.A., which operates, amongst others, the Disneyland Park, Walt Disney Studios Park, Disneyland
Up until the mid-2010s, the Association of European Airlines (AEA) represented 24 established European airlines, mostly national flag carriers such as Air France–KLM, Lufthansa, Finnair, and SAS,
Examples of European firms that operate in the pharmaceutical industry are GlaxoSmithKline and Bayer. Examples of European firms that operate in the tour operating industry are Thomas Cook and TUI.
In 2017 Adidas was a profitable sportswear company.Traditionally, Adidas did not produce most of the shoes, apparel, and accessories that it sold.Instead, the company entered into contracts with
In response to the deregulation of the European airline industry during the 1980s and 1990s, European airlines followed their US peers in starting frequent flyer programs as a way to differentiate
Matti, who has just completed his first finance course, is unsure whether he should take a course in business analysis and valuation using financial statements since he believes that financial
A finance student states, “I don’t understand why anyone pays any attention to accounting profits, given that a ‘clean’ number like cash from operations is readily available.” Do you agree?
Bill Simon says, “We should get rid of the IASB, IFRS Standards, and EU Accounting and Audit Directives, since free market forces will make sure that companies report reliable information.”Do you
Juan Perez argues that “Learning how to do business analysis and valuation using financial statements is not very useful, unless you are interested in becoming a financial analyst.”Comment.
Many economists believe that innovation is one of the main building blocks of economic growth and job creation. Not all economic infrastructures, however, are equally supportive of innovation. In
One of the key accounting policies of banks and other financial institutions is how they recognize (changes in) the fair value of the securities that they hold in the balance sheet and income
In the aftermath of the dot-com crash, many tried to pinpoint whose fault it was that the whole bubble occurred in the first place. As mentioned previously, sell-side analysts, often the most visible
The essential difference between the statement of cash flows and the income statement is that:(a) The statement of cash flows only deals with the items measurable in monetary terms, whereas the
Which of the following is not a cash inflow?(a) Proceeds from borrowing.(b) Returns on interest-earning assets.(c) Payment of dividends.(d) Returns on equity securities.
Which of the following is a cash outflow?(a) Proceeds from borrowing.(b) Repayments of debt principal.(c) Payment for taxes.(d) Both (b) and (c).
How would payments for taxes be classified?(a) Operating outflow.(b) Operating inflow.(c) Investing outflow.(d) Financing outflow
How would the sale of a building be classified?(a) Operating outflow.(b) Operating inflow.(c) Investing inflow.(d) Financing inflow.
How would the repayment of debt principal be classified?(a) Operating outflow.(b) Operating inflow.(c) Investing outflow.(d) Financing outflow
What type of accounts are accounts receivable and inventory?(a) Cash accounts.(b) Operating accounts.(c) Financing accounts.(d) Investing accounts.
What type of accounts are notes payable and current maturities of longterm debt?(a) Cash accounts.(b) Operating accounts.(c) Financing accounts.(d) Investing accounts.
The change in retained earnings is affected by which of the following?(a) Net income and common stock.(b) Net income and paid-in capital.(c) Net income and payment of dividends.(d) Payment of
The indirect method of the statement of cash flows starts with:(a) Deferrals.(b) Non-cash items such as depreciation and amortization.(c) Net income.(d) Gains and losses on asset sales.
What constitutes a cash inflow?(a) + Asset account.(b) + Liability account.(c) + Equity account.(d) (b) and (c)
What constitutes a cash outflow?(a) + Asset account(b) – Liability account(c) – Equity account(d) All of the above
What are internal sources of cash?(a) Cash inflows from operating activities.(b) Cash inflows from investing activities.(c) Cash inflows from financing activities.(d) All of the above.
What are external sources of cash?(a) Cash inflows from operating activities.(b) Cash inflows from investing activities.(c) Cash inflows from financing activities.(d) Both (b) and (c).
Which of the following items is included in the adjustment of net income to obtain cash flow from operating activities?(a) Depreciation expense for the period.(b) The change in deferred
Which statement is true for gains and losses from capital asset sales?(a) They do not affect cash and are excluded from the statement of cash flows.(b) They are included in cash flows from
Which of the following current assets is included in the adjustment of net income to obtain cash flow from operating activities?(a) Accounts receivable.(b) Inventory.(c) Prepaid expenses.(d) All
Which of the following current liability accounts is included in the adjustment of expenses to obtain cash flow from operating activities?(a) Accounts payable.(b) Notes payable and current
How is it possible for a firm to be profitable and still go bankrupt?(a) Earnings have increased more rapidly than sales.(b) The firm has positive net income but has failed to generate cash from
Which of the following statements is true?(a) The decrease in prepaid expenses is deducted because the firm has recognized an expense in the current period for which cash was paid in an earlier
Which of the following statements is false?(a) Operating activities include delivering or producing goods for sale and providing services and the cash effects of transactions and other events that
Which of the following could lead to cash flow problems?(a) Obsolete inventory, accounts receivable of inferior quality, easing of credit by suppliers.(b) Slow-moving inventory, accounts receivable
Indicate whether each of the following transactions for the current period would appear as an operating, investing, or financing activity in the statement of cash flows. If any transaction does not
State, for the transactions affecting cash, whether they relate to an operating, investing, financing activity, or a non-cash transaction.(a) Bank interest paid.(b) Lease paid.(c) Depreciation
The income statement and balance sheet of All Wired, Inc., follows:Additionally, All Wired purchased land of $24,500 by financing it 100% with long-term notes payable during 2016. During the year,
All Wired is a marketing services firm that creates advertising copy for clients and places the advertising in various mass media. Accounts receivable represents amounts owed by clients, and accounts
Which of the following is not a source of information for the financial statement user?(a) Auditor’s report.(b) Proxy statement.(c) Stock price(d) Management discussion and analysis.
Which of these are tools and techniques used by the financial analyst to convert financial statement data from sources that facilitate the evaluation of a firm’s financial condition and
Which one is not a key financial ratio?(a) Liquidity ratios.(b) Activity ratios.(c) Common size ratios.(d) Profitability ratios.

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