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financial reporting financial statement analysis and valuation

Questions and Answers of Financial Reporting Financial Statement Analysis And Valuation

6.3 Assume TPI plans to reduce net debt to $100 million, pay 8% interest, keep debt at that level through 2011 and then switch to a 26% debt ratio via another equity issue. Use original APV to
6.2 Obtain the original APV of TPI Inc. using the data of Problem 2.7, and compare your result to that obtained using WACC in the solution to Problem 2.7. Project interest expenses on the basis of
6.1 Discuss the reason for switching to standard WACC valuation to compute the continuation value in APV discounting.Problems 113
North American stock is trading at $35 per share and there are 100 million shares outstanding. What is the maximum share price GDC can afford to pay for North American if it estimates that it needs 6
5.8 North American Labels, Inc. is made up of two business units: Pinkerton and Pipedream.Great Dane Capital (GDC) has identified North American as a possible takeover target.Estimates of the
The current price of SCN stock is $36.7 per share. There are 200 million shares outstanding. Your own research on the matter has produced the following information:13See Stewart (1991), op cit .14In
5.7 Mr. N. N. Miller, an important stockholder of SCN has asked you, a member of the investment banking firm of Bauer & Smith, to determine if his conjecture has any merit. Miller claims that SCN is
5.6 Capital invested amounts to $100, ROC = 10%, and WACC = 15%. ROC will remain at 10% during the next 5 years; afterwards it will increase to 15%, and it will stay at that level. The firm is
5.5 Compute the enterprise value and the required capital investment as a fraction of NOPAT for ROC = 25% for 10 years and ROC = 10% thereafter, WACC = 10%, g = 15%, and initial invested capital
5.4 Consider the case in which initial equity capital is $100 million, ROE = 25%, the cost of equity is 15%, the duration of the positive spread is 10 years, and expected growth during this period is
5.3 Invested capital is $100 million. ROC is expected to be 20% for the next 10 years and drop to 10% afterwards. The cost of capital is 10%. The firm is expected to grow at 5% per year.What is the
5.2 Recalculate the value of TPI Inc. using the EVA approach for an initial capital of $90 million and compare it to your result in Problem 5.1.
5.1 Value TPI Inc. using the EVA approach with the data of Problem 2.7 and compare your result to the answer to Problem 2.7. Assume that initial capital is $70 million.
(d) If the ROC in the expansion described in (c) is expected to be only 5%, the growth opportunity is worth –$109 and would bring down the enterprise value from $2,000 to$2,000 − $109 = $1,891.
(c) Consider instead the case in which the firm expects to make only one additional expansion equal to C4 = 500. The expansion would take place at the end of year 4 and yield ROC = 9% for the
(b) Assume Ct is expected to be positive in future years but to yield just the cost of capital.Then, Vis still $2,000 because growth opportunities just break even and have zero NPV.
(a) For a firm with NOPAT1 = 140, Ct = 0, and cost of capital equal to 7%, enterprise value is equal to $140/0.07 = $2,000.
4.8a. The following exhibit contains data for a number of paper companies as of December 2002. Use them to estimate trailing and forward revenue, EBITDA, and P/E multiples of each company. Compute
4.7 Interpret the following price-earning and price-to-book ratios according to the discussion of the size premium made in Chapter 3, Section 3.7.82 Chapter 4 Metrics and Multiples Price-Earning
4.6 British Telecommunications (BT) went public in December 1984. American Depository Receipts (ADRs) consisting of 10 BT shares were sold to U.S. investors. BT provided local, national, and
4.5 Compute the equivalent EBITDA multiple for Consumer World Inc. as per the data of Problem 4.4. In addition, assume depreciation/sales = 4%, EBITDA/sales = 8%, and WACC = 9%.
4.4 The P/E multiple of Consumer World Inc. is 15×. In addition, its cost of equity = 12%, growth rate = 7%, and tax rate = 40%. Decompose the P/E multiple into a no-growth component and the
d. Interpret the results obtained in a through c.
c. Assume the multiples computed for a net debt ratio of 30% correspond to a large-cap firm with a growth rate of 8% and a cost of equity computed from a riskless rate of 5.64%, an equity premium of
b. How would the three ratios change for a net debt ratio equal to 20%? For a net debt ratio equal to 40%? Assume that changes in the cost of debt are negligible.Problems 81
a. What are the equivalent EBITDA and revenue multiples?
4.3 Consider a company with a forward P/E multiple equal to 18×, tax rate 40%, debt ratio 30%, cost of debt 9%, depreciation to sales 4%, and EBITDA to sales margin 10%. Answer the following
4.2 Sometimes, it is claimed that stocks are fairly priced when earnings yields equal the yield on high-grade corporate bonds. The earnings yield is defined as per share profits divided by price.
b. What is the growth rate of profit after taxes assumed for year 6 and beyond? State the assumptions needed in order to answer this question. Estimate the P/E multiple with respect to year 6
a. What is the value of equity as of the beginning of year 1? What is the P/E multiple with respect to year 1 earnings implied by your valuation? What is the P/E multiple with respect to year 5
4.1 Consider the following data:End of Year 1 2 3 4 5(million $)Profit after taxes 5 6 8 10 11 Free cash flow 0 0 0 5 8 Continuation value of equity 120 Stockholders’ required return on equity =
3.9 Verify the estimation of AdvPak cost of equity made in Section 3.7. Do it step by step starting from the levered β coefficients of the comparable companies.
b. Update the data to the present and compute the average unlevered β coefficient.
a. Adjust their estimated betas for regression toward the mean (see Section 3.3) and estimate the average unlevered β coefficients.
3.8 The previous exhibit contains estimations of β coefficients, market capitalization, and net debt for a number of paper companies.
3.7 The β coefficient of the stock of a company is 1.32. Its average market value net debt ratio is 50%. What is its unlevered β coefficient?Paper Industry Capital Structure and β Coefficients as
3.6 Use the Equity Premium Calculator to estimate the equity premium as of January 16, 2007 with the following data:S&P 500 forward P/E (next 12 months) 15.0 Consensus 5-year earnings growth rate
10. Note that the first year growth is embedded in the forward multiple.73See Appendix B.64 Chapter 3 The Equity Premium and the Cost of Capital Payout × (1 +Real Compound Compound n Growth Growth
3.5 Verify the value of the prospective equity premium as of December 26, 2006 as computed in Section 3.2.5 using the data provided there. First, verify that the values of undiscounted terms in
3.4 Recalculate the equity premium with the data of Problem 3.3 allowing for gradual convergence toward trend values of growth and payout as done in Section 3.2.5. (You can use the spreadsheet Equity
b. Suppose that the consensus forecast of nominal earnings and dividend growth of the S&P 500 for the next 5 years was 16% or 11% in real terms. Furthermore, since the long-term real growth of
a. What is the expected real growth rate of earnings implied by the S&P 500 P/E ratio according to Equation (3.5) of the dividend growth model? Do you think the implied growth rate was sustainable in
3.3 Consider the following data on the S&P 500 index on October 14, 1987, just before the crash of 1987:Index 305.2 P/E 21.2 Dividend yield 2.9%Payout 61.4%Beta 1.0 Equity premium over long Treasury
3.2. Use the dividend growth model and the following data and assumptions: stock price =$76.05, dividend yield = 1.7%, next 5-year growth of EPS = 7.0%, earnings growth over years 6 to 10 decreases
3.2 Verify the calculation of Exxon’s cost of equity as of December 26, 2006 made in Exhibit
3.1 Explain the nature of the survivorship bias and why it results in higher observed equity premiums for those markets that survived over the long run such as the U.S. and U.K. stock markets.
2.11 On July 26, 2002, AOL-Time Warner stock closed at $10.90, had a next-year consensus earnings estimate of $0.99 per share, forward P/E = 11, and 18.5% annual nominal earnings growth expected for
2.10 In the spring of 1999, the pricing of Internet companies was a matter of debate among finance practitioners and academics alike. Take the case of AOL, which on April 22, 1999 closed at$148.6875,
c. Compute the trailing P/E multiple implied by the continuation value of your valuation.(Hint: Construct the pro-forma income statement for 2012.)
b. Estimate the value per share of Storr’s equity and the gross proceeds to 3DS.
a. Estimate the free flows of Storr for the years 2008 to 2012 and compute its enterprise value as of 1/1/2008.
3DS intends to put net debt equivalent to 50% of Storr’s enterprise value on the balance sheet. Net debt will pay 7.9% interest. 3DS intends to capitalize the company with 10 million shares and
For simplicity, assume that all debt financing for each year is raised at the beginning of the year such that beginning-of-year debt and average debt are the same.2.9 The holding company 3DS is
c. Compute and interpret the prospective (i.e., with respect to next-year-earnings) priceearnings multiples implied by your valuation at year-end 2007 and year-end 2011. (Hint:Construct the pro-forma
b. Estimate the value per share of Square Peg’s equity.
a. Estimate the free cash flows of Square Peg for the 5 years 2008 to 2012 and compute the enterprise value as of year-end 2007.
In addition, Square Peg’s tax rate is 38%, its WACC is 11%, and its net debt amounts to $650 million and is projected to grow to $820 million by the end of 2011. The interest rate on debt is 8.5%.
After 2011, EBIT and deferred taxes are expected to grow at the nominal rate of 3%, capital expenditures will equal depreciation plus increases in deferred taxes, and net working capital will not
For simplicity, assume that all debt financing for each year is raised at the beginning of the year such that beginning-of-year debt and average debt are the same.2.8 Consider the following 4-year
d. Would the proceeds of the IPO be sufficient for retire $53 million of debt?
c. Check if a debt ratio in the mid 20s is consistent with maintaining an EBIT interest coverage ratio of about 6 times.
b. Compute and interpret the prospective (i.e., with respect to next-year-earnings) priceearnings multiple implied by your valuation at the beginning of 2008 and compare it to the investment
a. Estimate the value of TPI’s share of common equity.
On the basis of the share prices of recent IPOs and other companies in the industry and the growth prospects of TPI, the investment bankers have suggested a preliminary IPO price based upon a P/E
The CFO plans to maintain the coverage ratio at that level afterwards and expects to raise future debt at an interest rate of about 8%. As far as the debt-ratio is concerned, the goal is to keep it
As a consequence, TPI is expected to begin 2008 with its net debt reduced to $59 million and its interest coverage ratio (here defined as EBIT-to-interest) increased to about 5.99.
2.7 TPI Inc., a manufacturer of computer storage devices, is planning to go public at the end of 2007. The purpose of the IPO is to retire debt and liquefy the position of some of its original
2.6 The buyer of Problem 2.5 is also considering the possibility of financing the acquisition with an alternative structure designed to maintain the interest coverage ratio at 4.87 times.(Interest
2.5 A prospective buyer of Fleet Meat Packing Co. would like to finance the acquisition entirely with equity capital and not use debt financing in the future. The buyer would like to determine the
2.4 GCL Industries is an industrial conglomerate undergoing restructuring. As part of its restructuring program GCL is considering the sale of its low-growth Fleet Meat Packing unit.Fleet is in the
2.3 Using the spreadsheet developed in Problem 2.2 change the growth of sales assumptions and reproduce Exhibit 2.11.
2.2 Using the forecasting assumptions of Exhibit 2.1 and the line-item formulas detailed in Note N2.1, reproduce Exhibits 2.2 to 2.5 on a worksheet. (Note that slight differences may result because
2.1 A firm sells a used piece of equipment for $150,000. The equipment was originally acquired for $500,000 and is 80% depreciated for tax purposes at the time of the sale. The firm’s marginal tax
How to value financial and real options.
How to value companies with changing capital structures.
How to compute economic value added for companies and business units.
How to estimate the sustainable debt of a company and the debt capacity of a highly leveraged transaction.vii viii Preface
How to estimate and apply valuation multiples.
How to perform discounted cash-flow valuation.
How to estimate the cost of capital for public and private companies from developed and emerging markets.
Consider the following two earnings forecasting models:E,(EPS) is the expected forecast of earnings per share for year t+1, given informa- tion available at t. Model 1 is usually called a random walk
Q9-12. 8 What is the difference between a spin-off and a split-off?
Q9-11. How does a weakening $US affect the consolidated balance sheet of a company with foreign subsidiaries?
Q9-10. What are some limitations of consolidated financial. statements?
Q9-9.A For accounting purposes, what are the two types of hedges? How are unrealized derivative gains and losses treated under each accounting method?
Q9-8.A What is a derivative? How do companies use them to hedge risk?
Q9-7. What is the underlying objective of consolidated financial statements?
Q9-6. What accounting method is used when a stock investment represents more than 50% of the in vestee company's voting stock and allows the investor company to "control" the investee company?
Q9-5. On January 1 of the current year, Tse Company purchases 30% of the common stock of Green Company for $ 1,300,000 cash. This ownership allows Tse to exert significant influence over Green.
Q9-4. What does significant influence imply regarding intercorporate investments? Describe the accounting procedures used for such investments.
Q9-3. Where are unrealized gains and losses related to marketable equity securities reported in the financial statements?
Q9-2. What is an unrealized gain (loss)? Explain.
Q9-1. What is a passive investment? Why do companies have passive investments?
Q8-18.Describe the accounting for a convertible bond. Can the conversion ever result in the recognition of a gain in the income statement?
Q8-17.What are three common forms of stock-based compensation and why do companies use such forms of compensation?
Q8-16.What items are typically reported under the stockholders' equity category of accumulated other comprehensive income (AOCI)?
Q8-15.What information is reported in a statement of stockholders' equity?
Q8-14.Employee stock options potentially dilute earnings per share (EPS). What can companies do to offset these dilutive effects and how might this action affect the bal ance sheet?
Q8-13.When a company reports negative retained earnings on the bal ance sheet (a deficit), can we conclude that the company has reported significant net losses on the income statement?
Q8-12.What is meant by the market cap of a company and how is it determined?

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