Financial Statement Analysis 11th Edition K. R. Subramanyam - Solutions

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The Policy Committee of your company decides to change investment strategies. This change entails an increase in exposure to the stocks of large companies producing consumer products dominated by leading brands. The committee decides the soft drink industry, specifically Coca-Cola Company (KO) and
Select a company from a nonregulated industry for which you can obtain complete financial statements for at least the most recent six years.Required:Based on these financial statements, the company’s background, industry statistics, and other market and company information, prepare a financial
You are the portfolio manager of a highyield bond portfolio at Solomon Group.You are concerned about the financial stability of Florida Gypsum Corporation (FGC), whose bonds represent one of the holdings in your portfolio at the middle of Year 6. The bonds you hold, 13.25% senior subordinated
Refer to the financial statement data of ABEX Chemicals, Inc., reproduced in Case 10–5.Required:a. Prepare a forecast of ABEX’s total operating income for Year 10. (Hint: Refer to forecast data for volume, price, and cost.)b. Identify additional information necessary to prepare a forecast of
Selected financial ratios from the(i) S&P 400, (ii) the brewing industry, and (iii) Anheuser-Busch Companies (BUD), for Years 2 through 6, are reproduced below.Required:a. Using these financial ratios, analyze the relative credit position of:(1) Brewing industry compared with the S&P 400.(2)
Reproduced below are condensed common-size financial statements of companies operating in nine different industries. The nine industries represented are:a. Tobacco manufacturing.d. Utilities. g. Grocery stores.b. Pharmaceuticals.e. Investment advising. h. Computer equipment.c. Health care.f.
The following financial data are available for each of two manufacturers of mountain bikes.Required:Compute and analyze each of the following seven factors and ratios. For each factor and ratio, does the evidence imply a higher or lower PE for Axel or Bike?a. Growth in earnings per share.e. Current
What are the attributes of a good financial analysis report? What distinct sections constitute a complete financial analysis report?
What additional knowledge and analytical skills must an analysis of financial statements bring to bear on companies operating in specialized or regulated industries?
What are the analytical implications of recognizing that financial statements are an abstraction of a company’s underlying business transactions and events?
What type of investigation should precede analysis of financial statements?
Identify and describe the six major building blocks of financial statement analysis. What is the initial step in applying the building blocks to an analysis of financial statements?
Use the data from Christy Company in the chapter to answer the following:a. Calculate Christy Company’s residual income for each of Year 1 through Year 5.b. Use the accounting-based equity valuation model to estimate the value of Christy’s equity at January 1 of each of Year 2 through Year 5.c.
Aspero, Inc., has sales of approximately $500,000 per year. Aspero requires a short-term loan of$100,000 to finance its working capital requirements. Two banks are considering Aspero’s loan request but each bank requires certain minimum conditions be satisfied. Bank America requires at least a
You are considering the purchase of all outstanding preferred and common stock of Finex, Inc., PROBLEM 11–2 for $700,000 on January 2, Year 2. Finex’s financial statements for Year 1 are reproduced below:You need to adjust net income to estimate the earnings potential of an acquisition. The
Refer to the financial statements of Quaker Oats Company in Problem 9–6 along with the following footnotes.Required:a. Recast Quaker Oats’ income statements through Income from Continuing Operations for Years 11, 10, and 9 (estimate federal income tax at 34%).b. Interpret trends revealed by the
An analyst needs to understand the sources and implications of variability in financial statement data.Required:Identify factors affecting variability in earnings per share, dividends per share, and market price per share that derive from:a. The company.b. The economy
Interim accounting statements comprise a major part of financial reporting. There is ongoing discussion considering the relevance of reporting on business activities for interim periods.Required:a. Discuss how revenues are recognized for interim periods. Comment on differences in revenue
A financial analyst’s comments on income statement classifications follow: EXERCISE 11–3 We should drop the word extraordinary and leave it to users to decide whether items like a strike will recur next year or not, and to decide whether a lease abandonment will recur or not. We need an
The president of Vancouver Viacom made the following comments to shareholders:Regarding management attitudes, Vancouver Viacom has resisted joining an increasing number of companies who along with earnings announcements make extraordinary or nonrecurring loss announcements. Many of these cases read
Refer to the financial statements of Quaker Oats Company in Problem 9–6 along with the following footnote.Required:a. Prepare a schedule where maintenance and repairs expense is shown (i) as a percentage of revenues and (ii) as a percentage of property, plant, and equipment (net) for:(1) Year 9
What are the implications of interim reports for financial analysis?
What are major disclosure requirements for interim reports? What are the objectives of these requirements?
Interim financial reports are subject to limitations and distortions. Identify and discuss at least two reasons for this.
How are interim financial statements used in analysis? What accounting problems with interim statements must we be alert to in an analysis?
What is earning power? Why is earning power important for financial statement analysis?
How do MD&A disclosure requirements aid in earnings forecasting?
What is the difference between forecasting and extrapolation of earnings?
a. Identify major determinants of PB and PE ratios.b. How can the analyst use jointly the values of PB and PE ratios in assessing the merits of a particular stock investment?
Can accounting manipulations influence earnings-based estimates of company valuation? Explain.
Comment on the following statement: “Extraordinary gains or losses do not result from ‘normal’ or‘planned’ business activities and, consequently, they should not be used in evaluating managerial performance.” Do you agree?
Describe the effects of extraordinary items on:a. Company resources.b. Management evaluation.
What three categories can unusual or extraordinary items be usefully subdivided into for purposes of analysis? Provide examples for each category. How should an analysis treat items in each of these categories? Is a certain treatment implied under all circumstances? Explain.
What are the analysis objectives in evaluating extraordinary items?
Why is management interested in the reporting of extraordinary gains and losses?
What factors and incentives motivate companies (management) to engage in earnings management?What are the implications of these incentives for financial statement analysis?
Identify and explain at least three types of earnings management.
Explain earnings management. How is earnings management distinguished from fraudulent reporting?
Describe the adjustment of the income statement for financial statement analysis.
Describe the recasting process. What is the aim of the recasting process in analysis?
Where do we find the data necessary for analysis of operating results and for their recasting and adjustment?
What is the purpose in recasting the income statement for analysis?
What is the relation between the reported values of assets and reported earnings? What is the relation between the reported values of liabilities, including provisions, and reported earnings?
Why is analysis of research and development expenses important in assessing and forecasting earnings?What are some concerns in analyzing research and development expenses?
Assume you are a fixed-income analyst at an investment management firm. You are following the developments at two companies, Sturdy Machines and Patriot Manufacturing, which are both U.S.-based industrial companies that sell their products worldwide. Both companies operate in cyclical industries.
As a new employee of Clayton Asset Management, you are assigned to evaluate the credit quality of BRT Corp. bonds. Clayton holds the bonds in its high-yield bond portfolio. The following information is provided to assist in the analysis.1. BRT Corporation is a rapidly growing company in the
You are analyzing the bonds of ZETA Company (see Case CC–2 in the Comprehensive Case PROBLEM 10–14 Chapter for data) as a potential long-term investment. As part of your decision-making process, you compute various ratios for Years 5 and 6. Additional data and information to be considered only
You are a senior portfolio manager with Reilly Investment Management reviewing the biweekly printout of equity value screens prepared by a brokerage firm. One of the screens used to identify companies is a “low long-term debt/total long-term capital ratio.” The printout indicates this ratio for
TOPP Company is planning to invest $20,000,000 in an expansion program expected to increase PROBLEM 10–12 income before interest and taxes by $4,000,000. TOPP currently is earning $5 per share on 2,000,000 shares of common stock outstanding. TOPP’s capital structure prior to the investment is
Refer to the following financial data of Fox Industries Ltd.:Required:a. Compute the (1) earnings coverage ratio for Year 7, and (2) average earnings coverage ratio for the five-year period Year 3 through Year 7 (inclusive), separately on the first mortgage bonds and on the sinking fund debentures
Your supervisor is considering purchasing the bonds and preferred shares of ARC Corp. She fur- PROBLEM 10–10 nishes you the following ARC income statement and expresses concern about the coverage of fixed charges.Required:a. Compute the following earnings coverage ratios:(1) Earnings to fixed
Refer to the financial statements of Campbell Soup Company in Appendix A.Required:a. Compute the following measures for Year 10. (Assume 50% of deferred income taxes will reverse in the foreseeable future—the remainder should be considered equity.)(1) Total debt to equity.(2) Total debt to total
As lending officer for Prudent Bank, you are analyzing the financial statements of ZETA Corporation (see Case CC–2 in the Comprehensive Case Chapter for data) as part of ZETA’s loan application. Your superior requests you evaluate ZETA’s liquidity using the two-year financial information
After reviewing your memo, Jollie dismisses it as “totally inadequate”—not because it did not include a quantitative analysis of financial ratios, but because it did not effectively address liquidity.Jollie writes:Liquidity is a cash issue, and liquidity analysis is a process of evaluating
You are an investment analyst at Valley Insurance. Robert Jollie, a CFA and your superior, recently asked you to prepare a report on Gant Corporation’s liquidity. Gant is a manufacturer of heavy equipment for the agricultural, forestry, and mining industries. Most of its plant capacity is located
Reproduced below are selected financial data at the end of Year 5 and forecasts for the end of Year 6 for Top Corporation:Year 6 Year 6 Account Year 5 (Forecast) Account Year 5 (Forecast)Cash . . . . . . . . . . . . . . . . . . . $ 35,000 ? Accounts payable . . $ 65,000 $122,000 Accounts
Shown below are selected financial accounts of RAM Corp. as of December 31, Year 1:Cash . . . . . . . . . . . . . . . . . . . . $ 80,000 Accounts payable . . . . $130,000 Accounts receivable. . . . . . . . . 150,000 Notes payable. . . . . . . 35,000 Inventory . . . . . . . . . . . . . . . . .
Selected financial data of Future Technologies, Inc., at December 31, Year 1, are shown below:Cash . . . . . . . . . . . . . . . . . . . . $ 42,000 Accounts payable . . . . $ 78,000 Accounts receivable. . . . . . . . . 90,000 Notes payable. . . . . . . 21,000 Inventory . . . . . . . . . . . . . . .
The following information is relevant for Questions 1 and 2:Austin Corporation’s Year 8 financial statement notes include the following information:a. Austin recently entered into operating leases with total future payments of $40 million that equal a discounted present value of $20 million.b.
Financial data ($ thousands) for Wisconsin Wilderness, Inc., are reproduced below:Short-term liabilities . . . . $ 500 Long-term liabilities . . . . 800 Equity capital . . . . . . . . . 1,200 Cash from operations . . . 300 Pretax income . . . . . . . . . 200 Interest expense . . . . . . . 40
The management of a corporation wishes to improve the appearance of its current financial position as reflected in the current and quick ratios.Required:a. Describe four ways in which management can window-dress the financial statements to accomplish this objective.b. For each technique you
Interpret the effect of the following six independent events and transactions for each of the following:a. Accounts receivable turnover (equals 4.0 prior to the event).b. Days’ sales in receivables.c. Inventory turnover (equals 4.0 prior to the event).The three columns to the right of each event
The Lux Company experiences the following unrelated events and transactions during Year 1.The company’s existing current ratio is 2:1 and its quick ratio is 1.2:1.1. Lux wrote off $5,000 of accounts receivable as uncollectible.2. A bank notifies Lux that a customer’s check for $411 is returned
What is the reason(s) why companies hire bond rating agencies to rate their debt?
Can an analysis of financial statements improve on published bond ratings? Explain.
What factors do rating agencies emphasize in rating an industrial bond? Describe these factors.
Why are debt securities regularly rated while equity securities are not?
a. What is the reason for restrictive covenants in long-term debt indentures?b. What is the reason for provisions regarding:(1) Maintenance of minimum working capital (or current ratio)?(2) Maintenance of minimum shareholders’ equity?(3) Restrictions on dividend payments?(4) Power of creditors to
A company in need of additional equity financing sells convertible debt. This action postpones equity dilution, and the company ultimately sells its shares at an effectively higher price. What are the advantages and disadvantages of this action?
Comment on the following assertion: “Debt is a supplement to, not a substitute for, equity financing.”
Company B is a wholly owned subsidiary of Company A. Company A is also Company B’s principal customer. As a potential lender to Company B, what particular facets of this relationship concern you most? What safeguards, if any, do you require in any loan contract?
Is net income a reliable measure of cash available to meet fixed charges?
A company you are analyzing has a purchase commitment of raw materials under a noncancelable contract that is substantial in amount. Under what conditions do you include this purchase commitment in computing fixed charges?
In computing the earnings to fixed charges ratio, what broad categories of items are included in fixed charges? What tax adjustments must be considered for these items?
What does the earnings to fixed charges ratio measure? What does this ratio add to the other tools of credit analysis?
Why is the evaluation of asset composition useful for capital structure analysis?
Equity capital on the balance sheet is reported using historical cost accounting and at times differs considerably from market value. How should our analysis allow for this, if at all, in analyzing capital structure?
What is the difference between common-size analysis and capital structure ratio analysis? Explain how capital structure ratio analysis is useful to financial statement analysis.
In evaluating solvency, why are long-term projections necessary in addition to a short-term analysis?What are some limitations of long-term projections?
a. Why might an analysis of financial statements need to adjust the book value of assets?b. Give three examples of the need for possible adjustments to book value.
Would you classify the items below as equity or liabilities? State your reason(s) and any assumptions.a. Minority interest in consolidated financial statements.d. Convertible debt.b. Appropriated retained earnings.e. Preferred stock.c. Guarantee for product performance on sale.
When is information on unconsolidated subsidiaries important to solvency analysis?
What are liabilities for pensions? What factors should our analysis of a company’s pension obligations take into consideration?
What is off-balance-sheet financing? Provide one or more examples.
In analysis of capital structure, how should lease obligations not capitalized be treated? Under what conditions should they be considered equivalent to debt?
How should we treat deferred income taxes in an analysis of capital structure?
Dynamic Electronics, Inc., a successful and high-growth company, consistently experiences a favorable difference between the rate of return on its assets and the interest rate paid on borrowed funds. Explain why this company should not increase its debt to the 90% level of total capitalization and
What is meant by financial leverage? Identify one or more cases where leverage is advantageous.
Why is analysis of a company’s capital structure important?
Identify several key elements in the evaluation of solvency.
What is the importance of what-if analysis on the effects of changes in conditions or policies for a company’s cash resources?
Identify important qualitative considerations in the analysis of a company’s liquidity. What SEC disclosures help our analysis in this area?
Describe the importance of sales in assessing a company’s current financial condition and the liquidity of its current assets.
What is the rule of thumb governing the expected level of the current ratio? What risks are there in using this rule of thumb for analysis?
What is window-dressing of current assets and liabilities? How can we recognize whether financial statements are window-dressed?
A seemingly successful company can have a poor current ratio. Identify possible reasons for this result.
Why is the composition of current liabilities relevant to our analysis of the quality of the current ratio?
What problems are expected in an analysis of a company using the LIFO inventory method when costs are increasing? What effects do price changes have on the (a) inventory turnover ratio and (b) current ratio?
What are the repercussions to a company of (a) overinvestment and (b) underinvestment in inventories?
Assume a company’s days’ sales in receivables is 60 days, compared to 40 days for the prior period. Identify at least three possible reasons for this change.

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