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business
valuation measuring and managing

Questions and Answers of Valuation Measuring And Managing

Verify the forecasts in Table 12-2. How will the forecasts change if the assumed growth rate in sales from 1999 to 2003 is changed to 15 percent (and all the other assumptions are kept
Janet Stringer argues that “the DCF valuation method has increased managers’focus on short-term rather than long-term performance, since the discounting process places much heavier weight on
Starite Company is valued at $20 per share. Analysts expect that it will generate free cash flows to equity of $4 per share for the foreseeable future. What is the firm’s implied cost of equity
Free cash flows (FCF) used in DCF valuations discussed in the chapter are defined as follows:FCF to debt and equity = Earnings before interest and taxes × (1 – tax rate)+ Depreciation and deferred
What type of companies have:a. a high PE and a low market-to-book ratio?b. a high PE ratio and a high market-to-book ratio?c. a low PE and a high market-to-book ratio?d. a low PE and a low
How can a company with a high ROE have a low PE ratio?AppendixLO1
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
Given the information in question (3), what will be Manufactured Earnings’ stock price if the market revises its expectations of long-term average ROE to 20 percent?AppendixLO1
Manufactured Earnings is a “darling” of Wall Street analysts. Its current market price is $15 per share, and its book value is $5 per share. Analysts forecast that the firm’s book value will
Explain why terminal values in accounting-based valuation are significantly less than those for DCF valuation.AppendixLO1
Joe Watts, an analyst at EMH Securities, states: “I don’t know why anyone would ever try to value earnings. Obviously, the market knows that earnings can be manipulated and only values cash
Joe Fatcat, 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
How would the following events (reported this year) affect your forecasts of a firm’s future net income?• an asset write-down• a merger or acquisition• the sale of a major division• the
What factors are likely to drive a firm’s outlays for new capital (such as plant, property, and equipment) and for working capital (such as receivables and inventory)?What ratios would you use to
Which of the following types of businesses do you expect to show a high degree of seasonality in quarterly earnings? Explain why.• a supermarket• a pharmaceutical company• a software company•
John Right, an analyst with Stock Pickers Inc., claims: “It is not worth my time to develop detailed forecasts of sales growth, profit margins, etcetera, to make earnings projections. I can be
Merck is one of the largest pharmaceutical firms in the world. In the period 1985 to 1995 Merck consistently earned higher ROEs than the pharmaceutical industry as a whole. As a pharmaceutical
Home Depot’s stock price dropped by 23 percent between January 1985 and February 1986, making it difficult for the company to rely on equity capital to finance its growth. Covenants on existing
How productive were Home Depot’s stores in the fiscal years 1983–1985? (You may use the statistics in Exhibit 1 in this analysis.)AppendixLO1
Analyze Home Depot’s financial performance during the fiscal years 1983–1985.Compare Home Depot’s performance in this period with Hechinger’s performance.(You may use the ratios and the cash
Evaluate Home Depot’s business strategy. Do you think it is a viable strategy in the long run?AppendixLO1
In a period of rising prices, how would the following ratios be affected by the accounting decision to select LIFO, rather than FIFO, for inventory valuation?• Gross margin• Current ratio•
What are the potential benchmarks that you could use to compare a company’s financial ratios? What are the pros and cons of these alternatives?AppendixLO1
What ratios would you use to evaluate operating leverage for a firm?AppendixLO1
ABC Company recognizes revenue at the point of shipment. Management decides to increase sales for the current quarter by filling all customer orders. Explain what impact this decision will have
What are the reasons for a firm having lower cash from operations than working capital from operations? What are the possible interpretations of these reasons?AppendixLO1
Joe Investor claims: “A company cannot grow faster than its sustainable growth rate.” True or false? Explain why.AppendixLO1
In 1995 Chrysler has a return on equity of 20 percent, whereas Ford’s return is only 8 percent. Use the decomposed ROE framework to provide possible reasons for this difference.AppendixLO1
James 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
Which of the following types of firms do you expect to have high or low sales margins?Why?• a supermarket• a pharmaceutical company• a jewelry retailer• a software company AppendixLO1
Which of the following types of firms do you expect to have particularly high or low asset turnover? Explain why.• a supermarket• a pharmaceutical company• a jewelry retailer• a steel company
Below is the segment disclosure reported by General Electric in its 1998 annual report.In addition, General Electric provided the following information about the businesses comprising
Review the financial statement effects for the Dura investments in Spiros II described in the chapter. How would these effects be reflected in Dura’s books if its investment were
The CFO of a large bank argues: “It is ridiculous to recognize any fair-value gains or losses on our debt instruments that we intend holding to maturity. Since we intend holding these securities,
In a meeting of the Board of Directors over a proposal to restructure, a firm’s CEO states: “I recommend we take as large a charge against current earnings as our auditors will permit, since Wall
In its 1998 annual report, Eastman Kodak reported the following information on its stock option program:Pro forma net earnings and earnings per share information, as required by SFAS No.123,
Eastman Kodak reported the following information on inventory valuation in its 1998 annual report:(In millions) 1998 1997 At FIFO or average cost (approximates current cost) $ 907 $ 788 Work in
In the contingent liability section of its 1998 annual report, Dow Chemical Company reported the following:Accruals for environmental matters are recorded when it is probable that a liability has
A firm hires a 27-year-old MBA at a salary of $85,000 for the first year. It also agrees to provide a pension upon retirement at age sixty-five and estimates that the present value of that pension is
Procter and Gamble is a consumer products firm that owns such brands as Pampers diapers, Crisco vegetable shortening, Tide laundry detergent, and Crest toothpaste.In its 1998 annual report, the
In 1997 Peoplesoft, a software company, presented the following footnote information in its annual report:The Company capitalizes software purchased from third parties if the related software product
On February 9, 1996, Walt Disney Co. acquired Capital Cities/ABC Inc. for $10.1 billion in cash and 155 million shares of Disney valued at $8.8 billion, based on the stock price at the date the
A firm purchases an asset for $10,000,000. Management forecasts that the asset will have an expected life of ten years and a salvage value of 5 percent. What are the financial statement effects from
A publishing company delivers 130,000 copies of a new textbook to bookstores during the year. The bookstores pay the publisher $10 per book, but have the right to be reimbursed for any books returned
A real estate developer sells land parcels to its customers and provides them with financing.In 2000, the first year of operation, the firm signed new land sale contracts for $25,000,000. This land
Consider a lessor that sells the right to use a depreciable asset, with a book value of$1,500, to a customer for two years for $1,000 per year, payable at the beginning of the year. At the end of the
A firm sells $200,000 of interest-bearing two-year notes receivable to a bank, with recourse, for $208,978. The interest rate on the notes is 10 percent, and the bank’s effective interest rate is
United Airlines sells a round-trip ticket for a flight from Boston to London for $750.The customer also receives 5,000 award miles, equivalent to 20 percent of the miles required for a free domestic
A firm signs a long-term contract to construct a building for $10,000,000. The building is to be completed in two years at a cost of $8,000,000. At the end of the first year,$6,000,000 of costs has
A customer pays $1,000 in advance for a service agreement. What are the financial statement effects of this transaction if (a) revenue is recognized at receipt of cash, and(b) revenue is recognized
Given the company’s business strategy, accounting policies, and recent performance, what is your assessment of its current condition and future potential?AppendixLO1
Evaluate the company’s financial and operating performance during 1986 and the first nine months of 1987.AppendixLO1
Identify the accounting policies of Manufactured Homes which have the most significant impact on the company’s financial statements. What are the key assumptions behind these policies? Do you think
Acceptance Insurance Companies Inc. underwrites and sells specialty property and casualty insurance. The company is the third largest writer of crop insurance products in the United States. In its
Q2 Apply the WXYZ format:(a) map which components are present/missing in each statement;(b) translate the statement to the WXYZ format by filling in any missing components
Q1 Is this framing appropriate?
7. Howmuch cash flow risk should a company take on?Howshould it manage risks with extreme outcomes that could potentially bankrupt the company but are very unlikely to occur?
6. On what basis should a company’smanagers decidewhich risks to hold and which to hedge?
5. How do diversifiable and nondiversifiable risks affect a company’s cost of capital?
4. Apply the conservation of value principle to acquisitions.
3. What is financial engineering? When does it create value?
2. Under what circumstances would changing a company’s capital structure affect its value?
1. What is the conservation of value principle? Provide some examples of where it might apply.
(v) How open are conversations with people who report to you?
(iv) How open are conversations with your manager?
(iii) Do people make suggestions/raise issues with their managers?
(ii) Can people make suggestions/raise issues with their managers?
(i) Do people receive good information from the organization (e.g. what is happening, future direction, current issues)?
(iii) Do people have an input into innovations and developments in the business more generally (e.g. suggestion schemes)?
(ii) Do people feel that they have the freedom to make innovations in their own jobs?
(i) Is the organization good at innovating and changing (e.g. developing new services or improving procedures)?
(iii) Do people feel that they make decisions and choose actions in their own jobs?
(ii) Do people throughout the organization have an input into decisions?
(i) Where are the main decisions made in the organization?
(v) Does the organization celebrate successes?
(iv) Are achievements rewarded?
(iii) How many of your colleagues are ‘stuck’ in their current roles?
(ii) Are you supported in your own development?
(i) Do people know where the organization is going, and do they buy in to that direction?
(iii) Do you feel connected to your manager?
(ii) Do you feel connected to the people you work with?
(i) Do people know what is happening in the organization (and does it make sense)?
(iii) Which of the types of action/performance in questions (i) and (ii) are more typical of your normal working day?
(ii) Give examples of the sort of action/performance that you have seen in the past that you would like to see less of in the future.
(i) Give examples of the sort of action/performance that you have seen in the past that you would like to see more of in the future.
In the recommended approach to decomposing TRS, explain the theory behind the zero-growth return. What is it? What drives it?
How can Company Aoutperform Company B on all key value drivers (e.g., growth and ROIC) but still deliver lower TRS?
Suppose that one year ago you bought 100 shares of SodaCo for $10 per share with the expectation of receiving a perpetual dividend of $1 per share. What was your expected annual percentage return on
What are total returns to shareholders (TRS), andwhy is this measure important?
(5) What style of learning (single- or double-loop) do you regard as necessary for the next stage of development in this case?
(4) What factors have influenced the outcomes to this point?
(3) Do you think the effort to change culture has been a success eighteen months into the process?
(2) Do you see the culture as integrated, differentiated or fragmented?
(1) Construct a cultural web for ITS Canada.
(2) Read the Island Opera case. Explain the activities that Bella undertakes in order to make identity claims on what could be seen as her aspirational identity. What resources does she draw upon to
(1) Consider the role of identity in the ABB case. To what extent do you see identity work occurring on the part of successive CEOs? To what extent do the changes appear to be linked to their
(4) What social structures are likely to have an impact, and will they be positive or negative for the change?
(3) What resources from the social context can be drawn upon to aid the change?
(2) Will the changes be a form of interaction with the self-identities of others?If so, will they be perceived to be confirmatory, change-oriented or conflictual?Are they likely to be perceived as a
(1) Will the change introduce, or be perceived to introduce, identity claims on the part of management? If so, are these the claims that we want to make and can they be substantiated?

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