B: The CFO of the company you are working for Entertainment Today has been tasked to assess two companies Time Warner Inc. and Walt Disney Co. to assess which one Entertainment Today should acquire. The CFO has tasked you to review the income statements and balance sheets of both companies and answer the following questions. [25 points] 1. By how much did Time Warner's profit margins change from 2012 to 2013? To what would you attribute this change? Answer the same question for Disney. 2. Compare the profit margins between Time Warner and Disney. How are they different? What are the main drivers of profit for each of the firms? 3. What are the main differences in the common size balance sheets of both firms? Look at the liabilities, assets and equity. 4. Which company would you recommend to the CFO for purchase? Time Warner, Inc. Annual Income Statement and Common-Sized Income Statement for Years Ending December 31, 2012 and December 31, 2013 (in $ millions except earnings per share) Dollars Sales $28,729 2012 Percentage of Sales 100.0% 2013 Dollars Percentage of Sales $29,795 100.0% Cost of goods sold (15.934) (55.5%) (16,230) (54.5%) Gross profits $12,795 44.5% $13,565 45.5% Selling, general, and administrative expenses (6,333) (22.0%) (6,465) (21.7%) Depreciation and amortization (248) (0.9%) (251) (0.8%) Other operating expenses (296) (1.0%) (244) (0.8%) Operating income $ 5,918 20.6% $ 6,605 22.2% Interest expense (1,253) (4.4%) (1,190) (4.0%) Nonoperating income (loss) (217) (-0.8%) (112) (-0.4%) Earnings before taxes $ 4,448 15.5% $ 5,303 17.8% Income taxes (1,526) (5.3%) (1.612) (5.4%) $2.922 10.2% $3,691 12.4% Net income Common shares outstanding 932.00 Earnings per share $ 3.14 942.00 $ 3.92 Time Warner, Inc. Balance Sheet and Common-Sized Balance Sheet for Years Ending December 31, 2012 and December 31, 2013 ($ millions) December 31, 2012 December 31, 2013 Cash and short-term investments Receivables Inventories Other current assets Total current assets Gross fixed assets Accumulated depreciation Net fixed assets Other assets Dollars Percentage of Assets $ 2.841 4.2% Dollars $ 1,862 Percentage of Assets 2.7% 7,385 10.8% 7,868 11.6% 2,036 3.0% 2,028 3.0% 1.002 1.5% 1,086 1.6% $ 13.264 19.5% $12,844 18.9% $ 57,607 84.6% $57,849 85.1% (4.828) (7.1%) (5,189) (7.6%) $ 52,779 77.5% $52,660 77.4% 2.046 3.0% $68.089 100.0% 2,490 $67.994 3.7% 100.0% TOTAL ASSETS LIABILITIES Accounts payable and accruals $ 8.039 11.8% $ 7,322 10.8% Short-term notes payable 749 1.1% 66 0.1% Other current liabilities Total current liabilities Long-term debt Deferred taxes Other liabilities TOTAL LIABILITIES EQUITY 1.011 1.5% 995 1.5% $ 9.799 14.4% $ 8,383 12.3% 19.122 28.1% 20,099 29.6% 2.127 3.1% 2,642 3.9% 7.244 10.6% 6,966 10.2% $ 38.292 56.2% $38,090 56.0% Common stock: Par value Capital surplus Total common stock sold Less: Treasury stock-(accumulated deficit) Total common stock Retained earnings Total common equity TOTAL LIABILITIES AND EQUITY $ 17 0.0% $ 17 0.0% 154.577 227.0% 153,410 225.6% $154,594 227.0% $153,427 225.6% (35,077) (51.5%) (37,630) (55.3%) $119,517 (89.721) (131.8%) 175.5% $115,797 170.3% $ 29.796 $ 68,088 43.8% (100.0%) (85,893) $29,904 (126.3%) 44.0% $ 67,994 100.0% Walt Disney Co. Annual Income Statement for Years Ending September 28, 2012 and September 29, 2013 (in $ millions except earnings per share) 2012 2013 Dollars Sales $42,278 Percentage of Sales 100% Dollars Percentage of Sales $45,041 100% Cost of goods sold (33,415) (79%) (35,591) (79%) Gross profits $ 8,863 21% $ 9,450 21% Selling, general, admin, and depreciation expense (139) (0%) (283) (1%) Operating income $ 8,724 21% $ 9,167 20% Interest expense (369) (1%) (235) (1%) Non-operating income (loss) 905 2% 688 2% Earnings before taxes $ 9,260 22% $ 9,620 21% Income taxes (3,087) (7%) (2.984) (7%) Net income (loss) $ 6,173 15% $6,636 15% Common shares outstanding 1,800 1,800 Earnings per share $ 3.43 $ 3.69 Walt Disney Co. Balance Sheet for Years Ending September 28, 2012 and September 29, 2013 ($ millions) September 28, 2012 Dollars Percentage of Sales Dollars September 29, 2013 Percentage of Sales ASSETS Cash and cash equivalents $ 3,387 5% $ 3,931 5% Receivables 6,540 9% 6,967 9% Inventories 1,537 2% 1,487 2% Other current assets 2,245 3% 1,724 2% Total current assets $13,709 18% $14,109 17% Gross fixed assets $38,582 52% $41,192 51% Accumulated depreciation (20,687) (28%) (22.459) (28%) Net fixed assets $17,895 24% $18,733 23% Other assets 43,294 58% 48,399 60% TOTAL ASSETS $74,898 100% $81,241 100% LIABILITIES Accounts payable and accruals $ 4,619 6% $ 4,899 6% Short-term notes payable 3,614 5% 1,512 2% Other current liabilities 4.580 6% 5,293 7% Total current liabilities Long-term debt Deferred taxes Other liabilities $12,813 17% $11,704 14% 10,981 15% 13,050 16% 2,251 3% 4,050 5% 9.094 12% 7,008 9% $35,139 47% $35,812 44% TOTAL LIABILITIES EQUITY Common equity Total common stock sold $31,731 42% $33,440 41% Less: Treasury stock (31,671) (42%) (34,582) (43%) Total common stock $ 60 0% ($1,142) (1%) Retained earnings 42,965 57% 47,758 59% Other equity (3.266) (4%) (1.187) (1%) Total common equity $39.759 53% $45,429 56% TOTAL LIABILITIES AND EQUITY $74,898 100% $81,241 100% 5. You have been given the following information [5 points] Anticipated rate of inflation 30-year treasury bonds % 3-month treasury bill 30-year AAA rate of inflation% 2.29 6.29 5.28 7.28 Calculate the nominal interest rate for a company trying to issue a bond