Request assistance in the completion of my homework assignment. I have managed to look most of my answers up but a few are still incorrect. I have attached the file for your review. My last submission was 27 out of 40 correct for 67%. I need an 80% to pass my homework or 32 need to be correct. Thank you in advance for your time.

1. It is likely that: A) prudent managers have a detailed knowledge of the composition of their sha B) mixing asset purchase and financing decisions could cause managers to ma C) none of the above. D) A and B. 2. The present value of a cash flow allows an investor to assess: A) the present value of a future cash flow. B) the value of a stream of cash flows in terms of the best and most certain alte C) what equivalent present payment would be equally acceptable in lieu of the consideration. D) A and B. E) A, B, and C. 3. In a stable, predictable industry, an average of the previous ten years' sales probably provides a less accurate forecast than assuming the same level of sal current year. True False 4. Which of the following would be included among the investment numbers of A) Purchase price of the asset. B) Trade-in value of an asset being replaced. C) Investment tax credit from acquisition. D) Installation costs of the machinery. E) All of the above. 5. If projected assets exceed liabilities and owners' equity, it is assumed that th funded through short-term or long-term debt. True False 6. For capital budgeting purposes, an asset's depreciable life is: A) always equal to the time horizon of an evaluation. B) equal to the asset's useful life. C) equal to the asset's economic life. D) an arbitrary period dictated by GAAP. E) none of the above. 7. The most accurate pro formas do not necessarily contain the most detail. True ... pg 23 False 8. Analysts within a company are less likely to fall into the 'false accuracy trap pro formas than would external analysts because insiders have access to more True False 9. Which of the following statements record a firm's financial situation on a sin A) Statement of financial position. B) Income statement. C) Statement of cash flows. D) All of the above. E) Both A and B. 10. Residual cash flows are estimated when: A) the useful lives of alternatives are different. B) one asset has a shorter economic life than its alternatives. C) one asset has a longer economic life than its alternatives. D) A and B. E) A, B, and C. 11. The cost of capital can be defined as: A) the weighted average cost of attracting investors to the firm. B) the price of obtaining funding for the firm, weighted according to target ratio structure. C) less than the weighted average return that investors in the firm require. D) A and B. E) A, B, and C. 12. It is not possible for stock appreciation to offset a dividend reduction and cr shareholders. True False 13. Dividends are not the sole source of returns for shareholders. True False 14. If managers do not foresee investment opportunities in the coming year tha they have seen in the past, it is not necessarily appropriate to raise the dividen mature companies pay. True False 15. If an investment's IRR is higher than the firm's chosen hurdle rate, then the A) has a positive NPV. B) is of greater risk than the overall risk of the firm. C) should be qualitatively considered before selection. D) A and C. E) A, B, and C. 16. A differential analysis: A) can be used to compare an alternative to the status quo. B) can be used to compare any set of alternatives. C) is easier to comprehend if a consistent frame of reference is employed. D) B and C. E) A, B, and C. 17. Flexibility issues are those which: A) deal with a company's financing reserves. B) impact the debt capacity that a firm should maintain. C) All of the above. 18. As the interest rate used to discount future cash flows is decreased, presen cash inflows: A) increases. B) decreases. C) stays the same. 19. A firm with substantial fixed costs such as a manufacturing overhead will ha risk in the trough of a business cycle than will a firm with high variable costs an True False 20. The qualitative portion of a financial analysis is analogous to the hypothesis scientific investigation because: A) assumptions are not tested until the numbers are run. B) false hypotheses (assumptions) may be formed. C) empirical measurement is not performed later. D) A and B. E) A, B, and C. 21. 'Other' issues normally do not cause managers to assign more importance element than the others. True False 22. The risk-free rate of return used to determine a firm's cost of capital will no upon the financial and operating risk level of the firm. True False 23. Timing issues involve: A) the costs of the alternative forms of capital. B) sequencing the alternatives, once funding amounts are known. C) none of the above. D) A and B. 24. If a company consistently uses hurdle rates that are higher than its margina then: A) it will certainly increase its earnings. B) it may have fewer and fewer investment alternatives. C) the risk of the firm will decrease. D) A and C. E) B and C. 25. The risk of illiquidity is more pronounced for share owners than it is for deb company. True False 26. FRICTO analysis does not point out poor investments. True False 27. A valuation determines whether a merger should occur; legalities determin business combination should be. True False 28. The 'efficient market' theory seems to be reasonable because: A) there are fewer financial analysts valuing securities. B) there are hundreds of investors trying to make money from improperly value the market forces which result drive stock prices to a fair value - pg. 47 verified C) statistical assessments are becoming increasingly important in financial ana D) B and C. E) A, B, and C. 29. It is best when evaluating mergers to rely on several quantitative methods. True False 30. It is not impossible for the acquisition price of a target firm ever to fall belo True False 31. Present value calculations allow managers to: A) choose assets which create the most value, even if their cash flows are time B) express present values in terms of future cash flows. C) create value for the firm. D) A and C. E) A, B, and C. 32. The final step(s) in using pro formas are to: A) test the assumptions. B) compare the results of the sensitivity analysis to the decision maker's risk to current situation. C) create best- and worst-case scenarios. D) A and C. E) A, B, and C. 33. Qualitative comparisons may be as important as the numerical comparison analysis. True False 34. When performing sensitivity analysis: A) statistical methods should not be employed. B) electronic spreadsheets can save time. C) assumptions should be changed one at a time. D) all of the above. E) B & C. 35. Management can improve its ROA by increasing investments in property, p True False 36. A payment of dividends reduces the cash balance. True False 37. Compound rates are used in an attempt to: A) screen out weak investments. B) quantify the firm's opportunity costs. C) quantify the firm's risk. D) A and B. E) none of the above. 38. More detail in a pro forma doesn't necessarily mean greater accuracy. True False 39. Synergy between two companies: A) is the complimentary situation where value is created in the joining of the fir B) may result in the improvement of the acquirer's bottom line. C) could be defined by purely qualitative benefits. D) A and C. E) A, B, and C. 40. The utility of sensitivity analysis is as great in merger valuations as it is in c True False 41. NPV is the preferred method for ranking investments because: A) it does not consider the time value of money. B) it measures the creation of value. C) it is sensitive to changes in the hurdle rate assumption. D) A and B. E) B and C. 42. Value is not added to a firm when earnings are enhanced. True False 43. A discount factor: A) is the same as compounding future cash flows. B) performs the reverse function of a compounding interest rate. C) allows investors to quantify a figure which will assist them in comparing alternative investments. D) B and C. pg 42/43 E) A, B, and C. 44. The claims of a company's debt holders are nearly always senior to the company's shareholders. (stockholders) True False 45. Present value calculations: A) can help the creation of value. B) can provide managers with a means of identifying the best investment choices. C) do not help in the creation of value. D) A and B. E) B and C. 46. Even though accounting practices vary, comparisons between a firm and its industry as a whole are considered True False 47. If a sufficient number of stockholders sell their shares, a company will find that its stock price has significantly dec True (due to liquidity generation) False 48. Horizontal and vertical percentage trends are not particularly useful in projecting future financial statements. True False 49. When making financial projections, the most conservative estimates should be used. True False -- pg 23 verified 50. A company which is experiencing a low stock price and low trading activity may wish to stimulate the market throu True False 51. Many analysts prefer the quick ratio to the current ratio because the former compares only cash equivalents to cu Truecheck for opposite question wording....former / latter pg 13 False 52. It is naturally in a company's best interest to maintain its stocks' value at the highest level the market will allow. True False 53. Time horizons are frequently selected so that they match the new asset's depreciable life. True False 54. To perform a sensitivity analysis of a forecast, you must recall the critical assumptions made to develop the projec True pg 26 verified False 55. Qualitative considerations may be as important as cash flow in investment selection. True False 56. The ratio which many observers use to quantify the stock market's opinion of a firm is the: A) ROE. B) EPS. C) D/E. D) P/E. pg 12 verified E) none of the above. 57. As the discount rate increases, the present value decreases. True False -- not verified, could not find answer 58. FRICTO analysis does not point out poor investments. True -- pg 64 False 59. Present value calculations allow managers to: A) express future cash flows in terms of present value cash flows. B) express present cash flows in terms of future cash flows. C) None of the above. D) Both A and B - pg 37 60. Financial strength ratios indicate a firm's capitalization. True False - maybe check, pg 10 61. The advantage of using the marginal cost of capital as a company's average hurdle rate is a) Capital market estimations of risk are probably more objective than the company's b) It reflects the incremental cost of funding future investments c) It is the basis of the market's assessments of a company's investment decisions d) A and C e) A, B and C 62. In order to use a cash flow in perpetuity as a residual value for an asset, it must be reasonably assumed that the cash flows from that asset have not leveled of f) TRUE FALSE 63. A FRICTO analysis enables prudent mangers to assess investment decisions TRUE or FALSE 64. The most accurate pro formas contain the most detail TRUE or FASLE \f1. It is likely that: A) prudent managers have a detailed knowledge of the composition of their sha B) mixing asset purchase and financing decisions could cause managers to ma C) none of the above. D) A and B. 2. The present value of a cash flow allows an investor to assess: A) the present value of a future cash flow. B) the value of a stream of cash flows in terms of the best and most certain alte C) what equivalent present payment would be equally acceptable in lieu of the consideration. D) A and B. E) A, B, and C. 3. In a stable, predictable industry, an average of the previous ten years' sales probably provides a less accurate forecast than assuming the same level of sal current year. True False 4. Which of the following would be included among the investment numbers of A) Purchase price of the asset. B) Trade-in value of an asset being replaced. C) Investment tax credit from acquisition. D) Installation costs of the machinery. E) All of the above. 5. If projected assets exceed liabilities and owners' equity, it is assumed that th funded through short-term or long-term debt. True False 6. For capital budgeting purposes, an asset's depreciable life is: A) always equal to the time horizon of an evaluation. B) equal to the asset's useful life. C) equal to the asset's economic life. D) an arbitrary period dictated by GAAP. E) none of the above. 7. The most accurate pro formas do not necessarily contain the most detail. True ... pg 23 False 8. Analysts within a company are less likely to fall into the 'false accuracy trap pro formas than would external analysts because insiders have access to more True False 9. Which of the following statements record a firm's financial situation on a sin A) Statement of financial position. B) Income statement. C) Statement of cash flows. D) All of the above. E) Both A and B. 10. Residual cash flows are estimated when: A) the useful lives of alternatives are different. B) one asset has a shorter economic life than its alternatives. C) one asset has a longer economic life than its alternatives. D) A and B. E) A, B, and C. 11. The cost of capital can be defined as: A) the weighted average cost of attracting investors to the firm. B) the price of obtaining funding for the firm, weighted according to target ratio structure. C) less than the weighted average return that investors in the firm require. D) A and B. E) A, B, and C. 12. It is not possible for stock appreciation to offset a dividend reduction and cr shareholders. True False 13. Dividends are not the sole source of returns for shareholders. True False 14. If managers do not foresee investment opportunities in the coming year tha they have seen in the past, it is not necessarily appropriate to raise the dividen mature companies pay. True False 15. If an investment's IRR is higher than the firm's chosen hurdle rate, then the A) has a positive NPV. B) is of greater risk than the overall risk of the firm. C) should be qualitatively considered before selection. D) A and C. E) A, B, and C. 16. A differential analysis: A) can be used to compare an alternative to the status quo. B) can be used to compare any set of alternatives. C) is easier to comprehend if a consistent frame of reference is employed. D) B and C. E) A, B, and C. 17. Flexibility issues are those which: A) deal with a company's financing reserves. B) impact the debt capacity that a firm should maintain. C) All of the above. 18. As the interest rate used to discount future cash flows is decreased, presen cash inflows: A) increases. B) decreases. C) stays the same. 19. A firm with substantial fixed costs such as a manufacturing overhead will ha risk in the trough of a business cycle than will a firm with high variable costs an True False 20. The qualitative portion of a financial analysis is analogous to the hypothesis scientific investigation because: A) assumptions are not tested until the numbers are run. B) false hypotheses (assumptions) may be formed. C) empirical measurement is not performed later. D) A and B. E) A, B, and C. 21. 'Other' issues normally do not cause managers to assign more importance element than the others. True False 22. The risk-free rate of return used to determine a firm's cost of capital will no upon the financial and operating risk level of the firm. True False 23. Timing issues involve: A) the costs of the alternative forms of capital. B) sequencing the alternatives, once funding amounts are known. C) none of the above. D) A and B. 24. If a company consistently uses hurdle rates that are higher than its margina then: A) it will certainly increase its earnings. B) it may have fewer and fewer investment alternatives. C) the risk of the firm will decrease. D) A and C. E) B and C. 25. The risk of illiquidity is more pronounced for share owners than it is for deb company. True False 26. FRICTO analysis does not point out poor investments. True False 27. A valuation determines whether a merger should occur; legalities determin business combination should be. True False 28. The 'efficient market' theory seems to be reasonable because: A) there are fewer financial analysts valuing securities. B) there are hundreds of investors trying to make money from improperly value the market forces which result drive stock prices to a fair value - pg. 47 verified C) statistical assessments are becoming increasingly important in financial ana D) B and C. E) A, B, and C. 29. It is best when evaluating mergers to rely on several quantitative methods. True False 30. It is not impossible for the acquisition price of a target firm ever to fall belo True False 31. Present value calculations allow managers to: A) choose assets which create the most value, even if their cash flows are time B) express present values in terms of future cash flows. C) create value for the firm. D) A and C. E) A, B, and C. 32. The final step(s) in using pro formas are to: A) test the assumptions. B) compare the results of the sensitivity analysis to the decision maker's risk to current situation. C) create best- and worst-case scenarios. D) A and C. E) A, B, and C. 33. Qualitative comparisons may be as important as the numerical comparison analysis. True False 34. When performing sensitivity analysis: A) statistical methods should not be employed. B) electronic spreadsheets can save time. C) assumptions should be changed one at a time. D) all of the above. E) B & C. 35. Management can improve its ROA by increasing investments in property, p True False 36. A payment of dividends reduces the cash balance. True False 37. Compound rates are used in an attempt to: A) screen out weak investments. B) quantify the firm's opportunity costs. C) quantify the firm's risk. D) A and B. E) none of the above. 38. More detail in a pro forma doesn't necessarily mean greater accuracy. True False 39. Synergy between two companies: A) is the complimentary situation where value is created in the joining of the fir B) may result in the improvement of the acquirer's bottom line. C) could be defined by purely qualitative benefits. D) A and C. E) A, B, and C. 40. The utility of sensitivity analysis is as great in merger valuations as it is in c True False 41. NPV is the preferred method for ranking investments because: A) it does not consider the time value of money. B) it measures the creation of value. C) it is sensitive to changes in the hurdle rate assumption. D) A and B. E) B and C. 42. Value is not added to a firm when earnings are enhanced. True False 43. A discount factor: A) is the same as compounding future cash flows. B) performs the reverse function of a compounding interest rate. C) allows investors to quantify a figure which will assist them in comparing alternative investments. D) B and C. pg 42/43 E) A, B, and C. 44. The claims of a company's debt holders are nearly always senior to the company's shareholders. (stockholders) True False 45. Present value calculations: A) can help the creation of value. B) can provide managers with a means of identifying the best investment choices. C) do not help in the creation of value. D) A and B. E) B and C. 46. Even though accounting practices vary, comparisons between a firm and its industry as a whole are considered True False 47. If a sufficient number of stockholders sell their shares, a company will find that its stock price has significantly dec True (due to liquidity generation) False 48. Horizontal and vertical percentage trends are not particularly useful in projecting future financial statements. True False 49. When making financial projections, the most conservative estimates should be used. True False -- pg 23 verified 50. A company which is experiencing a low stock price and low trading activity may wish to stimulate the market throu True False 51. Many analysts prefer the quick ratio to the current ratio because the former compares only cash equivalents to cu Truecheck for opposite question wording....former / latter pg 13 False 52. It is naturally in a company's best interest to maintain its stocks' value at the highest level the market will allow. True False 53. Time horizons are frequently selected so that they match the new asset's depreciable life. True False 54. To perform a sensitivity analysis of a forecast, you must recall the critical assumptions made to develop the projec True pg 26 verified False 55. Qualitative considerations may be as important as cash flow in investment selection. True False 56. The ratio which many observers use to quantify the stock market's opinion of a firm is the: A) ROE. B) EPS. C) D/E. D) P/E. pg 12 verified E) none of the above. 57. As the discount rate increases, the present value decreases. True False -- not verified, could not find answer 58. FRICTO analysis does not point out poor investments. True -- pg 64 False 59. Present value calculations allow managers to: A) express future cash flows in terms of present value cash flows. B) express present cash flows in terms of future cash flows. C) None of the above. D) Both A and B - pg 37 60. Financial strength ratios indicate a firm's capitalization. True False - maybe check, pg 10 61. The advantage of using the marginal cost of capital as a company's average hurdle rate is a) Capital market estimations of risk are probably more objective than the company's b) It reflects the incremental cost of funding future investments c) It is the basis of the market's assessments of a company's investment decisions d) A and C e) A, B and C 62. In order to use a cash flow in perpetuity as a residual value for an asset, it must be reasonably assumed that the cash flows from that asset have not leveled of f) TRUE FALSE 63. A FRICTO analysis enables prudent mangers to assess investment decisions TRUE or FALSE 64. The most accurate pro formas contain the most detail TRUE or FASLE Financing and investment decisions should not be mixed. True False A qualitative analysis should precede the quantitative analysis portion, because it may highlight the numbers which sh True - pg 19 verified False If projected assets exceed liabilities and owners' equity, it is assumed that the difference is funded through debt. True False Balance sheets are ordinarily projected after income statements. True - pg 24 verified False 1. It is likely that: A) prudent managers have a detailed knowledge of the composition of their sha B) mixing asset purchase and financing decisions could cause managers to ma C) none of the above. D) A and B. 2. The present value of a cash flow allows an investor to assess: A) the present value of a future cash flow. B) the value of a stream of cash flows in terms of the best and most certain alte C) what equivalent present payment would be equally acceptable in lieu of the consideration. D) A and B. E) A, B, and C. 3. In a stable, predictable industry, an average of the previous ten years' sales probably provides a less accurate forecast than assuming the same level of sal current year. True False 4. Which of the following would be included among the investment numbers of A) Purchase price of the asset. B) Trade-in value of an asset being replaced. C) Investment tax credit from acquisition. D) Installation costs of the machinery. E) All of the above. 5. If projected assets exceed liabilities and owners' equity, it is assumed that th funded through short-term or long-term debt. True False 6. For capital budgeting purposes, an asset's depreciable life is: A) always equal to the time horizon of an evaluation. B) equal to the asset's useful life. C) equal to the asset's economic life. D) an arbitrary period dictated by GAAP. E) none of the above. 7. The most accurate pro formas do not necessarily contain the most detail. True ... pg 23 False 8. Analysts within a company are less likely to fall into the 'false accuracy trap pro formas than would external analysts because insiders have access to more True False 9. Which of the following statements record a firm's financial situation on a sin A) Statement of financial position. B) Income statement. C) Statement of cash flows. D) All of the above. E) Both A and B. 10. Residual cash flows are estimated when: A) the useful lives of alternatives are different. B) one asset has a shorter economic life than its alternatives. C) one asset has a longer economic life than its alternatives. D) A and B. E) A, B, and C. 11. The cost of capital can be defined as: A) the weighted average cost of attracting investors to the firm. B) the price of obtaining funding for the firm, weighted according to target ratio structure. C) less than the weighted average return that investors in the firm require. D) A and B. E) A, B, and C. 12. It is not possible for stock appreciation to offset a dividend reduction and cr shareholders. True False 13. Dividends are not the sole source of returns for shareholders. True False 14. If managers do not foresee investment opportunities in the coming year tha they have seen in the past, it is not necessarily appropriate to raise the dividen mature companies pay. True False 15. If an investment's IRR is higher than the firm's chosen hurdle rate, then the A) has a positive NPV. B) is of greater risk than the overall risk of the firm. C) should be qualitatively considered before selection. D) A and C. E) A, B, and C. 16. A differential analysis: A) can be used to compare an alternative to the status quo. B) can be used to compare any set of alternatives. C) is easier to comprehend if a consistent frame of reference is employed. D) B and C. E) A, B, and C. 17. Flexibility issues are those which: A) deal with a company's financing reserves. B) impact the debt capacity that a firm should maintain. C) All of the above. 18. As the interest rate used to discount future cash flows is decreased, presen cash inflows: A) increases. B) decreases. C) stays the same. 19. A firm with substantial fixed costs such as a manufacturing overhead will ha risk in the trough of a business cycle than will a firm with high variable costs an True False 20. The qualitative portion of a financial analysis is analogous to the hypothesis scientific investigation because: A) assumptions are not tested until the numbers are run. B) false hypotheses (assumptions) may be formed. C) empirical measurement is not performed later. D) A and B. E) A, B, and C. 21. 'Other' issues normally do not cause managers to assign more importance element than the others. True False 22. The risk-free rate of return used to determine a firm's cost of capital will no upon the financial and operating risk level of the firm. True False 23. Timing issues involve: A) the costs of the alternative forms of capital. B) sequencing the alternatives, once funding amounts are known. C) none of the above. D) A and B. 24. If a company consistently uses hurdle rates that are higher than its margina then: A) it will certainly increase its earnings. B) it may have fewer and fewer investment alternatives. C) the risk of the firm will decrease. D) A and C. E) B and C. 25. The risk of illiquidity is more pronounced for share owners than it is for deb company. True False 26. FRICTO analysis does not point out poor investments. True False 27. A valuation determines whether a merger should occur; legalities determin business combination should be. True False 28. The 'efficient market' theory seems to be reasonable because: A) there are fewer financial analysts valuing securities. B) there are hundreds of investors trying to make money from improperly value the market forces which result drive stock prices to a fair value - pg. 47 verified C) statistical assessments are becoming increasingly important in financial ana D) B and C. E) A, B, and C. 29. It is best when evaluating mergers to rely on several quantitative methods. True False 30. It is not impossible for the acquisition price of a target firm ever to fall belo True False 31. Present value calculations allow managers to: A) choose assets which create the most value, even if their cash flows are time B) express present values in terms of future cash flows. C) create value for the firm. D) A and C. E) A, B, and C. 32. The final step(s) in using pro formas are to: A) test the assumptions. B) compare the results of the sensitivity analysis to the decision maker's risk to current situation. C) create best- and worst-case scenarios. D) A and C. E) A, B, and C. 33. Qualitative comparisons may be as important as the numerical comparison analysis. True False 34. When performing sensitivity analysis: A) statistical methods should not be employed. B) electronic spreadsheets can save time. C) assumptions should be changed one at a time. D) all of the above. E) B & C. 35. Management can improve its ROA by increasing investments in property, p True False 36. A payment of dividends reduces the cash balance. True False 37. Compound rates are used in an attempt to: A) screen out weak investments. B) quantify the firm's opportunity costs. C) quantify the firm's risk. D) A and B. E) none of the above. 38. More detail in a pro forma doesn't necessarily mean greater accuracy. True False 39. Synergy between two companies: A) is the complimentary situation where value is created in the joining of the fir B) may result in the improvement of the acquirer's bottom line. C) could be defined by purely qualitative benefits. D) A and C. E) A, B, and C. 40. The utility of sensitivity analysis is as great in merger valuations as it is in c True False 41. NPV is the preferred method for ranking investments because: A) it does not consider the time value of money. B) it measures the creation of value. C) it is sensitive to changes in the hurdle rate assumption. D) A and B. E) B and C. 42. Value is not added to a firm when earnings are enhanced. True False 43. A discount factor: A) is the same as compounding future cash flows. B) performs the reverse function of a compounding interest rate. C) allows investors to quantify a figure which will assist them in comparing alternative investments. D) B and C. pg 42/43 E) A, B, and C. 44. The claims of a company's debt holders are nearly always senior to the company's shareholders. (stockholders) True False 45. Present value calculations: A) can help the creation of value. B) can provide managers with a means of identifying the best investment choices. C) do not help in the creation of value. D) A and B. E) B and C. 46. Even though accounting practices vary, comparisons between a firm and its industry as a whole are considered True False 47. If a sufficient number of stockholders sell their shares, a company will find that its stock price has significantly dec True (due to liquidity generation) False 48. Horizontal and vertical percentage trends are not particularly useful in projecting future financial statements. True False 49. When making financial projections, the most conservative estimates should be used. True False -- pg 23 verified 50. A company which is experiencing a low stock price and low trading activity may wish to stimulate the market throu True False 51. Many analysts prefer the quick ratio to the current ratio because the former compares only cash equivalents to cu Truecheck for opposite question wording....former / latter pg 13 False 52. It is naturally in a company's best interest to maintain its stocks' value at the highest level the market will allow. True False 53. Time horizons are frequently selected so that they match the new asset's depreciable life. True False 54. To perform a sensitivity analysis of a forecast, you must recall the critical assumptions made to develop the projec True pg 26 verified False 55. Qualitative considerations may be as important as cash flow in investment selection. True False 56. The ratio which many observers use to quantify the stock market's opinion of a firm is the: A) ROE. B) EPS. C) D/E. D) P/E. pg 12 verified E) none of the above. 57. As the discount rate increases, the present value decreases. True False -- not verified, could not find answer 58. FRICTO analysis does not point out poor investments. True -- pg 64 False 59. Present value calculations allow managers to: A) express future cash flows in terms of present value cash flows. B) express present cash flows in terms of future cash flows. C) None of the above. D) Both A and B - pg 37 60. Financial strength ratios indicate a firm's capitalization. True False - maybe check, pg 10 61. The advantage of using the marginal cost of capital as a company's average hurdle rate is a) Capital market estimations of risk are probably more objective than the company's b) It reflects the incremental cost of funding future investments c) It is the basis of the market's assessments of a company's investment decisions d) A and C e) A, B and C 62. In order to use a cash flow in perpetuity as a residual value for an asset, it must be reasonably assumed that the cash flows from that asset have not leveled of f) TRUE FALSE 63. A FRICTO analysis enables prudent mangers to assess investment decisions TRUE or FALSE 64. The most accurate pro formas contain the most detail TRUE or FASLE Financing and investment decisions should not be mixed. True False A qualitative analysis should precede the quantitative analysis portion, because it may highlight the numbers which sh True - pg 19 verified False If projected assets exceed liabilities and owners' equity, it is assumed that the difference is funded through debt. True False Balance sheets are ordinarily projected after income statements. True - pg 24 verified False Understanding Corporate Finance Robert N. Holt,Ph.D.,C.P.A. Fifth Edition Copyright 2011 Ivy Software Table of Contents Title Page Introduction..................................................................................................................................1 Chapter One- Analyzing Financial Statements............................................................................2 Chapter Two- Projecting Earnings and Cash Flow....................................................................20 Chapter Three- Creating Value for Stockholders.......................................................................28 Chapter Four- Capital Budgeting................................................................................................38 Chapter Five- Calculating the Cost of Raising Capital...............................................................46 Chapter Six- Assessing Merger and Acquisition Targets...........................................................57 Chapter Seven- Financing Investments.......................................................................................63 Illustrations..................................................................................................................................72 Introduction Students of finance quickly learn that it is a complex discipline. Many balk at the prospect of continuing their study when they realize that it is a field that no one will ever wholly master. Others are dismayed when they realize that the best financial managers are those which keep themselves continually apprised of the latest theoretical and practical developments: the commitment necessary to sustain excellence in this profession is a profound one. Because finance is such an encompassing field, specialization is prevalent. There are experts in investment analysis, security analysis, lending, security underwriting, leasing, personal finance, and corporate finance, to name a very few of the specializations. Pick up an annual report of any financial services company and you will gain an understanding of the diversity. Despite the diversity of the subject, there are a few basic principles which apply to the entire field. The notion of value creation and the importance of judgment in financial decisions are two principles that will never be superseded by new analytical techniques. In effort to focus the purpose of this text, a perspective has been chosen. The reader should understand that this entire book has been written from the point of view of a general manager in a public corporation. The special problems and opportunities in private businesses are not addressed. However, all of the analytical techniques that are discussed are applicable to both kinds or organizations. Understanding Corporate Finance is a practitioner-oriented, introductory text designed for managers and analysts. In this book new theoretical trails are not blazed; rather, it is the intent of the author to provide the reader with the basic analytical skills which are necessary for one to function effectively as a general manager. If there has been little theoretical pioneering, current theory has been provided when such knowledge is necessary to the understanding of an analytical method. This text is a cumulative one. It is necessary to understand Chapter 1 before preceding to Chapter 2, and so on. Important terms, and those that the user will likely see again, are presented in bold type. Understanding Corporate Finance is intended as a companion piece to the personal computer-based course of the same name. It is in the interactive problem sessions that the user will test his or her understanding, and be presented with an opportunity to learn about corporate finance by participating in the resolution of real problems. What will the student gain by completing this course? It is intended that a user will master the basic financial skills that every general manager should understand. Furthermore, it is hoped that the reader will gain a perspective that will foster ability to understand the financial behavior of corporations and capital markets. The author is indebted to the teaching methods and subject material of the Colgate Darden Graduate School of Business Administration First Year program. Without the benefit of an individual's experience in that program, this work would not have been possible. I am especially indebted to Dana Dame, who wrote the first draft of this book. 1 Chapter 1 Analyzing Financial Statements INTRODUCTION Financial statements can be the source of information for several dissimilar groups. Banks may wish to examine a firm's reports to make lending decisions, or union locals may want to know how their company is performing in order to structure an upcoming round of contract negotiations the users of a company's external financial reports can be found both inside and outside the firm and can be friendly or hostile. The basic quantitative tools that analysts use to interpret a firm's reports are not difficult to grasp. As long as the statements that are being used are comparable, performance measures can be easily calculated. Today, government agencies and certain professional organizations oversee the form and content of external financial statements so that they can be successfully compared. This ability for an analyst to easily compare financial reports has not always been possible. In 1934, because of the disparities that existed in financial reports and other reasons, Congress created the Securities and Exchange Commission (SEC). The SEC was charged with regulating all companies that have publicly traded securities. Since the creation of the SEC, only such "public" companies have been required to publish external financial statements. Private companies, although not required to do so, prepare financial statements for external users, if not the public as a whole. A bank, for instance, often requires private companies to provide it with financial reports before it considers issuing loans. One of the primary objectives of the SEC is to ensure that a firm's external statements contain accurate financial information that fairly represents underlying economic reality. In order to execute this basic philosophy, the SEC periodically publishes Accounting Series Releases (ASRs), which dictate the standards to be followed by the accounting profession. Although the SEC has the Congressional authority to set accounting standards, it has through the years allowed the accounting profession to regulate itself, subject, naturally, to the SEC's approval. Since 1934, various committees of accounting professionals have provided this service. Today, the principal organization to which the SEC has implicitly granted authority to monitor accounting standards is the Financial Accounting Standards Board (FASB). The FASB has outlined a set of major goals for financial accounting: The objectives [of external financial reporting] stem primarily from the informational needs of external users who lack the authority to prescribe the financial information they want from an enterprise and therefore, must use the information that management communicates to them. Financial reporting should provide information that is useful to present and potential investors, creditors and other users in making rational investment, credit and similar decisions. 2 The role of financial reporting in the economy is to provide information that is useful in making business and economic decisions, not to determine what those decisions should be. The role of financial reporting requires it to provide evenhanded, neutral or unbiased information.1 The FASB further indicates that financial statements should report not only a firm's economic resources, but claims on those resources by creditors and investors as well. It is important to realize that the SEC and FASB do not precisely delineate all accounting standards, but rather they choose to provide flexible guidelines in many cases. Flexibility in accounting standards is desirable because there are vast differences among firms. A body of customs, not unlike English common law, has evolved and comprise what is known as Generally Accepted Accounting Principles (GAAP). One of the fundamental goals of GAAP is to provide a framework for financial reporting so that the statements of very different firms can be compared. Other goals of GAAP include rules governing: Accounting Periods financial reports should be prepared periodically, and cover periods of equal length. Companies may choose the time of year that they desire their accounting periods to end (the SEC requires a report at least annually). Matching they report. in their statements, firms should include all expenses incurred to realize the revenues that Conservatism firms, given a situation where measurement uncertainties produce equally likely profit figures, should report the lowest figure. Firms should strive to anticipate all expenses, and not report revenues until they can be properly recognized. Deliberate understatement is forbidden. Understandability the information contained in reports should be written at a level that a reader with a reasonable comprehension of business principles can understand. Relevance oriented. reports should contain information that is relevant to the decisions at hand, and be user- Reliability information that is provided must be complete and verifiable. Consistency firms should strive to use consistent accounting methods so that their statements can be compared over time. The preceding list of concepts does by no means include all of the GAAP, but rather those that are especially relevant to external reporting. In addition to these principles, the FASB has identified specific requirements that apply to the external reports of all firms. These requirements include that all firms must report The Financial Position at Period's End 1 FASB, Statement of Financial Accounting Concepts No. 1, "Objectives of Financial Reporting by Business Enterprises" (Stanford, Conn.: 1978), pars. 28, 33, 34. 3 The Cash Flows for the Period The Earnings for the Period The Comprehensive Income for the Period The Investments by and Distributions to Owners for the Period In the next section, the financial statements which fulfill these requirements will be introduced. THE FINANCIAL STATEMENTS Before the statements can be presented, a few general concepts about financial statements should be understood. Since accounting principles allow a certain degree of leeway in external reporting, an analyst should become acquainted with the particular methods that the company under study has chosen to use in its reports. For example, a firm recently may have switched from the First-In-First-Out (FIFO) method of valuing inventory to the Last-In-First-Out (LIFO) method. In inflationary times this switch would result in the firm assigning a higher cost to the goods sold than it would have under the previous method. This in turn would cause the reported income to appear lower under the new method, given an equal sales level in the two years, and the analyst might err in his conclusion about the cause of the lower earnings unless it is realized that the switch has occurred. In addition to understanding the accounting principles that are being used, the analyst must look beyond the mere statements themselves to the footnotes of the reports. Frequently, the footnotes contain the clues that are necessary to understand which accounting principles apply. A third consideration for an analyst is whether the statements have been independently audited. Quarterly statements frequently are not examined. Where reports have been independently audited, the auditor's report should be read carefully. A qualified opinion attached to an annual report, where the auditor qualifies the company's application of accounting principles, may be cause for serious concern. It may, however, merely indicate one of several conditions, such as industry practice, that cannot be verified by the auditors using Generally Accepted Auditing Standards. With the idea that the statements of real companies should be approached somewhat cautiously, we are ready to proceed to the financial statements of a fictional toy manufacturer. The Balance Sheet The balance sheet, or statement of financial position, fulfills the FASB requirement that a firm report its financial position at period's end. It records a firm's assets, liabilities, and owners' equity at a point in time, the last day of the reporting period, in accordance with the universal accounting convention: Assets = Liabilities + Owners' Equity As mentioned earlier, reporting periods are chosen at management's discretion, but must be consistent from year to year. Firms ordinarily choose to end their fiscal years in a month where their statements will record their most favorable financial position, or the season which most accurately reflects their typical financial situation. As shown in Figure 1.1, the Clever Toy Company has chosen to end its reporting period on December 31st. At this time of year, as a company with seasonal sales, Clever Toy has much lower inventory levels than it would during the peak production months of the summer, when inventory is allowed to build for the heavy fall sales season. By December, large inventories have been converted to sales. A balance sheet prepared in June would record a very different picture. 4 Examine Figure 1.1 for a moment. Notice that the heading indicates that this report represents the financial position on a particular day. The accounts have been arranged into "current" (having due dates less than one year or reporting period) and "noncurrent" (having due dates greater than one year or reporting period) portions. Accounts are conventionally listed in order of decreasing liquidity. Liquidity is a measure of how easily an item may be converted to cash the greater an item's liquidity, the easier it can be converted to cash. Since the financial position is displayed for more than one year, the report shown is called a comparative balance sheet Figure 1.1 The Clever Toy Company Balance Sheet As of December 31 ASSETS 2011 2010 Current Assets Cash Marketable Securities Accounts Receivable Inventories Prepaid Expenses and Other Assets $ 160,000 146,000 390,000 372,000 97,000 $ 88,000 42,000 376,000 404,000 128,000 Total Current Assets $1,165,000 $1,038,000 367,000 64,000 309,000 708,000 337,000 64,000 301,000 720,000 $2,613,000 $2,460,000 Current Liabilities Bank Notes Payable Current Portion - Long Term Debt Accounts Payable and Accrued Expenses Accrued Taxes $ 42,000 11,000 532,000 109,000 $ 35,000 25,000 473,000 129,000 Total Current Liabilities $ 694,000 $ 662,000 370,000 88,000 326,000 87,000 $1,152,000 $1,075,000 235,000 50,000 1,176,000 235,000 50,000 1,100,000 $2,613,000 $2,460,000 Long-Term Assets Investments Land Buildings Equipment Total Assets LIABILITIES AND OWNERS' EQUITY Long-Term Liabilities Long Term Debt Deferred Income Taxes Total Liabilities Owners' Equity Common Stock (100,000 shares) Paid-in Capital Retained Earnings Total Liabilities and Owners' Equity 5 The Income Statement The income statement, also referred to as a statement of earnings or profit and loss (P&L) statement, fulfills the requirement that a firm disclose its earnings for a period and show a comprehensive report of the factors that influenced those earnings during that period. Therefore, the intent of the income statement is to match a company's expenses with its revenues for an entire reporting period, whether that is a week, month, quarter or fiscal year. The difference between the firm's revenues and all expenses, including taxes, is the firm's net income for the period. Net income is also referred to as net profit, net earnings, or profit after tax in various circles. It is very important to realize that the company's net income and its cash flow for the same period are rarely the same figure. When they are equivalent, it is purely coincidental. There are certain noncash expenses, such as depreciation and amortization, which reduce net income but do not reduce a firm's cash position, because noncash expenses do not involve a transfer of cash. All expenses are deducted from a firm's revenues to arrive at a net income figure, but all expenses do not use cash. Neither are all cash outlays recorded as expenses: purchases of inventory or property, plant, and equipment are not expenses. The Clever Toy Company's income statement is shown in Figure 1.2. Examine that statement for a moment. Notice that the heading clearly indicates that the report covers a period of time, in this case a full year. An income statement by convention begins with a figure representing the company's revenues (or sales) for the period. From this figure, the cost of producing the company's goods or services, which is the cost of goods sold or cost of sales, is then deducted. The remaining subtotal is referred to as the gross margin or gross profit. From the gross margin, the remaining expenses which the company chooses not to directly allocate to the cost of sales, are subtracted. These expenses include operating expenses, interest on loans, and taxes. Notice the presence of the noncash expense, depreciation. Financial analysts use certain subtotals from income statements in their calculations. Unfortunately, often there are variations in the statements which force analysts to perform detective work to ascertain what these subtotals are. Some of the more popular subtotals from income statements that have not been previously discussed include: Operating Income The firm's income after operating expenses from its main line of business, before inclusion of income from investments, and before interest or taxes have been deducted. The firm's total income from all sources before interest Earnings Before Interest and Taxes (EBIT) or taxes have been deducted. Earnings Before Tax (EBT) The firm's EBIT, less interest charges. When examining income statements, analysts must be as familiar with the company's preparation methods as they are when they examine the firm's balance sheets. 6 Figure 1.2 The Clever Toy Company Income Statement For the Year Ended December 31 2011 2010 $3,414,000 1,886,000 $3,010,000 1,580,000 1,528,000 1,430,000 Less Operating Expenses Salaries Sales and Administration Other Expenses Depreciation 300,000 680,000 80,000 175,000 280,000 640,000 79,000 175,000 Operating Income Plus Income from Investments Less Interest Expense 293,000 26,000 35,000 256,000 18,000 27,000 Operating Income Before Taxes Less Income Taxes 284,000 120,000 247,000 104,000 $ 164,000 $ 143,000 Net Revenues Less Cost of Goods Sold Gross Profit Net Income Statement of Owners' Equity The statement of owners' equity, or statement of stockholders' equity, fulfills the requirement that a company publicize all investments in the firm, and all distributions to owners, during the course of the reporting period. Stated in other words, the purpose of this statement is to describe all changes which have occurred in the owners' equity accounts. Sources of new equity, or investments in the firm, include the firm's earnings and proceeds from the sale of stock during the reporting period, if any. Reductions in equity include the distribution of dividends, and the purchase and retirement of outstanding stock (outstanding shares which have been purchased but not yet retired are referred to as treasury stock). As in all financial statements, formats vary in statements of owners' equity. The format illustrated in Figure 1.3 is typical. Notice the entries in Figure 1.3. As in the income statement, this report clearly indicates that the statement covers an entire period. The three columns of figures listed make up all of the components of owners' equity, as listed on the balance sheet. Beneath the beginning balances, figures are entered only where they are appropriate. The dashed lines mean "not applicable". Notice which entries define sources, and which ones are uses of owners' equity, as discussed earlier in this section. Refer back to Figure 1.1, and compare the owners' equity entries on the balance sheet to this statement. A subset of this statement, which only includes the changes in the firm's retained earnings account for the period, is often included in a company's financial statements. It is referred to as a statement of retained earnings, and may be incorporated in the income statement. 7 Figure 1.3 The Clever Toy Company Statement of Owner's Equity For the Year Ended December 31, 20 1 Common Stock Balance December 31, 20 0 $235,000 Paid-in Capital $50,000 Retained Earnings $1,100,000 Add: Net Income Proceeds from Sale of Stock 0 0 164,000 - Subtract: Dividends Increase in Treasury Stock 0 0 88,000 - Balance December 31, 20 1 $235,000 $50,000 $1,176,000 Perhaps you have realized that the reason "retained earnings" are so named is that they are earnings that the firm has "retained" and not distributed in the form of dividends. Retained earnings are not cash. Compare the cash balance with the retained earnings entry on Clever Toy's balance sheet. The retained earnings entry represents the cumulative total of net income that the company has earned, and not distributed, since it came into being. The Statement of Cash Flows In December 1987, the Financial Accounting Standards Board (FASB) published Statement of Financial Accounting Standards No. 95, Statement of Cash Flows. This pronouncement requires for the first time that companies present a statement of cash flows in published financial statements. Prior to this announcement, companies presented a statement of changes in financial position (often referred to as a "funds statement"). The statement of changes in financial position could be presented on either a working capital flow basis or a cash flow basis. The working capital approach explained the changes in working capital, whereas the cash basis explained the changes in cash during a period. The current format of the statement of cash flows is shown in Figure 1.4. There are three major headings in Figure 1.4: (1) Cash Flow from Operating Activities, (2) Cash Flow from Investing Activities and (3) Cash Flow from Financing Activities. Cash Flow from Operating Activities begins with net income and proceeds to add noncash expenses and in addition shows certain other adjustments. Depreciation is added to net income since depreciation is a noncash expense. In other words, depreciation requires no cash outlay, yet it is an expense and does reduce net income. Adding it back to net income is justified since we are trying to translate net income to cash. Changes in current assets and liabilities is the next major section of the statement. As sales increase, one would expect to see increases in accounts receivable and inventories to support these sales. Unfortunately as receivables and/or inventories increase, cash is "used up." In this case receivables increased by $14,000 - See figure 1-1. An increase in inventories from one year to the next indicates that cash has been invested in the inventory increase. On the other hand, if inventories decrease, cash is "freed up." The inventory decrease from one year to the next indicates a disinvestment in this asset. In this case, inventories decreased by $32,000. For current liabilities such as accounts payable, the opposite entails. If an accounts payable increases, cash is "freed up" since the payment is delayed. If an accounts payable balance decreases from one year to the next, cash is "used up," since the company repaid more debt than it incurred during the year. In this case, the total current liabilities increase (other than taxes) was $52,000. 8 The second section of the statement of cash flows is cash flow from investing activities and presents cash flows related to the purchase and sale of property, plant and equipment and other noncurrent assets such as longterm investments. To some extent these purchases and sales are discretionary, since management may postpone the purchase of assets or even sell assets when the economic or business outlook is poor and cash is scarce. According to Clever Toy Company's balance sheet, building and equipment acquisitions net of dispositions was $171,000. This is calculated by taking the 2011 ending balance of buildings and equipment ($1,017,000) and adding to it the depreciation for 2011 ($175,000). The result is all buildings and equipment subject to depreciation during the year. The total is $1,192,000. Subtracting the beginning balance of the buildings and equipment for 2011 ($1,021,000) gives the acquisitions net of dispositions (171,000). In addition, the long-term investments increased by $30,000. Cash flows from financing activities shows the effects of financing transactions such as issuance and repayment of debt, issuance and repurchase of stock and payment of dividends. Clever Toy Company's long-term debt increased by $44,000 during 2011. This is reflected as a source of cash in the statement of cash flows. Had the long-term debt decreased during the year, this would have indicated that the company repaid more debt than it borrowed, and thus would have been a use of cash. The deferred income tax account (another long-term liability) increased by $1,000. The common stock paid-in capital accounts were unchanged indicating no new issuance of stock. The change in retained earnings of $76,000 has been partially explained by net income that was reported in the operating activities section. The remainder of the change in retained earnings is attributable to cash dividends paid of $88,000 as reported in the Statement of Owners' Equity. The dividends are a use of cash. The net cash used by financing activities was $43,000. The net increase in cash was $72,000. To summarize the cash flow statement, The Clever Toy Company earned $164,000 in 2011, but because of noncash expenses and changes in current assets and liabilities, it generated operating cash of $316,000. It obtained long-term financing of $44,000 and used the total cash generated of $360,000 to acquire buildings, equipment and long-term investments (net of dispositions) of $201,000. In addition, cash dividends of $88,000 were paid and cash increased by $72,000. 9 Figure 1.4 The Clever Toy Company Statement of Cash Flows (Indirect Method) For the year ended December 31, 20 1 (dollars in thousands) Cash Flow From Operating Activities Net Income Adjustment to Reconcile Net Income to Cash Provided by Operating Activities: Depreciation Change in Current Assets and Liabilities Accounts Receivable (increase) decrease Inventory (increase) decrease Other current Assets (increase) decrease Accounts Payable and Accrued Expenses increase (decrease) Taxes Payable increase (decrease) Cash Provided by Operating Activities $ 164 175 (14) 32 (73) 52 (20) $ 316 Cash Flow From Investing Activities Acquisition of Property, Plant and Equipment Cash Provided by Investing Activities Other $ 201 (201) Cash Flow from Financing Activities Issuance of Long-Term Debt $ 44 Cash Dividends Paid Cash Provided (Used) by Financing Activities h Net Increase (Decrease) in Cas Cash Balance at Beginning of Year 1 (88) (43) 72 88 Cash Balance at End of Year $ 160 RATIO CALCULATION The balance sheet, income statement, owners' equity report, and cash flow statement often constitute the total amount of information that an analyst can obtain when researching a company. Through the years, certain ratios that can be derived from these statements have been developed. These ratios are easy to calculate, but can be deceptively difficult to interpret, especially when inferences must be made about the economic realities that lie beneath the numbers. The ratios that are used most often vary with the analysts' perspectives. An issuer of short-term credit will concentrate on numbers which indicate a firm's short-term health, for example. Ratios can be organized into three categories. Operating Performance ratios measure a firm's profitability and asset usage skill. Liquidity ratios measure a firm's ability to meet its short-term financial obligations, and its skill in managing working capital. Ratios of Financial Strength indicate the risk which can be associated with the way a company has packaged the debt and equity that it uses to finance its assets 10 The following ratios will be calculated from Clever Toy's financial statements. I. Operating Performance Ratios Profit Margin indicates a firm's ability to convert sales into earnings; also called return on sales. Clever Toy's profit margin for 2011 is $164,000 or 4.8%. $3,414,000 When considered alone, a profit margin of 4.8% might be deemed a small return on sales. However, the percentage must be considered within the context of the toy manufacturing industry. A 4.8% margin may be commendable for producers of toys. A retail grocer might be content with a profit margin of 1%. A software firm, on the other hand, may earn a 40% ROS. Gross Margin indicates the average percentage by which the sales price of a company's goods or services exceeds the cost of those goods or services. Clever Toy's gross margin for 2011 is $1,528,000 or 44.8%. $3,414,000 A manufacturing company's gross margin typically falls between 25 and 50%. Asset Turnover measures a firm's ability to generate sales through its assets; it is especially important to consider this ratio along with qualitative issues. For example, a high asset turnover may be the result of a company having neglected essential investments in new equipment rather than having highly productive assets. Our toy manufacturer's asset turnover equals $3,414,000 (net sales) divided by the average total assets for the year. The average total assets is the amount at the beginning of 2011, $2,460,000, plus the amount at the end of the year, $2,613,000, divided by 2. $3,414,000 divided by $2,535,500 is 1.35. Thus, Clever Toy "turns over" its assets 1.35 times per year. A capital-intensive firm such as an electric utility may have an asset turnover below one, while a service-oriented firm could turn its assets ten times in a year. Return on Assets (ROA) is considered by many to be the best indicator of a firm's asset usage skill, and is composed of two elements. ROA is also referred to as return on investment (ROI). Return on Assets = Profit Margin x Asset Turnover or: You can easily derive ROA by dividing net income by average total assets, but by examining the two components you can determine where changes in the firm's ROA may have come from. 11 Clever Toy's ROA for 2011 is 4.8% x 1.35 or 6.48%. In industrial settings, ROA figures between 5 and 10% are common. By contrast, a well-managed bank may have an ROA as low as 1.0%. Return on Equity (ROE) measures the return on investment for the firm's shareholders a bit more discretely than the ROA ratio. ROA includes the return for both owners and creditors (since assets are typically funded by a combination of debt equity). In this formula, net income (after interest and taxes) may be used unless there are holders of preferred stock. "Net income available to shareholders" is net income minus any dividends paid to preferred stockholders. Since Clever Toy has never issued preferred stock, its ROE for 2011 is $164,000 divided by the average owners' equity, $1,423,000, or 11.5%. This figure is in the range of a typical industrial company. Earnings per Share (EPS) is simply the company's net income available to shareholders divided by the average number of shares of common stock outstanding during the year; analysts use changes