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The questions that I need help with are attached! Thanks Eighth Homework 1. Other things being equal (such as future growth rates, required rates of
The questions that I need help with are attached! Thanks
Eighth Homework 1. Other things being equal (such as future growth rates, required rates of return and so forth), should a firm that manages its earnings upwards have a higher or lower price to earnings ratio than a firm that reports the same earnings but that does not manage its earnings? Why? Assume that market participants realize that the firm manages its earnings. 2. Assume that a firm has an asset write down of $3,000,000 after concluding that the value of a building is only $4,000,000 instead of $7,000,000. Why might an analyst or other user want to adjust for that asset write down when looking at the firm's income this year? Also, why will that asset write down lead to higher income in future years? 3. Use the financial statements for Hewlett-Packard to answer this question. Calculate earnings before unusual items for HP. Earnings before unusual items is the after-tax income that HP would report if it did not report any atypical items in that fiscal year. For HP the atypical items are in-process research and development charges, restructuring charges, and acquisition-related charges. 4. Use the Hewlett-Packard's financial statements to answer this question. Assume that HP managed its earnings in 2009 by selecting an inappropriately low allowance for doubtful accounts for its accounts receivable. You should ignore its allowance for doubtful accounts for its financing receivables in answering this question. Assume that HP uses the percentage of accounts receivable approach to estimate its allowance for doubtful accounts and that the appropriate assumed default percentage for 2009 is the percentage that HP used in 2008. (a) Recalculate the allowance for doubtful accounts for 2009 using the appropriate (unmanaged) percentage. (b) Calculate earnings before taxes for HP using the re-estimated allowance for doubtful accounts. You should ignore the adjustments you made in question 3 in answering this question. If HP was managing its income then this income number might be more indicative of the true profitability of HP. 5. One possible motivation for managing earnings is to avoid violating a debt covenant. A typical debt covenant might require that a firm have a certain interest coverage ratio or debt to equity ratio. Describe several actions that a firm could take to reduce its debt to equity ratio. Assume that debt is defined as total liabilities and equity is defined as total shareholders' equity. Include examples that do and do not involve managing earnings. 6. How is the process of adjusting (removing) unusual items different for extraordinary items compared to restructuring chargesStep by Step Solution
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