7-2. Operating expenses vary directly with production and sales. A) True B) False

Transcription

1 Investments 320 Dr. Ahmed Y. Dashti Chapter 7 Interactive Qustions 7-1. Companies are required to submit an EDGAR compatible 10K file to the SEC at the beginning of each fiscal year. A) True B) False 7-2. Operating expenses vary directly with production and sales. A) True B) False 7-3. Cash flow per share is calculated by using net cash increase. A) True B) False 7-4. Financial analysts often find it useful to condense a balance sheet down to its principal categories. A) True B) False 7-5. Given the data in table above what was the earnings per share for Adolph Coors Co.? A) $4.08 B) $2.51 C) $0.40 D) $ A 10K report is filed, while a 10Q report is filed. A) annually...monthly B) semi-annually...quarterly C) quarterly...annually D) annually...quarterly 7-7. Which of the following is NOT a profitability ratio? A) operating margin B) return on equity C) P/E ratio D) gross margin 7-8. At least what proportion of preferred stock dividends received by a corporation is normally exempt from federal income taxation? A) 100% B) 70% C) 50% D) 20% Page 1 of 12

2 7-9. Given: Net Income $15 Depreciation $3 Issuance of New Debt $10 Repurchase of Common Stock $5 Sale of Property $11 Purchase of Equipment $9 Dividend Payment $2 What is the financing cash flow? A) $1 B) $2 C) $3 D) $ Calculate book value per share, assuming that XYZ Corp. has 10,000 shares of common stock outstanding with net income of $15,000, and a return on equity equal to 60%. A) $1.00 B) $1.50 C) $2.00 D) $2.50 Test Your Investment Quotient 1. CFA. Balance Sheet Assets White Company assets as of December 31, 1999: Cash and cash equivalents $ 150 Operating assets $1,190 Property, plant, and equipment $1,460 Total assets $2,800 White Co. experienced the following events in 2000: Old equipment that cost $120 and that was fully depreciated was scrapped Depreciation expense was $125 Cash payments for new equipment were $200 Based on the information above, what was White Co. s net amount of property, plant, and equipment at the end of 2000? a. $1,415 b. $1,535 c. $1,655 d. $1, Cash Flow Cash flow per share is calculated as a. Net cash flow/shares outstanding. b. Operating cash flow/shares outstanding. c, Investing cash flow/shares outstanding. d. Financing cash flow/shares outstanding. Page 2 of 12

3 3. Cash Flow Which of the following is not an adjustment to net income used to obtain operating cash flow? a. Changes in operating assets b. Changes in current liabilities c. Loss on sale of assets d. Dividends paid 4. Cash Flow The difference between net income and operating cash flow is at least partially accounted for by which of the following items? a. Retained earnings b. Cash and cash equivalents c. Depreciation d. Dividends paid 5. Financial Ratios Which of the following profitability ratios is incorrect? a. Gross margin = Gross profit/cost of goods sold b. Operating margin Operating income/net sales c. Return on assets = Net income/total assets d. Return on equity = Net income/stockholder equity 6. Financial Ratios Which of the following per-share ratios is incorrect? a. Book value per share = Total assets/shares outstanding b. Earnings per share = Net income/shares outstanding c. Cash flow per share Operating cash flow/shares outstanding d. Dividends per share = Dividends paidlshares outstanding 7. Stock Repurchase A company repurchase of common stock outstanding has which of the following effects on the balance sheet? a. An increase in shares outstanding b. An increase in stockholder equity c. A decrease in paid-in capital d. A positive investment cash flow 8. Dividend Payment A dividend payment has which of the following effects on the balance sheet? a. An increase in shares outstanding b. A decrease in stockholder equity c. A decrease in paid-in capital d. An increase in retained earnings 9. Stock Split A 2-for-i stock split has which of the following effects on the balance sheet? a. An increase in shares outstanding b. A decrease in stockholder equity c. A decrease in paid-in capital d. An increase in retained earnings Page 3 of 12

4 Use the following raw data to answer the next four questions: Net income: $16 Depreciation/amortization: $4 Repurchase of outstanding common stock: $10 Issuance of new debt: $18 Sale of property: $12 Purchase of equipment: $14 Dividend payments: $4 10. Cash Flow Analysis Operating cash flow is a. $20 b. $16 c. $12 d. $ Cash Flow Analysis Investing cash flow is a. $2 b. $(2) c. $12 d. $(12) 12. Cash Flow Analysis Financing cash flow is a. $8 b. $(8) c. $4 d. $(4) 13. Cash Flow Analysis Net cash increase is a. $18 b. $20 c. $22 d. $24 Use the following financial data to answer the next three questions: Cash payments for interest: $(12) Retirement of common stock: $(32) Cash payments to merchandise suppliers: $(85) Purchase of land: $(8) Sale of equipment: $30 Payments of dividends: $(37) Cash payment for salaries: $(35) Cash collection from customers: $260 Purchase of equipment: $(40) 14. CFA. Cash Flow Analysis Cash flows from operating activities are a. $91 b. $128 c. $140 d. $ CFA. Cash Flow Analysis Cash flows from investing activities are a. $(67) b. $(48) c. $(18) d. $(10) Page 4 of 12

5 16. CFA. Cash Flow Analysis Cash flows from financing activities are a. $(81) b. $(69) c. $(49) d. $(37) 17. CFA. Cash Flow Analysis A firm has net sales of $3,000, cash expenses (including taxes) of $1,400, and depreciation of $500. If accounts receivable increase over the period by $400, cash flow from operations equals a. $1,200 b. $1,600 c. $1,700 d. $2, CFA. Cash Flow Analysis A firm using straight-line depreciation reports gross investment in fixed assets of $80 million, accumulated depreciation of $45 million, and annual depreciation expense of $5 million. The approximate average age of fixed assets is a. 7 years b. 9 years c. 15 years d. 16 years 19. Preferred Dividends What proportion of preferred stock dividends received by a corporation is normally exempt from federal income taxation? a percent b percent c percent d percent 20. Price Ratios All else the same, which of the following ratios is unaffected by an increase in depreciation? a. Price-earnings (PIE) b. Price-book (PIE) c. Price-cash flow (PICF) d. Price-sales (PIS) Concept Questions 1. 10K and 1OQ What are the 10K and 1OQ reports? Who are they filed by? What do they contain? Who are they filed with? What is the easiest way to retrieve one? 2. Financial Statements In very broad terms, what is the difference between an income statement and a balance sheet? 3. Current Events What makes current assets and liabilities current? Are operating assets current? 4. Income and EPS What is the relationship between net income and earnings per share (EPS)? 5. Noncash Items Why do we say depreciation is a noncash item? 6. Cash Flow What are the three sections on a standard cash flow statement? 7. Operating Cash Flow In the context of the standard cash flow statement, what is operating cash flow? Page 5 of 12

6 8. Pro Forma What is a pro forma financial statement? 9. Retained Earnings What is the difference between the retained earnings number on the income statement and the balance sheet? 10. Gross! What is the difference between gross margin and operating margin? What do they tell us? Generally speaking, are larger or smaller values better? 11. More Gross Which is larger, gross margin or operating margin? Can either be negative? Can both? 12. Dividends and Taxes Are dividends paid a tax-deductible expense to the paying company? Suppose a company receives dividends from another. How are these taxed? 13. Cash Flow The bottom line on a standard cash flow statement is calculated how? What exactly does it represent? 14. Retained Earnings Take a look at the balance sheet for Coors (Table 7.8). On it, retained earnings are about $982 million. How do you interpret this amount? Does it mean that Coors has $982 million in cash available to spend? 15.CFA. Price Ratios Peninsular Research has a client who has inquired about the valuation method best suited for comparison of companies in an industry that has the following characteristics: Principal competitors within the industry are located in the United States, France, Japan, and Brazil. The industry is currently operating at a cyclical low, with many firms reporting losses. The industry is subject to rapid technological change. John Jones, CFA, recommends that the client consider the price-earnings ratio, price- book value ratio, and price-sales ratio. Determine which one of the three valuation ratios is most appropriate for comparing companies in this industry. Support your answer with two reasons that make that ratio superior to either of the other two ratios. Questions and Problems 1. Income Statements Given the following information for Smashville, Inc., construct an income statement for the year: Cost of goods sold: $118,000 Investment income: $1,500 Net sales: $195,000 Operating expense: $41,000 Interest expense: $4,200 Dividends: $4,000 Tax rate: 35% What are retained earnings for the year? 2. Balance Sheets Given the following information for Smashville, Inc., construct a balance sheet: Current liabilities: $24,000 Cash: $28,000 Long-term debt: $91,000 Other assets: $18,000 Fixed assets: $105,000 Other liabilities: $7,000 Investments: $23,000 Operating assets: $62, Performance Ratios Given the information in the previous two problems calculate the gross margin, the operating margin, return on assets, and return on equity for Smashville, Inc. Page 6 of 12

7 4. Per-share Ratios During the year, Smashville, Inc., had 12,000 shares of stock outstanding and depreciation expense of $13,000. Calculate the book value per share, earnings per share, and cash flow per share. 5. Price Ratios At the end of the year, Smashville stock sold for $48 per share. Calculate the price-book ratio, price-earnings ratio, and the price-cash flow ratio. 6. Price Ratios You are given the following information concerning a company and its forecasts for next year: Optimistic Pessimistic BVPS $17.20 $16.35 EPS CFPS You also find the following ratios for the company: price-book 3.1, price-earnings = 22.5, and price-cash flow = What is the projected stock price under the optimistic and pessimistic scenarios? 7. Operating Cash Flow Weston Corporation had earnings per share of $1.82, depreciation expense of $280,000, and 180,000 shares outstanding. What was the operating cash flow per share? If the share price was $26, what was the price-cash flow ratio? 8. Earnings per Share Alphonse Inc. has a return on equity of 25 percent, 20,000 shares of stock outstanding, and a net income of $50,000. What are earnings per share? 9. Addition to Retained Earnings Oranges Co. has net income of $125,000 and 30,000 shares of stock. If the company pays a dividend of $1.75, what are the additions to retained earnings? 10. Cash Flow Statement Given the following information for Hetrich, Inc., calculate the operating cash flow, investment cash flow, financing cash flow, and net cash flow: Net income: $100 Depreciation: 40 Issuance of new stock: 10 Repurchase of debt: 20 Sale of property: 15 Purchase of equipment: 45 Dividend payments: 5 Interest payments: 35 Use the following financial statement information to answer the next five questions. Amounts are in thousands of dollars (except number of shares and price per share): Kiwi Fruit Company Balance Sheet Cash and cash equivalents $ 300 Operating assets 500 Property, plant, and equipment 2,100 Other assets 80 Total assets $2,980 Current liabilities $ 400 Long-term debt 1,200 Other liabilities 100 Total liabilities $1,700 Paid-in capital $ 300 Retained earnings 980 Total shareholder equity $1,280 Total liabilities and equity $2,980 Page 7 of 12

8 Kiwi Fruit Company Income Statement Net sales $6,000 Cost of goods sold (4,700) Gross profit $1,300 Operating expenses (625) Operating income $675 Other income 140 Net interest expense (200) Pretax income $615 Income tax (210) Net income $ 405 Earnings per share $1.01 Shares outstanding 400,000 Recent price $18 Kiwi Fruit Company Cash Flow Statement Net income $ 405 Depreciation and amortization 205 Changes in operating assets (135) Changes in current liabilities (110) Operating cash flow $ 365 Net additions to properties $ 405 Changes in other assets (130) Investing cash flow $ 275 Issuance/redemption of long-term debt $(250) Dividends paid (120) Financing cash flow $(370) Net cash increase $ Calculating Margins Calculate the gross and operating margins for Kiwi Fruit. 12. Calculating Profitability Measures Calculate ROA and ROE for Kiwi Fruit and interpret these ratios. 13. Calculating Per-Share Measures Calculate the price-book, price-earnings, and price- cash flow ratios for Kiwi Fruit. 14. Pro Forma Financial Statements Following the examples in the chapter, prepare a pro forma income statement, balance sheet, and cash flow statement for Kiwi Fruit assuming a 10 percent increase in sales. 15. Projected Share Prices Based on the previous two questions, what is the projected stock price assuming a 10 percent increase in sales? Answers to Questions and Problems 1. Sales $ 195,000 Cost of goods sold 118,000 Gross profit $ 77,000 Operating expense 41,000 Operating income $ 36,000 Investment income 1,500 Investment expense 4,200 Pretax income $ 30,300 Income taxes 10,605 Net income $ 19,695 Dividends $ 4,000 Retained earnings $ 15,695 Page 8 of 12

9 2. Cash $ 28,000 Current liabilities $ 24,000 Operating assets 62,000 Long-term debt 91,000 Fixed assets 105,000 Other liabilities 7,000 Investments 23,000 Other assets 18,000 Stockholder equity 114,000 $ Total assets 236,000 Total liabilities and equity $ 236, Gross margin = 39.49% Operating margin = 18.46% ROA = 8.35% ROE = 17.28% 4. BVPS = $9.50 EPS = $1.64 CFPS = $ Price-book = 5.05 Price-earnings = Price-cash flow = Optimistic Pessimistic P/B price = $ = $ P/E price = $ = $ P/CF price = $ = $ Depreciation per share = $1.56 Operating cash flow per share $3.38 Price-cash flow = EPS = $ Total dividends = $52,500 Addition to Retained Earnings = $72, Net income Dep and amort. Operating cash flow Net additions to property Investing cash flow Issue/Redeem Stock Issue/Redeem LTD Dividends paid Financing cash flow Net cash increase Intermediate Questions 11. Gross margin is = 21.67%. Operating margin is = 11.25%. 12. Return on assets (ROA) is = 13.59%. Return on equity (ROE) is = 31.64%. Page 9 of 12

10 13. Note that, measured in thousands, there are 400 shares. Book value per share (BVPS) is thus = $3.20. Earnings per share (EPS) is = $1.01 (as shown on the income statement). Cash flow per share (CFPS) is = $1.53. The recent price per share is $18, so the Price/Book ratio is 5.63; the Price/Earnings ratio is 17.78; and the Price/Cash flow ratio is Page 10 of 12

11 14. With a 10% sales increase, sales will rise to $6,600. The pro forma income statement follows. A constant gross margin is assumed, implying that Cost of Goods Sold will also decrease by 10%. A constant tax rate is used. Items in italics are carried over unchanged. Net sales Cost of goods sold Gross profit Operating expense Operating income Other income Net interest expense Pretax income Income tax Net income Kiwi Fruit Company Pro Forma Income Statement Earnings per share Shares outstanding Next, we prepare the cash flow statement. Notice that we pick up the $491 net income from the pro forma income statement. Items in italics are carried over unchanged. By assumption, no investments occur, and no long-term debt is issued or redeemed. Net income Dep and amort. Kiwi Fruit Company Pro Forma Cash Flow Statement Chg. in operating assets Chg. In current liabilities Operating cash flow Net additions to property Changes in other assets Investing cash flow Issue/Redeem LTD - Dividends paid Financing cash flow Net cash increase Page 11 of 12

12 Finally, we have the balance sheet. Cash rises by the $331 Net cash flow from the cash flow statement. The $135 increase in Operating Assets and the $110 decrease in Current Liabilities are also from the cash flow statement. The $205 reduction in Property, Plant, and Equipment is the amount of the depreciation deduction shown on the cash flow statement. The increase in retained earnings is equal to pro forma Net Income less pro forma Dividends. Cash and equiv. Operating assets PP & E Other assets Total assets Kiwi Fruit Company Pro Forma 2001 Balance Sheet Current liabilities Long-term debt Other liabilities Total liabilities Paid in capital Retained earnings Total equity Total L&E 15. Using the benchmarks from question 13, projected stock prices are: BVPS P/B = $23.21 EPS P/E = $21.80 CFPS P/CF = $20.53 Thus, projected prices assuming a 10% sales increase are in the $20.53 $23.21 range. Page 12 of 12