Net income Net Sales. or in other words Return on equity = Return on sales x Asset turnover x Asset-to-equity ratio

Transcription

1 1. Which of the following statements is CORRECT? A. High current and quick ratios always indicate that a firm is managing its liquidity position well. B. A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving, i.e., it is becoming more liquid. C. The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged. D. Since the ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA. E. Suppose firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. Under these conditions, then firms that have high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios. 2. Which of the following statements is CORRECT? A. If a firm has the highest price/earnings ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president. B. If a firm has the highest market/book ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president. C. Other things held constant, the higher a firm's expected future growth rate, the lower its P/E ratio is likely to be. D. The higher the market/book ratio, then, other things held constant, the higher one would expect to find the Market Value Added (MVA). E. If a firm has a history of high Economic Value Added (EVA) numbers each year, and if investors expect this situation to continue, then its market/book ratio and MVA are both likely to be below average. 3. If a bank loan officer at Wells Fargo were considering request of McFrankel s Inc. for a loan, which of the following statements would you consider to be CORRECT? A. Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge McFrankel s Inc. B. The lower the company's EBIT coverage ratio, other things held constant, the lower the interest rate the bank would charge McFrankel s Inc. C. Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge McFrankel s Inc. D. Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge McFrankel s Inc. E. The lower the company's TIE ratio (EBIT / Interest expense), other things held constant, the lower the interest rate the bank would charge McFrankel s Inc. 2

2 4. If the CEO of General Electric was filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant. A. The division's DSO (days' sales outstanding 1 ) is 40, whereas the average for its competitors is 30. B. The division's ROIC is above the average of other firms in its industry. C. The division's total assets turnover ratio is below the average for other firms in its industry. D. The division's debt ratio is above the average for other firms in the industry. E. The division's inventory turnover is 6, whereas the average for its competitors is Which of the following would, generally, indicate an improvement in financial position of McFrankels Inc. ceteris paribus (holding other things constant)? A. The total assets turnover decreases. B. The TIE (EBIT / Interest expense) declines. C. The Days Sales Outstanding (DSO) increases. D. The EBITDA coverage ratio 2 increases. E. The current and quick ratios both decline. 6. You observe that McFrankel Enterprises ROE is above the industry average, but its profit margin and debt ratio are both below the industry average. Which of the following statements is CORRECT? A. Its total assets turnover must equal the industry average. B. Its total assets turnover must be above the industry average. C. Its return on assets must equal the industry average. D. Its TIE ratio must be below the industry average. E. Its total assets turnover must be below the industry average. 7. According to our alleged class discussions on the topic, a useful tool in financial statement analysis is the common-size financial statement. What does this tool enable the financial analyst to do? A. Evaluate financial statements of companies within a given industry of approximately the same value. B. Determine which companies in the same industry are at approximately the same stage of development. C. Ascertain the relative potential of companies of similar size in different industries. D. Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over time or between companies within a given industry without respect to relative size. E. Evaluate the strategy of various companies across industries. 1 DSO is the average number of days after making a sale before receiving cash. 2 EBITDA coverage ratio = (EBITDA + Lease payments)/ Interest expense + Lease payments + Principal payments 3

3 8. Other things held constant, which of the following alternatives would increase a McFrankel Company's cash flow for the current year? A. Increase the number of years over which fixed assets are depreciated for tax purposes. B. Pay down the accounts payables. C. Reduce the days' sales outstanding (DSO) without affecting sales or operating costs. D. Pay workers more frequently to decrease the accrued wages balance. E. Reduce the inventory turnover ratio without affecting sales or operating costs. 9. Which of the following statements is CORRECT? A. Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than that of B. B. Firms A and B have the same current ratio, 0.75, the same amount of sales and cost of goods sold, and the same amount of current liabilities. However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude that A's quick ratio must be smaller than B's. C. Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio. D. One problem with ratio analysis is that relationships can be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to increase. E. One problem with ratio analysis is that relationships can be manipulated. For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger. 10. The president for life of McFrankel s would like to strengthen the company's financial position. Which of the following actions would make McFrankel s financially stronger? A. Increase inventories while holding sales and cost of goods sold constant. B. Increase accounts receivable while holding sales constant. C. Increase EBIT while holding sales constant. D. Increase accounts payable while holding sales constant. E. Increase notes payable while holding sales constant. 11. In comparing the current ratios of two companies, why is it invalid to assume that the company with the higher current ratio is the better company? A. The two companies may be different sizes. B. A high current ratio may indicate inadequate inventory on hand. C. The two companies may define working capital in different terms. D. A high current ratio may indicate inefficient use of various assets and liabilities. 4

4 12. If a firm changes its inventory method from FIFO to LIFO just prior to a period of rising prices, the effect in the next period will be Current Ratio Inventory Turnover in Days A Increase Increase B Decrease Increase C Increase Decrease D Decrease Decrease E No effect Decrease In the first half of the 20 th Century, financial analysts associated with the chemicals company DuPont developed a standard way of profiling companies that has since become known as DuPont Analysis. It uses the following three ratios to better analyze ROE: Return on sales: Asset turnover: Asset-to-equity ratio: Net income Net sales Net sales Total assets Total assets Stockholders equity The amount of profit the company makes per dollar of sales. The ratio of sales to total assets (i.e., how much the company sells relative to the total value of all it owns) A measure of how much the firm relies on borrowing of all kinds. In general, the higher the asset-to-equity ratio the more risk the company is taking on. In Dupont analysis, a simple formula relates these three ratios to net income. It provides a quick snapshot of the company s situation at any given time. The formula is: Net income Stockholders Equity Net income Net Sales Net sales Total assets Total assets Stockholders equity or in other words Return on equity = Return on sales x Asset turnover x Asset-to-equity ratio For questions 13 through 17, refer to DuPont framework data for five diverse industries presented below: 5

5 Industry Assets-to Equity Asset Turnover Return on Sales ROE A % 15.45% B % 19.06% C % 22.37% D % 13.61% E % 14.21% For each question 13 through 17, use the following key: a. Industry A b. Industry B c. Industry C d. Industry D e. Industry E 13. Which Industry represents electric service (utility) companies? 14. Which Industry represents retail grocery stores? 15. Which Industry represents legal service firms? 16. Which Industry represents retail department stores? 17. Which Industry represents retail jewelry stores? The following table on common size (as a percentage of operating revenue) financial statement data applies to questions 6 through 10.For each of these questions, write the following: a. Firm A b. Firm B c. Firm C d. Firm D e. Firm E 6

6 Item Firm A Firm B Firm C Firm D Firm E Cash 0.7% 11.0% 1.5% 261.9% 1.9% Receivables Inventories PP&E Other Assets Total Assets 34.2% 147.5% 202.0% 1,136.1% 25.4% Current Liabilities 7.7% 30.8% 14.9% 936.9% 9.8% Long-Term Debt Other L-T Liabilities Stockholder Equity Total Liabilities & Equity 34.2% 147.5% 202.0% 1,136.1% 25.4 Sales Revenue 100% 100% 100% 100% 100% COGS (74.1) (31.6) (79.7) 0 (81.4) Operating Expenses (19.7) (37.1) 0 (41.8) (15) R&D 0 (10.1) Interest Expense (0.5) (3.1) (4.6) (36.6) 0 Income taxes (2.2) (6.0) (5.2) (8.6) (1.5) Net income 3.5% 12.1% 10.5% 13.0% 2.2% 18. Which firm is the Canadian Commercial Bank? 19. Which firm is the Australian Electric Utility? 20. The products of a particular grocery store chain are very similar to the products of other grocery store chains. There are low barriers to entry in the grocery store industry; an entrant needs merely retail space and access to food distributors. Thus, this industry is subject to extensive competition and nondifferentiated products. Which firm is the Brazilian grocery store chain? 21. Temp agencies provide temporary office services to business and other firms. Operating revenues represent amounts billed to customers for temporary help services, and operating expenses include amounts paid to temporary help employees. Which firm is the Texas-based temp agency? 22. In the pharmaceutical industry, the barriers to entry are high. The government approval process is very costly and lengthy, and patents give firms the right to manufacture and sell the product for a long time. Which firm is the Swiss pharmaceutical company? 7

7 The following information applies to questions 23 through 26. A simplified version of Tipsy McFrankel Enterprise s 2013 income statement (in millions of dollars) is given below: Revenues $10,000 Cost of Goods Sold $ 4,000 Selling and Administrative expenses $ 2,000 Interest expense $ 400 Investment (dividend and interest) income $ 500 Purchase of Equipment $2,000 Income taxes $1,000 Dividends paid $ What is the gross profit for McFrankel s? a. $2,000 b. $4,000 c. $6,000 d. $3,100 e. none of the above 24. What is the operating income for McFrankel s? a. $3,000 b. $2,100 c. $3,100 d. $4,100 e. $4, What is the net income for McFrankel s? a. $2,800 b. $4,800 c. $3,100 d. $5,100 e. none of the above 26. Assuming McFrankel s sold a McArtery Buster happy meal for $10, on average, assuming cost of goods sold is the only variable cost, how much profit before taxes would the company make on the sale? a. $2.00 b. $2.10 c. $4.00 d. $4.10 e. $6.00 8

8 27. In accordance with the Principle of Revenue recognition, which of the definitions below best describes revenues: a. cash receipts. b. increases in net assets from selling a product. c. increases in net assets from occasional sales of equipment. d. increases in net assets from selling common stock. e. net cash receipts 28. Generally Accepted Accounting Principles (GAAP) allows management to make some choices among reporting and valuation rules. Where would you go to look to determine what choices management has made? a. Auditor's opinion b. Balance Sheet c. The CEO s letter to the shareholders d. Footnotes e. Management Discussion and Analysis Don t be accrual 29. Accrual basis accounting requires: a. recording revenues when earned and realized, and expenses in the same period, after the related revenue has been recorded. b. recording revenues when earned and when cash is received, and expenses when cash is paid. c. recording revenues when cash is received and expenses when incurred. d. recording revenues and the related expenses in different periods. e. Recording expenses first and than matching the related revenues to these expenses. 30. Assume Chávez & Castro Enterprises (AKA Massacre & Murders Inc.) uses the accrual accounting method. The firm rubs out (assassinates) lowlifes (unarmed protestors), creeps (law abiding citizens) and other undesirables (entrepreneurs) for a price. Each client is required to pay for services one month before the hit (execution).murdering revenue should be recognized when a. the bumping off (murdering) expenses are incurred. b. a client hires a hit (places an order for murder) c. a bill is sent to a client d. the related cash is received e. the assassination is carried out 9

9 31. Who is primarily responsible for the information provided in a set of financial statements? a. independent auditor of the company b. board of directors of the company c. the reigning domestic tax authority d. management of the company e. the regulators of the stock market in which the firm s securities trade 32. Tedious, Tiresome & Tongue-Tied Enterprises sells space to advertisers. The company requires an advertiser to pay for services one month before publication. Advertising revenue should be recognized when a. the advertising expenses are incurred. b. an advertiser place an order c. a bill is sent to an advertiser d. the related cash is received e. the related ad is published 33. Which of the following items WOULD NOT appear on an income statement? a. Sales revenue b. Amortization of patents c. Cost of goods sold d. Dividends e. Gross profit 34. What types of information cannot be found in the financial statements? A. Reputation of the firm, morale of employees, and prestige in the community. B. Nature and terms of off-balance sheet financing arrangements. C. Disclosures about the quarterly earnings of a company. D. Disclosures about segments of an enterprise. E. Disclosures about the fair value of financial instruments. 35. What item is probably the least useful when analyzing financial statements? A. Management discussion and analysis. B. Public relations materials. C. The statement of cash flows. D. The financial statements E. The notes to the financial statements. 10

10 36. Which of the following best describes the primary objective of external financial reporting? A. to provide information to the tax authorities regarding the company's compliance to tax regulations. B. to compute the amount of dividends to be received by the stockholders. C. to provide useful economic information about a company to help external parties make sound financial decisions. D. to provide useful information to the managers of a company about the efficiency and effectiveness of current operating procedures. E. to provide information to the financial regulators about the company's adherence to generally accepted accounting principles. 37. In regards to the current ratio which answer best states the preferences of investors and creditors for the magnitude of this ratio (within an acceptable range). Investors Creditors a. high end, high end b. Low end high end c. high end, low end d. low end, low end. 38. Which of the following conditions put creditors at the most risk? (TIE = Net Income/Interest Expense). Times interest earned (TIE) ratio Debt-to-equity ratio a. high, high. b. low, high. c. high, low. d. low, low. e. below average, below average. 39. Which of the following conditions put creditors at the most risk? Equity Multiplier Quick (acid-test) ratio a. high, high. b. low, high. c. high, low. d. low, low. 11

11 40. Which of the following conditions put creditors at the most risk? Receivables turnover in days Inventory turnover in days a. high, high. b. Low high c. high, low. d. low, low. For each point in time below, state whether the company is most likely in the (a) introductory phase, (b) growth phase, (c) maturity phase, or (d) decline phase. SCF Section Point in time W Point in time X Point in time Y Point in time Z Cash provided by operations (10,000) (60,000) 120,000 (30,000) Cash provided by investing 50,000 (60,000) (10,000) (40,000) Cash provided by financing (40,000) 140,000 (50,000) 80,000 Net Income (20,000) (40,000) 100,000 10, Point in time W 42. Point in time X 43. Point in time Y 44. Point in time Z 45. For a company to remain viable over the long term, it must generate positive cash flows. Which cash generating activities are most important in this respect? a. Operating Activities b. Investing Activities c. Financing Activities d. Capital Activities e. All of the above. 46. For purposes of classification on the statement of cash flows, which is an operating activity? a. receipt of dividends b. selling available-for-sale investments c. issuing a short-term notes payable d. collecting on a loan to another company e. payment of dividends 12

12 The data in the table are taken from Milhouse Van Houten Enterprises, a small merchandiser in outdoor recreational equipment. Item Sales trend Selling expenses to sales 9.8% 13.7% 15.3% Sales to plant assets ratio 3.5 to to to 1 Current ratio 2.6 to to to 1 Acid-test ratio 0.8 to to to 1 Merchandise Inventory turnover 7.5 times 8.7 times 9.9 times Accounts receivable turnover 6.7 times 7.4 times 8.2 times Total asset turnover 2.6 times 2.6 times 3.0 times Profit margin ratio 3.3% 3.5% 3.7% Return on total assets 8.8% 9.4% 11.1% Return on common equity 9.75% 11.5% 12.25% *There were no issues or retirements of common stock over the three- year period. For questions 47 through 57, use these data to answer each of the following questions 47 through 55, write A for Yes and B for No. 47. Is it becoming easier for the company to meet its current liabilities on time and to take advantage of any available cash discounts? 48. Is the company collecting its accounts receivable more rapidly? 49. Is the company s investment in accounts receivable decreasing? 50. Is the company s investment in plant assets increasing? 51. Is the owner s investment becoming more profitable? 52. Did the dollar amount of selling expenses decrease during the three-year period? 53. Is the company employing financial leverage to the advantage of the common stockholders? 54. Is it becoming easier for the company to pay its bills as they come due? 55. Are customers paying their bills at least as fast now as they did in 2011? 56. Is the total of the accounts receivable (a) increasing, (b) decreasing, or (c) remaining constant? 57. Is the level of inventory (a) increasing, (b) decreasing, or (c) remaining constant? 13

13 58. Which question is least likely to be answered by the statement of cash flows? a. What are the sources of the firm's cash? b. What are the sources of the firm's revenues and expenses? c. What portion of the firm's cash was generated from operations? d. How was cash used during the period? e. What financing or investing activities took place during the period? 59. Which of the following statements regarding product life cycle and profitability is true? a. Profit is highest in the emerging growth life cycle phase because the product is new and unique. b. Cash flows are lowest in the established growth stage of the life cycle because costs are so high. c. Cash flows are at its greatest in the decline stage of the product life cycle because no new investment is needed. d. Breakeven is attained in the emerging growth stage of the product life cycle. e. Cash flow turns positive in the maturity phase. Financial Statement Questions - The following items listed below appear in a set of audited GAAP financial statements for McFrankels Inc. Determine the financial statement in which each of the items listed below would be found. Indicate your selection by writing an A for the balance sheet, B for the income statement, C for the cash flow statement, D for the statement of shareholders equity, and E for the footnotes. 60. Interest income 61. Cash received from customers 62. Net increase (decrease) in cash 63. Cash equivalents at 12/31/ Summary of significant accounting policies 65. Commitments and Contingencies 66. Leasehold improvements 67. Comprehensive income 68. Principal balance due on loans 69. Restrictive covenants from loan agreements 70. Dividends declared 14

14 71. Total operating expenses 72. Purchases of plant assets during Retained earnings 74. Estimated useful life of plant assets 75. Depreciation and amortization expense 76. Pending lawsuits 77. Cash paid to suppliers and employees 78. Goodwill 79. Mortgage due to bank 80. Foreign currency translation adjustments 81. Unrealized holding gains/losses on marketable securities 82. Cash paid for taxes 83. Cost of goods sold 84. Subsequent events 85. Deferred revenue 86. A financial analyst for McFrankel Enterprises is comparing this year's results to last year. In doing so, it was observed that while McFrankel Enterprises net operating income decreased, their net income and operating cash flow actually increased. Ceteris paribus or caeteris paribus (all else equal), which of the following events could have been responsible for this occurrence? A. The company's interest expense decreased significantly. B. The company's accruals decreased greatly. C. The company's tax rate increased. D. The company's depreciation expense decreased severely. E. The company's dividend decreased. A financial analyst is given the following ratios for McFrankel s and its industry. Ratio Firm Industry Days Sales Outstanding (DSO) 40 days 45 days 87. Which of the following statements best represent the conclusion that the analyst could draw from these ratios? A. The firm has a lower level of accounts receivable than does the industry. B. The firm has a lower level of credit sales than does the industry. C. The firm collects it credit sales quicker than the industry. D. The firm has easier credit terms than the industry. E. The firm is relatively illiquid relative to the industry. 15

15 88. McFrankel s inventory turnover has steadily decreased over the past 5 years, from 35 times at the end of December 2008 to 20 times at the end of What would a financial analyst be MOST justified in concluding? A. The firm s inventory has decreased significantly. B. The firm's total assets have decreased. C. The firm has reduced its level of profitability. D. The firm is using its inventory less efficiently. E. The firm's sales are increasing rapidly. 89. A McFrankel s interest expense/net income ratio has steadily increased over the past 5 years, from 5 times at the end of December 2008 to 10 times at the end of What would a financial analyst be MOST justified in concluding? A. The firm s risk of default has increased. B. The firm s sales have increased. C. The firm s profitability has increased. D. The firm has become safer for its creditors. E. The firm's financial position has improved. For questions 90 to 100, classify the events below as they would appear on the statement of cash flows. For operating activities (write A), for investing activities (write B), for financing activities (write C). If the event would not appear on the face of the statement of cash flows write D. 90. Buy back common equity from shareholders (treasury stock) 91. Pay back money borrowed from the bank 92. Buy Inventory on account(credit) from a supplier 93. Sell Inventory on credit, then collect from the customer 94. Declare and pay a cash dividend to preferred stockholders 95. Declare and distribute a stock dividend to common stockholders 96. Accrue interest on bank loan later pay the interest to the bank 97. Receive money in advance for future services, later provide the services 98. Prepay insurance for upcoming fiscal year 99. Enter into an executory contract with a client which calls for future services in return for future payment Loaned money to an affiliated company. 16

16 Part Two Case (1): Analyzing A Mystery Cash Flow Statement The table below presents a statement of cash flows for a shadowy and enigmatic company which is located in the Yangtze River Delta in East China at the mouth of the Yangtze River in the middle portion of the Chinese coast. Using the methods of analysis we discussed in class, please give a written interpretation of the financial performance of this company (on a separate piece of paper). To help you with your analysis please answer the following: 1. What is the purpose of the statement of cash flows? 2. What stage of the life cycle do you feel this firm is in? Please explain. 3. Assess and analyze the working capital management performance of this firm? 4. What is your analysis and assessment of the cash flows from operating activities for this firm? How do you interpret the relationship between net income and cash flows from operating activities for this firm? 5. What is your assessment and analysis of the firm s investing activities? Please explain. 6. What is your assessment and analysis of the firm s financing activities? Please explain. 7. What is your overall assessment and analysis of this firm s financial performance? Please explain (e.g., calculate, analyze and interpret the free cash flow for each year as well as some SCF ratios). Year (all amounts are in billions) Operating Activities Net Income (Net Loss) ( 126) ( 312) Depreciation and other noncash expenses Deferred Income Taxes Equity Income, net of dividends ( 77) ( 42) ( 24) ( 32) ( 23) Foreign currency adjustments ( 22) 5 7 ( 21) ( 15) (Gains) Losses on sales of assets 5 13 ( 6) 3 ( 4) Other Operating Charges

17 Year Working Capital (Increase) Decrease in Accounts ( 453) ( 348) ( 269) ( 202) ( 287) Receivable (Increase) Decrease in Inventories ( 469) ( 368) ( 175) ( 155) ( 206) (Increase) Decrease in Prepayments ( 5) 1 5 Increase (Decrease) in Accounts Payable Increase (Decrease) in Other Current Liabilities Net Cash Flows from Operations ( 16) ( 320) Year Investing Activities Fixed Assets Acquired ( 143) ( 177) ( 206) ( 257) ( 344) Change in Marketable Securities ( 127) ( 68) Proceeds from Disposals of Fixed Assets Net Acquisitions ( 408) ( 396) ( 241) ( 105) ( 137) Net Cash Flows from Investing Activities ( 634) ( 592) ( 335) ( 308) ( 459) Year Financing Activities Increase in Short-Term Borrowing Increase in Long-Term Borrowing Issuance of Capital Stock Acquisition of Capital Stock ( 68) ( 46) ( 39) 0 0 Decrease in Short-Term Borrowing ( 123) ( 91) ( 64) ( 23) ( 18) Decrease in Long-Term Borrowing ( 334) ( 80) ( 40) 0 0 Dividends ( 214) ( 111) Net Cash Flows from Financing Activities ( 27) Change in Cash ( 52) ( 163) ( 43) Cash Beginning of the Year Cash End of the Year Change in Sales from Previous Year 19% 28% 37% 48% 88% 18

18 Case (2): ROIC, ROA, ROE Questions Normalized Financial Information Chilean Indo Firm Sales Revenue Cost of Goods Sold (COGS) Gross Profit Selling, Gen & Admin Expenses (SG&A) Operating Income Investment Income and Gains Losses and Restructuring Charges Earnings before Interest and Taxes (EBIT) Interest Expense (assuming 10% interest rate) Earnings Before Taxes Income Taxes (35%) Net Income Dividends Assets Liabilities Equity Answer the following questions in MS Word (You can input the data into MS Excel) 1. Calculate each company s (a) ROE, (b) ROA, and (c) ROIC. 2. Why is the Indonesian firm s ROE so much higher than the Chilean firm s ROE? Does this mean the Indonesian firm is a better company? Why or why not? 3. ROE is an extremely popular measure, what are its limitations e.g. timing, risk (eat well v. sleep well) and value problems. 4. Define the components of ROE, why are ROEs similar across diverse firms, while the components of these ROEs differ so dramatically? 5. What is each firm s sustainable or balance growth rate? 6. Why is the Chilean firm s ROA so much higher than the Indonesian firm s ROA? What does this tell you about the two companies? 7. Define the two components of ROA, economically and strategically, what is the relationship between them? 8. How do the two companies ROIC compare? What does this suggest about the two companies? 9. Assuming a 15% cost of equity, calculate each firm s economic income. 10. Which firm would you prefer to give a long-term loan to? 11. Which firm would you expect to have a higher PE ratio? 12. Which firm would you expect to have a higher MV/BV ratio? 19

19 Case (3): Hold the Formaldehyde That which doesn t kill you makes you stronger? Boon Rawd Brewery, Thailand's first and largest brewery, was founded by Phraya Bhirom Bhakdi in 1933 and is still family owned. Companhia de Bebidas das Américas (known as AmBev), which is based in Brazil is Latin America's largest brewer and the world's fifth-largest beer maker (by volume sold in 2013). It resulted from the merger of Brazil's two largest brewers, Brahma and Antarctica in July Normalized Financial Information Boon Rawd AmBev Sales Revenue $1,000 $1,000 Cost of Goods Sold (COGS) $600 $700 Gross Profit $400 $300 Selling, Gen & Admin Expenses (SG&A) $200 $200 Operating Income $200 $100 Investment Income and Gains $100 $300 Losses and Restructuring Charges $200 $100 Earnings before Interest and Taxes (EBIT) $100 $300 Interest Expense (10%) $20 $70 Earnings Before Taxes $80 $230 Income Taxes (35%) $28 $81 Net Income $52 $150 Assets $1,000 $1,000 Liabilities $200 $700 Equity $800 $300 20

20 Answer the following questions in MS Word (You can input the data into MS Excel) 13. Calculate each company s (a) ROE, (b) ROA, and (c) ROIC. 14. Why is Boon Rawd Brewery s ROE so much lower than Companhia de Bebidas das Américas? Does this mean Companhia de Bebidas das Américas is a better company? Why or why not? 15. Why is Boon Rawd Brewery s ROA so much lower than Companhia de Bebidas das Américas? What does this tell you about the two companies? 16. How do the ROIC s of Companhia de Bebidas das Américas and Boon Rawd Brewery compare? What does this suggest about the two companies? 17. Answer questions 13 through 17 using Acct adjusted numbers (e.g., use core operating earnings that are sustainable). 21