投资学10版习题答案19.docx

投资学10版习题答案19.docx

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投资学投资学10版习题答案版习题答案19CHAPTER19:

FINANCIALSTATEMENTANALYSISPROBLEMSETS1.ThemajordifferenceinapproachofinternationalfinancialreportingstandardsandU.S.GAAPaccountingstemsfromthedifferencebetweenprinciplesandrules.U.S.GAAPaccountingisrules-based,withextensivedetailedrulestobefollowedinthepreparationoffinancialstatements;manyinternationalstandards,EuropeanUnionadaptedIFRS,allowmuchgreaterflexibility,aslongasconformitywithgeneralprinciplesisdemonstrated.EventhoughU.S.GAAPisgenerallymoredetailedandspecific,issuesofcomparabilitystillariseamongU.S.companies.Comparabilityproblemsarestillgreateramongcompaniesinforeigncountries.2.Earningsmanagementshouldnotmatterinatrulyefficientmarket,whereallpubliclyavailableinformationisreflectedinthepriceofashareofstock.Investorscanseethroughattemptstomanageearningssothattheycandetermineacompanystrueprofitabilityand,hence,theintrinsicvalueofashareofstock.However,iffirmsdoengageinearningsmanagement,thentheclearimplicationisthatmanagersdonotviewfinancialmarketsasefficient.3.Bothcreditratingagenciesandstockmarketanalystsarelikelytobemoreorlessinterestedinalloftheratiosdiscussedinthischapter（aswellasmanyotherratiosandformsofanalysis）.SincetheMoodysandStandardandPoorsratingsassessbonddefaultrisk,theseagenciesaremostinterestedinleverageratios.Astockmarketanalystwouldbemostinterestedinprofitabilityandmarketpriceratios.4.ROA=ROSATOTheonlywaythatCrustyPiecanhaveanROShigherthantheindustryaverageandanROAequaltotheindustryaverageisforitsATOtobelowerthantheindustryaverage.5.ABCsassetturnovermustbeabovetheindustryaverage.6.ROEAROEBFirmsAandBhavethesameROA.AssumingthesametaxrateandassumingthatROAinterestrate,thenFirmAmusthaveeitheralowerinterestrateorahigherdebtratio.7.=NetprofitmarginAssetturnoverLeverageratio=5.5%2.02.2=24.2%8.a.Lowerbaddebtexpensewillresultinhigheroperatingincome.b.LowerbaddebtexpensewillhavenoeffectonoperatingcashflowuntilGalaxyactuallycollectsreceivables.9.A.CertainGAAPrulescanbeexploitedbycompaniesinordertoachievespecificgoals,whilestillremainingwithintheletterofthelaw.Aggressiveassumptions,suchaslengtheningthedepreciablelifeofanasset（whichareutilizedtoboostearnings）resultinalowerqualityofearnings.10.A.Off-balance-sheetfinancingthroughtheuseofoperatingleasesisacceptablewhenusedappropriately.However,companiescanusethemtooaggressivelyinordertoreducetheirperceivedleverage.Acomparisonamongindustrypeersandtheirpracticesmayindicateimproperuseofaccountingmethods.11.A.Awarningsignofaccountingmanipulationisabnormalinventorygrowthascomparedtosalesgrowth.Byoverstatinginventory,thecostofgoodssoldislower,leadingtohigherprofitability.12.Alternatively,0.03=0.65ROA+（ROA-0.06）0.50.0462=ROA+（ROA-0.06）0.50.0462=ROA+0.5ROA-0.030.0762=ROA+0.5ROA0.0762=1.5ROA0.0508=ROA13.14.a.CashflowsfrominvestingactivitiesSaleofoldequipment$72,000Purchaseofbus（33,000）Netcashusedininvestingactivities39,000b.CashflowsfromfinancingactivitiesRepurchaseofstock$（55,000）Cashdividend（80,000）Netcashusedinfinancingactivities（135,000）c.CashflowsfromoperatingactivitiesCashcollectionsfromcustomers$300,000Cashpaymentstosuppliers（95,000）Cashpaymentsforinterest（25,000）Netcashprovidedbyoperatingactivities$180,000Netincreaseincash$84,00015.a.Thetotalcapitalofthefirmsmustfirstbecalculatedbyaddingtheirrespectivedebtandequitytogether.ThetotalcapitalforAcmeis100+50=150,andthetotalcapitalforApexis450+150=600.TheeconomicvalueaddedwillbethespreadbetweentheROCandcostofcapitalmultipliedbythetotalcapitalofthefirm.AcmesEVAthusequals（17%9%）150=12（million）.ApexsEVAequals（15%10%）600=30（mil）.NoticethateventhoughApexsspreadissmaller,theirlargercapitalstockallowsthemmoreeconomicvalueadded.b.However,sinceApexhasalargercapitalstock,itsEVAperdollarinvestedincapitalissmallerat30/600=.05comparedtoAcmes12/150=.08CFAPROBLEMS1.SmileWhitehashigherqualityofearningsforthefollowingreasons:

SmileWhiteamortizesitsgoodwilloverashorterperiodthandoesQuickBrush.SmileWhitethereforepresentsmoreconservativeearningsbecauseithasgreatergoodwillamortizationexpense.SmileWhitedepreciatesitsproperty,plantandequipmentusinganaccelerateddepreciationmethod.Thisresultsinrecognitionofdepreciationexpensesoonerandalsoimpliesthatitsincomeismoreconservativelystated.SmileWhitesbaddebtallowanceisgreaterasapercentageofreceivables.SmileWhiteisrecognizinggreaterbad-debtexpensethanQuickBrush.Ifactualcollectionexperiencewillbecomparable,thenSmileWhitehasthemoreconservativerecognitionpolicy.2.a.=NetprofitmarginTotalassetturnoverAssets/equityb.c.g=ROEPlowback3.a.CFfromoperatingactivities=$260$85$12$35=$128b.CFfrominvestingactivities=$8+$30$40=$18c.CFfromfinancingactivities=$32$37=$694.a.QuickBrushhashadhighersalesandearningsgrowth（pershare）thanSmileWhite.Marginsarealsohigher.ButthisdoesnotmeanthatQuickBrushisnecessarilyabetterinvestment.SmileWhitehasahigherROE,whichhasbeenstable,whileQuickBrushsROEhasbeendeclining.WecanseethesourceofthedifferenceinROEusingDuPontanalysis:

ComponentDefinitionQuickBrushSmileWhiteTaxburden（1t）Netprofits/pretaxprofits67.4%66.0%InterestburdenPretaxprofits/EBIT1.0000.955ProfitmarginEBIT/Sales8.5%6.5%AssetturnoverSales/Assets1.423.55LeverageAssets/Equity1.471.48ROENetprofits/Equity12.0%21.4%Whiletaxburden,interestburden,andleveragearesimilar,profitmarginandassetturnoverdiffer.AlthoughSmileWhitehasalowerprofitmargin,ithasafarhigherassetturnover.Sustainablegrowth=ROEPlowbackratioROEPlowbackRatioSustainableGrowthRateLudlowsEstimateofGrowthRateQuickBrush12.0%1.0012.0%30%SmileWhite21.40.347.310Ludlowhasoverestimatedthesustainablegrowthrateforbothcompanies.QuickBrushhaslittleabilitytoincreaseitssustainablegrowthplowbackalreadyequals100%.SmileWhitecouldincreaseitssustainablegrowthbyincreasingitsplowbackratio.b.QuickBrushsrecentEPSgrowthhasbeenachievedbyincreasingbookvaluepershare,notbyachievinggreaterprofitsperdollarofequity.AfirmcanincreaseEPSevenifROEisdecliningasistrueofQuickBrush.QuickBrushsbookvaluepersharehasmorethandoubledinthelasttwoyears.Bookvaluepersharecanincreaseeitherbyretainingearningsorbyissuingnewstockatamarketpricegreaterthanbookvalue.QuickBrushhasbeenretainingallearnings,buttheincreaseinthenumberofoutstandingsharesindicatesthatithasalsoissuedasubstantialamountofstock.5.a.ROE=OperatingmarginInterestburdenAssetturnoverLeverageTaxburdenROEforEastover（EO）andforSouthampton（SHC）in2013isfoundasfollows:

Profitmargin=SHC:

EO:

145/1,793=795/7,406=8.1%10.7%Interestburden=SHC:

EO:

137/145=600/795=0.940.75Assetturnover=SHC:

EO:

1,793/2,104=7,406/8,265=0.850.90Leverage=SHC:

EO:

2,104/1,167=8,265/3,864=1.802.14Taxburden=SHC:

EO:

91/137=394/600=0.660.66ROESHC:

EO:

7.8%10.2%b.ThedifferencesinthecomponentsofROEforEastoverandSouthamptonare:

ProfitmarginEOhasahighermargin.InterestburdenEOhasahigherinterestburdenbecauseitspretaxprofitsarealowerpercentageofEBIT.AssetturnoverEOismoreefficientatturningoveritsassets.LeverageEOhashigherfinancialleverage.TaxburdenNomajordifferenceherebetweenthetwocompaniesROE.EOhasahigherROEthanSHC,butthisisonlyinpartduetohighermarginsandabetterassetturnover.Greaterfinancialleveragealsoplaysapart.c.ThesustainablegrowthratecanbecalculatedasROEtimesplowbackratio.ThesustainablegrowthratesforEastoverandSouthamptonareasfollows:

ROEPlowbackRatio*SustainableGrowthRateEastover10.2%0.363.7%Southampton7.80.584.5*Plowback=（1Payoutratio）EO:

Plowback=（10.64）=0.36SHC:

Plowback=（10.42）=0.58Thesustainablegrowthratesderivedinthismannerarenotlikelytoberepresentativeoffuturegrowthbecause2013wasprobablynota“normal”year.ForEastover,earningshadnotyetrecoveredto20102011levels;earningsretentionofonly0.36seemslowforacompanyinacapitalintensiveindustry.Southamptonsearningsfellbyover50percentin2013anditsearningsretentionwillprobablybehigherthan0.58inthefuture.Thereisadanger,therefore,inbasingaprojectionononeyearsresults,especiallyforcompaniesinacyclicalindustrysuchasforestproducts.6.a.TheformulafortheconstantgrowthdiscounteddividendmodelisForEastover:

Thiscompareswiththecurrentstockpriceof$28.Onthisbasis,itappearsthatEastoverisundervalued.b.Theformulaforthetwo-stagediscounteddividendmodelisForEastover:

g1=0.12andg2=0.08D0=1.20D1=D0（1.12）1=$1.34D2=D0（1.12）2=$1.51D3=D0（1.12）3=$1.69D4=D0（1.12）3（1.08）=$1.82Alternatively,CF0=$0;CF1=$1.34;CF2=$1.51;CF3=$1.69+$60.67;I=11;SolveforNPV=$48.03.ThisapproachmakesEastoverappearevenmoreundervaluedthanwasthecaseusingtheconstantgrowthapproach.c.Advantagesoftheconstantgrowthmodelinclude:

（1）logical,theoreticalbasis;

（2）simpletocompute;（3）inputscanbeestimated.Disadvantagesinclude:

（1）verysensitivetoestimatesofgrowth;

（2）gandkdifficulttoestimateaccurately;（3）onlyvalidforgk;（4）constantgrowthisanunrealisticassumption;（5）assumesgrowthwillneverslowdown;（6）dividendpayoutmustremainconstant;（7）notapplicableforfirmsnotpayingdividends.Improvementsofferedbythetwo-stagemodelinclude:

（1）Thetwo-stagemodelism