Q&A Hero

Q: Reformulate the following income statement (in millions of dollars): Sales 2,400 Operating expenses to generate sales Loss from real estate partnership (1,650) (100) Interest income 40 Interest expense (160) 530 Income tax expense 159 Net income 371 The firms statutory tax rate is 35%. What is the effective tax rate on operating income from sales?

Q: Explain in no more than 50 words why it is common that firms with higher return on net operating assets (RNOA) also have negative free cash flow. Also explain why such firms tend to have above-average forward P/E.

Q: The following are summaries from financial statements for the warehouse retailer, Home Depot Inc. for fiscal year ending January 29, 2006:Summary Reformulated Balance Sheet, January 29, 2006(in millions of dollars)Where relevant, make all calculations for 2006 with beginning-of-period balance sheet numbers in the questions below.(g) Calculate the following from these statements: 1. Financial leverage at the end of fiscal year, 2005 2. Operating liability leverage at the end of fiscal year, 2005(h) Home Depot estimates that it pays an implicit after-tax borrowing cost on its operating liabilities of 2% after tax. Calculate the rate of return it would have earned from its operations had it not used this supplier financing(i) Calculate the return on net operating assets (RNOA) for the 2006. Also calculate the core return on net operating assets for the year.(j) Show that Core RNOA = Core Profit Margin × Asset Turnover(k) The firm has a net borrowing cost of 3.0% after tax. Calculate the return on common equity (ROCE) for 2006.(l) Complete the income statement to report the after-tax net financial expenses for 2006 and comprehensive income.(m) In an article in the Financial Times on September 9th of this year, Mark Sellers, a hedge fund manage in Chicago, argued that Home Depot should borrow $17 billion to repurchase its stock. Suppose that core operating profitability and the net borrowing cost were forecasted to be the same for 2007 as in 2006. What return on common equity (ROCE) would you forecast for 2007 under the following conditions: 1. Home Depot did not made the stock repurchase 2. Home Depot made the stock repurchase on January 29, 2006

Q: Cisco Systems traded at $20 per share on December 3, 2001. Analysts are forecasting earnings per share of 0.22 for 2002 and 0.39 for 2003. The firm does not pay dividends. Value Cisco on the assumption that abnormal earnings growth forecasted for 2003 will continue at the same level into the future. Use a cost of equity capital of 10%.

Q: TEST NUMBER 3This exam comes in two parts. Part I involves an analysis of a set of financial statements and Part II involves forecasting and valuation based on those financial statements.Part I: Analysis (20 Points)The following is a comparative balance sheet for a firm for fiscal year 2002 (in millions of dollars): 20022001 20022001Operating cash6050 Accounts payable1,2001,040Short-term investments (at market)550500 Accrued liabilities390450Accounts receivable940790 Long-term debt1,8401,970Inventory910840 Property and plant2,840 2,710 Common equity1,870 1,430 5,300 4,890 5,300 4,890The following is the statement of common shareholders’ equity for 2002 (in millions of dollars):Balance, end of fiscal year 20011,430Share issues from exercised employee stock options810Repurchase of 24 million shares(720)Cash dividend(180)Tax benefit from exercise of employee stock options12Unrealized gain on investments50Net income468Balance, end of fiscal year 20021,870The firm’s income tax rate is 35%. The firm reported $15 million in interest income and $98 million in interest expense for 2002. Sales revenue was $3,726 million.a. Calculate the loss to shareholders from the exercise of employee stock options during 2002.b. The shares repurchased were in settlement of a forward purchase agreement. The market price of the shares at the time of the repurchase was $25 each. What was the effect of this transaction on the income for the shareholders?c. Prepare a comprehensive income statement that distinguishes after-tax operating income from financing income and expense. Include gains or losses from the transactions in questions (a) and (b) above.d. Prepare a reformulated comparative balance sheet that distinguishes assets and liabilities employed in operations from those employed in financing activities. Calculate the firms’ financial leverage and operating liability leverage at the end of 2002.e. Calculate free cash flow for 2002. Part II: Forecasting and Valuation (20 Points)Use a cost of capital for operations of 9%.Sales revenue is forecasted to grow at a 6% rate per year in the future, on a constant asset turnover of 1.25. Operating profit margins of 14% are expected to be earned each year.a. Forecast return on net operating assets (RNOA) for 2003.b. Forecast residual operating income for 2003.c. Value the shareholders’ equity at the end of the 2002 fiscal year using residual income methods.d. Forecast abnormal growth in operating income for 2004.e. Value the shareholders’ equity at the end of 2002 using abnormal earnings growth methods.f. After reading the stock compensation footnote for this firm, you note that there are employee stock options on 28 million shares outstanding at the end of 2002. A modified Black-Scholes valuation of these options is $15 each. How does this information change your valuation?

Q: Part AThe following is a condensed version of the statement of shareholders equity for Dell Computer Corporation for fiscal year ending January 31, 2003 (in millions of dollars):Balance at February 1, 2002Net incomeUnrealized gain on debt investmentsUnrealized loss on derivative instrumentsForeign currency translation gainComprehensive incomeShares issued on exercise of options, including tax benefits of $260Repurchase of 50 millions sharesOther information:1> Dells tax rate is 35%2> The repurchase occurred when the stock traded at $28 per share.Required:Prepare a reformulated statement of shareholders equity for 2003 for Dell Computer Corporation. The reformulated statement should identify comprehensive income.Part BThe following is extracted from Dells balance sheet at January 31, 2003 (in millions of dollars):Net financial assetsCommon equity (2,579 million shares outstanding) 9,1674,873Analysts are forecasting consensus earnings per share of $1.01 for the year ending January 31, 2004.a. Calculate net operating assets at January 31, 2003.b. Net financial assets are expected to earn an after-tax return of 4% in 2004. What is the forecast of operating income implicit in the analysts eps forecast?c. Forecast the residual operating income for 2004 that is implicit in the analysts forecast. Use a required annual return for operations of 9%.d. Dells shares are currently trading at $34 each. With the above information, value the shares under the following set of scenarios using residual income methods:(i) Sales will grow at 5% per year after 2004.(ii) Operating assets and operating liabilities with both grow at 5% per year after 2003.(iii) Operating profit margins (after tax) will be the same as these forecasted for 2004.e. Under the same scenarios, forecast free cash flow for 2004.f. Under the same scenarios, forecast abnormal growth in operating income for 2005.g. Show that, with a long term growth rate of 5%, the following formula will give the same value as that in part (d) of the question:where G2 is the (one plus) cum-dividend growth rate in operating income two years ahead and g is (one plus) the long-term growth rate.

Q: TEST NUMBER 2Below is an excerpt from the cash flow statement of a firm for fiscal year 2003:Required:a. Calculate free cash flow for 2003.b. Calculate net payments to debt holders and issuers for 2003.c. Calculate comprehensive income for 2003.(30 points).

Q: The following is an incomplete statement of common shareholders equity (in millions of dollars).Balance, December 31, 2004760Net income?Common dividends?Issue of common stock102Unrealized gain on available-for-sale securities8Foreign currency translation loss(6)Balance, December 31, 2005963The firm has no net debt (a pure equity firm) and reported an after-tax operating profit margin of 12 % on sales of $912 million in its income statement for 2005. All operating expenses in the income statement are involved in generating core income.Calculate the following for 2005:(a) Net income and comprehensive income(b) Free cash flow(c) Dividends paid to common shareholders(d) Core return on net operating assets (on beginning-of-year balance sheet)(e) Asset turnover

Q: From the following information, calculate comprehensive income for fiscal year 2005. Amounts are in millions of dollars.

Q: A junior colleague of yours has prepared the following pro forma to indicate his forecasts for a firm (in millions of dollars):The interest expense relates to bonds payable with an effective interest rate of 5% equal to the coupon rate. The firms tax rate is 35%. There are no financial assets.There are four things wrong with this pro forma. Can you spot them? (You are not required to re-work the pro forma).

Q: TEST NUMBER 7The following summarizes reformulated balance sheets at the end of fiscal years 2008 and 2007 (in millions of dollars):(a) What was operating income (after tax) for 2008?(b) What was net financial expense (after tax) for 2008?(c) What was the net payment to shareholders?

Q: The following numbers were calculated from the financial statements of a firm for fiscal year 2006.Net operating assets $107.5 millionNet financial obligations 22.7 millionAsset turnover, 2006 1.9Core operating profit-margin, after tax 7.5%(a) Calculate the core return on net operating assets for 2006.(b) You forecast that the core profit margin and asset turnover in the future will be the same as in 2006. You also forecast that sales will grow at 4% per year in the future. The firm’s required return for its operations is 9%. (i) Calculate the enterprise price-to-book ratio and enterprise value. (ii) Calculate the levered price-to-book ratio.(c) The firm’s 52 million outstanding shares are trading at $4.75 each. Given your forecasts, what is your expected rate of return from buying the firm at this price?

Q: TEST NUMBER 6Time allowed: 90 minutesTotal Points: 40 The following is an incomplete statement of common shareholders’ equity (in millions of dollars).The firm has no net debt (a pure equity firm) and reported an after-tax operating profit margin of 12 ½% on sales of $912 million in its income statement for 2005. All operating expenses in the income statement are involved in generating core income.Calculate the following for 2005:(a) Net income and comprehensive income(b) Free cash flow(c) Dividends paid to common shareholders(d) Core return on net operating assets (on beginning-of-year balance sheet(e) Asset turnover

Q: The following are summary income statement and balance sheet numbers for a firm (in millions of dollars). The firm has a required return for operations of 9%.(a) Prepare a table on the next page giving the following for 2003- 2005. Use beginning-of-period balance sheet numbers in denominators.Return on common equity (ROCE)Return on net operating assets (RNOA)Core return on net operating assets (Core RNOA)Free cash flowNet payments to common shareholdersNet payments to net debt holdersAsset turnoverCore profit marginGrowth rate for net operating assets(b) On the basis of these financial statements, forecast(i) Residual operating income for 2006 and 2007.(ii) Abnormal operating income growth for 2007.(c) Value the equity using two methods:(i) Residual operating income valuation(ii) Abnormal operating income growth valuation(d) Calculate the enterprise price-to-book ratio implied by your valuation. Also, calculate the enterprise trailing and forward P/E ratios implied by your valuation.(e) After making your valuation you discover (in footnotes) that the firm has 37 million employee stock options outstanding, valued at $10 per option. The firms tax rate is 35%.How does this information modify your calculation of the enterprise price-to-book ratio?

Q: Below is a summary of part of IBMs Statement of Cash Flows for the year ended December 31, 2001 (in millions of dollars). The firm faces a 37% statutory tax rate.Net cash provided from operating activities 9,274Cash flow from investing activities:Payments for plant, rental machines and other property (5,616)Proceeds from disposition of plant, rental machines and other property 1,619Investment in software (565)Purchases of marketable securities (1,079)Proceeds from marketable securities 1,393Net cash used in investing activities (4,248) Supplemental data:Cash paid during the year for:Income taxes 2,697Interest paid 1,447Interest received 617(a) From this information, calculate free cash flow for 2001.(b) What was the net amount of cash paid out of the firm in financing activities during 2001?

Q: TEST NUMBER 4At the time that of its 10-Q filing of financial statements for the first half of its January 2002 fiscal year, Home Depot’s shares traded at $50 per share. The following are summaries from those financial statements.According to financial statement footnotes, Home Depot’s statutory tax rate (combined Federal and State rates) is 39%. Other comprehensive income (not in net earnings above) is negligible. Use a required six-month return for operations of 4% in calculations below.(a)Calculate the following from these statements:1. Financial leverage2. Operating liability leverage3. After-tax profit margin(b) Home Depot earned a return on beginning net operating assets (RNOA) of 9.3% for the six months ending July 29, 2001.1. What was the asset turnover during these six months?2. What was the residual operating income over the six months?(c) Calculate the free cash flow generated by operations during the six months.(d) At the current market price of $50 per share, what growth rate for residual operating income does the market forecast for the future?(e) Calculate Home Depot’s price-to-sales ratio for trailing six-month sales.(f) If both profit margin and asset turnover are expected to continue at their current levels in the future, what is the sales growth rate forecast implied in the price-to-sales ratio?

Q: Differentiate between the three types of staffing policies used by international companies. What are the advantages of each?

Q: ________ is an approach that seeks efficiency of operations through the integration of all material acquisition, movement, and storage activities.

Q: Responsibility for performing the marketing functions can be shifted and shared in a variety of ways, but no function can be completely eliminated.

Q: In geocentric staffing, operations outside the home country are managed by the best-qualified individuals, regardless of their nationality.

Q: The triple bottom line is a measure of a firm's success based on multiple criteria commonly referred to as: A. product, price, and promotion. B. people, planet, and profit. C. partnership, planning, and positioning. D. segmentation, targeting, and positioning. E. brands, buyers, and bucks.

Q: A polycentric staffing strategy can facilitate the transfer of special know-how to branch operations.

Q: Compared with other approaches to business, the marketing concept is distinct in that it: A. focuses on profits. B. produces new products and services. C. creates a broad assortment of products. D. produces quality products. E. focuses on satisfying customers' needs.

Q: Logistics management can provide a competitive advantage through improved customer service.

Q: Citizens who are working and living in their home country are called expatriates.

Q: Channel assembly, which sends components and modules to be assembled by a distributor, treats these distributors as manufacturing partners.

Q: Scenario: Swingset International Jerome Johnston, the human resource manager at the U.S.-based Swingset International, is developing an international staffing policy for the company. Jerome personally believes Swingset should send managers from the United States to manage each subsidiary. But the CEO of the company, Valerie Vermont, believes subsidiary operations ought to be managed by individuals from the host country. Which staffing policy should Swingset consider if it wants its foreign operations to be managed by the best-qualified individuals regardless of nationality? A) nepotism B) ethnocentric staffing C) geocentric staffing D) employee referrals

Q: E-commerce refers to exchanges between organizations (not individuals) and the activities that facilitate those exchanges.

Q: E-commerce refers to exchanges between individuals and organizationsand the activities that facilitate those exchangesbased on applications of information technology.

Q: Marketing specialists such as intermediaries and collaborators hinder the exchange process between producers and consumers.