1、Chapter 19 - Financial Statement Analysis 19-1 Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. CHAPTER 19: FINANCIAL STATEMENT ANALYSIS PROBLEM SETS 1. The major difference in approach of internati
2、onal financial reporting standards and U.S. GAAP accounting stems from the difference between principles and rules. U.S. GAAP accounting is rules-based, with extensive detailed rules to be followed in the preparation of financial statements; many international standards, European Union adapted IFRS,
3、 allow much greater flexibility, as long as conformity with general principles is demonstrated. Even though U.S. GAAP is generally more detailed and specific, issues of comparability still arise among U.S. companies. Comparability problems are still greater among companies in foreign countries. 2. E
4、arnings management should not matter in a truly efficient market, where all publicly available information is reflected in the price of a share of stock. Investors can see through attempts to manage earnings so that they can determine a companys true profitability and, hence, the intrinsic value of
5、a share of stock. However, if firms do engage in earnings management, then the clear implication is that managers do not view financial markets as efficient. 3. Both credit rating agencies and stock market analysts are likely to be more or less interested in all of the ratios discussed in this chapt
6、er (as well as many other ratios and forms of analysis). Since the Moodys and Standard and Poors ratings assess bond default risk, these agencies are most interested in leverage ratios. A stock market analyst would be most interested in profitability and market price ratios. 4. ROA = ROS ATO The onl
7、y way that Crusty Pie can have an ROS higher than the industry average and an ROA equal to the industry average is for its ATO to be lower than the industry average. 5. ABCs asset turnover must be above the industry average. 6. Debt ROE (1 Tax rate)ROA (ROA Interest rate) Equity = + ROEA ROEB Firms
8、A and B have the same ROA. Assuming the same tax rate and assuming that ROA interest rate, then Firm A must have either a lower interest rate or a higher debt ratio. Chapter 19 - Financial Statement Analysis 19-2 Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribut
9、ion without the prior written consent of McGraw-Hill Education. 7. Net income Net income Sales Assets ROE= = 鬃 Equity Sales Assets Equity= Net profit margin Asset turnover Leverage ratio = 5.5% 2.0 2.2 = 24.2% 8. a. Lower bad debt expense will result in higher operating income. b. Lower bad debt exp
10、ense will have no effect on operating cash flow until Galaxy actually collects receivables. 9. A. Certain GAAP rules can be exploited by companies in order to achieve specific goals, while still remaining within the letter of the law. Aggressive assumptions, such as lengthening the depreciable life
11、of an asset (which are utilized to boost earnings) result in a lower quality of earnings. 10. A. Off-balance-sheet financing through the use of operating leases is acceptable when used appropriately. However, companies can use them too aggressively in order to reduce their perceived leverage. A comp
12、arison among industry peers and their practices may indicate improper use of accounting methods. 11. A. A warning sign of accounting manipulation is abnormal inventory growth as compared to sales growth. By overstating inventory, the cost of goods sold is lower, leading to higher profitability. 12.
13、Alternatively, 0.03 = 0.65 ROA + (ROA - 0.06) 0.5 0.0462 = ROA + (ROA - 0.06) 0.5 0.0462 = ROA + 0.5ROA - 0.03 0.0762 = ROA + 0.5ROA 0.0762 = 1.5ROA 0.0508 = ROA Debt ROE (1 ) ROA (ROA-Interest rate) Equity 0.03 (0.65) ROA (ROA 0.06) 0.5 0.03 0.975 ROA 0.0195 0.975 ROA 0.0495 ROA 0.0508 5.08% t = +
14、=+ = = = =Chapter 19 - Financial Statement Analysis 19-3 Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 13. 14. a. Cash flows from investing activities Sale of old equipment $72,000 Purchase of bu
15、s (33,000) Net cash used in investing activities 39,000 b. Cash flows from financing activities Repurchase of stock $(55,000) Cash dividend (80,000) Net cash used in financing activities (135,000) c. Cash flows from operating activities Cash collections from customers $300,000 Cash payments to suppl
16、iers (95,000) Cash payments for interest (25,000) Net cash provided by operating activities $180,000 Net increase in cash $84,000 15. a. The total capital of the firms must first be calculated by adding their respective debt and equity together. The total capital for Acme is 100 + 50 = 150, and the
17、total capital for Apex is 450 + 150 = 600. The economic value added will be the spread between the ROC and cost of capital multiplied by the total capital of the firm. Acmes EVA thus equals (17% 9%) 150 = 12 (million). Apexs EVA equals (15% 10%) 600 = 30 (mil). Notice that even though Apexs spread i
18、s smaller, their larger capital stock allows them more economic value added. b. However, since Apex has a larger capital stock, its EVA per dollar invested in capital is smaller at 30/600 = .05 compared to Acmes 12/150 = .08 CFA PROBLEMS 1. SmileWhite has higher quality of earnings for the following
19、 reasons: SmileWhite amortizes its goodwill over a shorter period than does QuickBrush. SmileWhite therefore presents more conservative earnings because it has greater goodwill amortization expense. Net income Net income Taxable income EBIT Sales Assets ROE= = 鬃鬃 Equity Taxable income EBIT Sales Ass
20、ets Equity ROE 0.75 0.6 0.1 2.40 1.25 .135 13.5% =Chapter 19 - Financial Statement Analysis 19-4 Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. SmileWhite depreciates its property, plant and equip
21、ment using an accelerated depreciation method. This results in recognition of depreciation expense sooner and also implies that its income is more conservatively stated. SmileWhites bad debt allowance is greater as a percentage of receivables. SmileWhite is recognizing greater bad-debt expense than
22、QuickBrush. If actual collection experience will be comparable, then SmileWhite has the more conservative recognition policy. 2. a. Equity Assets Assets Sales Sales profits Net Equity profits Net ROE = = = Net profit margin Total asset turnover Assets/equity b. 475 4,750 2,950 ROE 10% 1.61 1.40 .226
23、2, or 22.62% 4,750 2,950 2,100 = = c. g = ROE Plowback 1.79 0.55 22.62% 15.67% 1.79 = 3. a. CF from operating activities = $260 $85 $12 $35 = $128 b. CF from investing activities = $8 + $30 $40 = $18 c. CF from financing activities = $32 $37 = $69 4. a. QuickBrush has had higher sales and earnings g
24、rowth (per share) than SmileWhite. Margins are also higher. But this does not mean that QuickBrush is necessarily a better investment. SmileWhite has a higher ROE, which has been stable, while QuickBrushs ROE has been declining. We can see the source of the difference in ROE using DuPont analysis: C
25、omponent Definition QuickBrush SmileWhite Tax burden (1 t) Net profits/pretax profits 67.4% 66.0% Interest burden Pretax profits/EBIT 1.000 0.955 Profit margin EBIT/Sales 8.5% 6.5% Asset turnover Sales/Assets 1.42 3.55 Leverage Assets/Equity 1.47 1.48 ROE Net profits/Equity 12.0% 21.4% Net profits 4
26、75 0.100 10% Sales 4750 = = = Sales 4,750 1.61 Assets 2,950 = = Assets 2,950 1.40 Equity 2,100 = =Chapter 19 - Financial Statement Analysis 19-5 Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Whil
27、e tax burden, interest burden, and leverage are similar, profit margin and asset turnover differ. Although SmileWhite has a lower profit margin, it has a far higher asset turnover. Sustainable growth = ROE Plowback ratio ROE Plowback Ratio Sustainable Growth Rate Ludlows Estimate of Growth Rate Quic
28、kBrush 12.0% 1.00 12.0% 30% SmileWhite 21.4 0.34 7.3 10 Ludlow has overestimated the sustainable growth rate for both companies. QuickBrush has little ability to increase its sustainable growthplowback already equals 100%. SmileWhite could increase its sustainable growth by increasing its plowback r
29、atio. b. QuickBrushs recent EPS growth has been achieved by increasing book value per share, not by achieving greater profits per dollar of equity. A firm can increase EPS even if ROE is declining as is true of QuickBrush. QuickBrushs book value per share has more than doubled in the last two years.
30、 Book value per share can increase either by retaining earnings or by issuing new stock at a market price greater than book value. QuickBrush has been retaining all earnings, but the increase in the number of outstanding shares indicates that it has also issued a substantial amount of stock. 5. a. R
31、OE = Operating margin Interest burden Asset turnover Leverage Tax burden ROE for Eastover (EO) and for Southampton (SHC) in 2013 is found as follows: Profit margin = Sales EBITSHC: EO: 145/1,793 = 795/7,406 = 8.1% 10.7% Interest burden = EBIT profits Pretax SHC: EO: 137/145 = 600/795 = 0.94 0.75 Ass
32、et turnover = Assets SalesSHC: EO: 1,793/2,104 = 7,406/8,265 = 0.85 0.90 Leverage = Equity AssetsSHC: EO: 2,104/1,167 = 8,265/3,864 = 1.80 2.14 Tax burden = profits Pretax profits Net SHC: EO: 91/137 = 394/600 = 0.66 0.66 ROE SHC: EO: 7.8% 10.2% b. The differences in the components of ROE for Eastov
33、er and Southampton are: Chapter 19 - Financial Statement Analysis 19-6 Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Profit margin EO has a higher margin. Interest burden EO has a higher interest
34、 burden because its pretax profits are a lower percentage of EBIT. Asset turnover EO is more efficient at turning over its assets. Leverage EO has higher financial leverage. Tax burden No major difference here between the two companies ROE. EO has a higher ROE than SHC, but this is only in part due
35、to higher margins and a better asset turnover. Greater financial leverage also plays a part. c. The sustainable growth rate can be calculated as ROE times plowback ratio. The sustainable growth rates for Eastover and Southampton are as follows: ROE Plowback Ratio* Sustainable Growth Rate Eastover 10
36、.2% 0.36 3.7% Southampton 7.8 0.58 4.5 *Plowback = (1 Payout ratio) EO: Plowback = (1 0.64) = 0.36 SHC: Plowback = (1 0.42) = 0.58 The sustainable growth rates derived in this manner are not likely to be representative of future growth because 2013 was probably not a “normal” year. For Eastover, ear
37、nings had not yet recovered to 20102011 levels; earnings retention of only 0.36 seems low for a company in a capital intensive industry. Southamptons earnings fell by over 50 percent in 2013 and its earnings retention will probably be higher than 0.58 in the future. There is a danger, therefore, in
38、basing a projection on one years results, especially for companies in a cyclical industry such as forest products. 6. a. The formula for the constant growth discounted dividend model is 0 0 (1 ) Dg P kg + = For Eastover: 0 $1.20 1.08 $43.20 0.11 0.08 P = = This compares with the current stock price
39、of $28. On this basis, it appears that Eastover is undervalued. b. The formula for the two-stage discounted dividend model is 33 12 0 1233 (1 ) (1 ) (1 ) (1 ) DP DD P kkkk =+ +Chapter 19 - Financial Statement Analysis 19-7 Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or
40、 distribution without the prior written consent of McGraw-Hill Education. For Eastover: g1 = 0.12 and g2 = 0.08 D0 = 1.20 D1 = D0 (1.12) 1= $1.34 D2 = D0 (1.12) 2= $1.51 D3 = D0 (1.12) 3= $1.69 D4 = D0 (1.12) 3 (1.08) = $1.82 4 3 2 $1.82 $60.67 0.11 0.08 D P kg = = = 0 1233 $1.34 $1.51 $1.69 $60.67
41、$48.03 (1.11) (1.11) (1.11) (1.11) P=+= Alternatively, CF 0 = $0; CF 1 = $1.34; CF 2 = $1.51; CF 3 = $1.69 + $60.67; I = 11; Solve for NPV = $48.03. This approach makes Eastover appear even more undervalued than was the case using the constant growth approach. c. Advantages of the constant growth mo
42、del include: (1) logical, theoretical basis; (2) simple to compute; (3) inputs can be estimated. Disadvantages include: (1) very sensitive to estimates of growth; (2) g and k difficult to estimate accurately; (3) only valid for g k; (4) constant growth is an unrealistic assumption; (5) assumes growt
43、h will never slow down; (6) dividend payout must remain constant; (7) not applicable for firms not paying dividends. Improvements offered by the two-stage model include: (1) The two-stage model is more realistic. It accounts for low, high, or zero growth in the first stage, followed by constant long
44、-term growth in the second stage. (2) The model can be used to determine stock value when the growth rate in the first stage exceeds the required rate of return. 7. a. In order to determine whether a stock is undervalued or overvalued, analysts often compute price-earnings ratios (P/Es) and price-bo
45、ok ratios (P/Bs); then, these ratios are compared to benchmarks for the market, such as the S (3) accounting practices may not be standardized; (4) changing accounting standards may make historical comparisons difficult. Disadvantages of the relative P/B model include: (1) book value may be understa
46、ted or overstated, particularly for a company like Eastover, which has valuable assets on its books carried at low historical cost; (2) book value may not be representative of earning power or future growth potential; (3) changing accounting standards make historical comparisons difficult. 8. The following table summarizes the valuation and ROE for Eastover and Southampton: Eastover Southampton Stock price $28.00 $48.00 Constant-growth model $43.20 $29.00 2-stage growth model $48.03 $35.50
