Financial Statement Analysis And Security Valuation 5th Edition by Stephen H Penman Test Bank

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Financial Statement Analysis And Security Valuation 5th Edition by Stephen H Penman Test Bank



Financial Statement Analysis And Security Valuation 5th Edition by Stephen H Penman Test Bank


Time allowed: 90 Minutes





Total Points: 40

























Question 1 (10 points)

Below is an excerpt from the cash flow statement of a firm for fiscal year 2003:





Cash flows from operating activities:

Net income

Adjustments to reconcile net

income to net cash provided by

operating activities:

Depreciation and amortization

Amortization of software

Tax benefits of employee

stock plans

Special charges

(Gains)/losses on investments

Change in operating assets and liabilities:



Pension assets

Other assets

Accounts payable

Pension liabilities

Other liabilities


Net cash provided by

operating activities


Cash flows from investing activities:

Payments for plant and other


Proceeds from disposition of plant

and other property

Investment in software

Purchases of marketable securities

and other investments

Proceeds from disposition of

marketable securities and

other investments


Net cash used in investing



Fiscal Year Ended

December 31, 2003







































Additional information:


Cash interest receipts

Cash interest payments


From the reformulated equity statement:


Shareholders equity December 31, 2002

Shareholders equity December 31, 2003

Net payout to shareholders


The firms tax rate is 35%.














Calculate free cash flow for 2003.












Calculate net payments to debt holders and issuers for 2003.













Calculate comprehensive income for 2003.


















Question 2 (30 points).


Part A


The 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, 2002

Net income

Unrealized gain on debt investments

Unrealized loss on derivative instruments

Foreign currency translation gain

Comprehensive income

Shares issued on exercise of options, including tax benefits of $260

Repurchase of 50 millions shares



Balance of January 31, 2003
















Other information:


Dells tax rate is 35%

The repurchase occurred when the stock traded at $28 per share.





Prepare a reformulated statement of shareholders equity for 2003 for Dell Computer Corporation.  The reformulated statement should identify comprehensive income.















(Page for answer)














































Part B


The following is extracted from Dells balance sheet at January 31, 2003 (in millions of dollars):


Net financial assets

Common equity (2,579 million shares outstanding)





Analysts are forecasting consensus earnings per share of $1.01 for the year ending January 31, 2004.


Calculate net operating assets at January 31, 2003.











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?












Forecast the residual operating income for 2004 that is implicit in the analysts forecast.  Use a required annual return for operations of 9%.










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:


Sales will grow at 5% per year after 2004.

Operating assets and operating liabilities with both grow at 5% per year after 2003.

Operating profit margins (after tax) will be the same as these forecasted for 2004.























Under the same scenarios, forecast free cash flow for 2004.















Under the same scenarios, forecast abnormal growth in operating income for 2005.












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.


Time allowed: 90 Minutes






Total Points: 40











Question 1 (12 points)


At the time that of its 10-Q filing of financial statements for the first half of its January 2002 fiscal year, Home Depots shares traded at $50 per share.  The following are summaries from those financial statements.


Balance Sheet, July 29, 2001
(in millions of dollars)
      Financial liabilities 1,320
Operating assets 23, 457   Operating liabilities 6,709
Financial assets      1,221   Common equity
(on 2,336 million outstanding shares)
     24,678        24,678


Statement of Earnings, Six Months Ended, July 29, 2001
(in millions of dollars)
Net sales               26,776  
Cost of Merchandise Sold                18,795  
Gross Profit                  7,981  
Operating Expenses:      
Selling and Store Operating   4,963  
Pre-Opening   59  
General and Administrative        436  
Total Operating Expenses   5,458  
Operating Income   2,523  
Interest Income (Expense):      
Interest and Investment Income   22  
Interest Expense       (11)  
Interest, Net   11  
Earnings Before Income Taxes   2,534  
Income Taxes                    978  
Net Earnings              1,556  


According to financial statement footnotes, Home Depots 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.


Calculate the following from these statements:

Financial leverage





Operating liability leverage





After-tax profit margin






Home Depot earned a return on beginning net operating assets (RNOA) of 9.3% for the six months ending July 29, 2001.

What was the asset turnover during these six months?






What was the residual operating income over the six months?

Calculate the free cash flow generated by operations during the six months.







At the current market price of $50 per share, what growth rate for residual operating income does the market forecast for the future?







Calculate Home Depots price-to-sales ratio for trailing six-month sales.







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?


Question 2 (5 points)

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   9,274
Cash flow from investing activities:    
Payments for plant, rental machines and other property   (5,616)
Proceeds from disposition of plant, rental machines and other property   1,619
Investment in software   (565)
Purchases of marketable securities   (1,079)
Proceeds from marketable securities   1,393
Net cash used in investing activities   (4,248)


Supplemental data:    
Cash paid during the year for:    
Income taxes               2,697
Interest paid               1,447
Interest received                  617


From this information, calculate free cash flow for 2001.







What was the net amount of cash paid out of the firm in financing activities during 2001?


Question 3 (7 points)

The following is from the statement of shareholders equity for Intel Corporation for 2000 (in millions of dollars).  Intel faces a 38% tax rate.

Balance, December 25, 1999   32,535
Net income   10,535
Unrealized loss on available-for-sale securities   (3,596)
Issuance of shares through employee stock plans, net of tax benefit of $887 million   1,684
Reclassification of put warrant obligation   130
Amortization of unearned compensation   26
Conversion of subordinated notes to common stock (market value of stock was $350 million)   207
Repurchase of common stock   (4,007)
Cash dividends   (470)
Issuance of shares for acquisitions         278


Calculate comprehensive income to Intels shareholders for 2000, being sure to include any hidden dirty surplus expenses.


Question 4 (10 points)

A firm with a return on common equity (ROCE) of 30% has financial leverage of 37.5% and a net after-tax borrowing cost of 5% on $240 million of net debt.

What rate of return does this firm earn on its operations?







The firm is considering repurchasing $150 million of its stock and financing the repurchase with further borrowing at a 5% after-tax borrowing cost.  What effect will this transaction have on the firms return on common equity if the same level of operating profitability is maintained?








Will this repurchase change the per share intrinsic value of the equity?  Why?








Will the normal P/E ratio for this firm change because of this transaction?  Why?

The firm had an unlevered price-to-book ratio (P/B) of 1.8 prior to the transaction.  What will be the effect of the repurchase on the levered price-to-book ratio?

Would you expect the earnings-per-share growth rate to change after the repurchase transaction?  Why?


Question 5 (6 points)

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%.



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