Financial Statement Analysis And Security Valuation 5th Edition By Stephen – Test Bank

Question 1 (6 points)

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

Common shareholders’ equity, May 31, 2004 450
Share issues (including $49 tax benefit 270
from employee stock options)
Share repurchases 27
Common dividends 17
Common shareholders’ equity, May 31, 2005 793

The firm’s statutory tax rate is 35%.

Comprehensive income (before option expense)

= ΔCSE + Net Payments to shareholders

= 343 + (27 + 17 – 270) = 117

Loss on exercise of options:

Before tax = 49 = 140
0.35
Tax benefit 49 91

Comprehensive income 26

Question 2 (12 points)

Below are some summary numbers for a firm for fiscal years 2004 and 2005 (in millions of dollars).

(c) Calculate return on common equity (ROCE), return on net operating assets (RNOA), and net borrowing cost (NBC) for the two years.

(d) How much of the change in ROCE over the two years is due to:

(I) Change in profit margin
(II) Change in asset turnover
(V) Change in financial leverage
(VI) Change in borrowing costs?

ROCE2005 = 31.36% = 15.60% + 1.303 [15.60% – 3.5%]

ROCE2004 = 22.89% = 17.50% + 0.400 [17.5% – 4.0%]

Change = 8.47% = –1.9% 0.903 –1.4%

2004 2005
PM 7.0% 6.0%
ATO 2.5% 2.6%
FLEV 0.400 1.303

ΔROCE = ΔRNOA + (ΔSPREAD + FLEV2004) + (ΔFLEV +SPREAD2005)

= –1.9% + (–1.4% x 0.400) + (0.903 x 12.1%)

= –1.9% – 0.56% + 10.93%

= 8.47%

ΔRNOA = (ΔPM x ATO2004) + (ΔATO x PM2005)

= (–1.0% x 2.5) + (0.1 x 6.0%)

= –2.5% + 0.6%

= –1.9%

(I) –2.5%
(II) 0.6%
(III) 10.93%
(IV) Change due to change in SPREAD = – 0.56%

Change due to change in NBC = 0.400 x 0.5%

= 0.2%

[If RNOA had not changed, change due to change in SPREAD would have been 0.2%]

Question 3 (16 points)

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%.

(d) 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 flow
 Net payments to common shareholders
 Net payments to net debt holders
 Asset turnover
 Core profit margin
 Growth rate for net operating assets

2003 2004 2005
ROCE 16.48% 11.11% 23.73%
RNOA 14.71% 10.17% 20.55%
Core RNOA 14.71% 14.75% 14.68%

OI – ΔNOA = FCF 101 61 169

CI – ΔCSE = Net dividend (d) 98 73 105

F = FCF – d 3 (12) 64

ATO 2.1 2.1 2.1

Core PM 7.0% 7.0% 7.0%

g (NOA) 4.02% 4.0% 4.0%