Short Questions:
From a financial analyst's point of view, Research and Development expenses of a pharmaceutical firm should be amortized over a longer period than those of a software firm. Why?
Assume that all of the debt on your books was borrowed three years ago, when the treasury bond rate was 7% and you were borrowing at 7.5%. If the treasury bond rate today is 6%, and you are a riskier firm than you used to be, will the market value of your debt be greater than or less than your book value? Explain.
What is the balance sheet and what is its purpose?
What is the income statement and what is its purpose?
What is the Statement of Cash Flows and what is its purpose?
What are some examples of intangible assets? Why is it important to consider intangible assets separately, from the point of view of a financial analyst?
How would you value assets-in-place?
How would you value growth assets?
What is the difference between purchase accounting and pooling accounting?
When is an obligation recognized as a liability according to GAAP?
What is the difference between a capital lease and an operating lease?
How would you categorize financing into debt and equity? How would you deal with convertible debt?
Definitions:
Problem 1.a. (Fall
1999) Appended is the balance sheet for AOL, Inc. for the last
two years, with a template for the computation of cashflows. Use this to prepare a Statement of Cash Flows for the year
ending June 30, 1999, and reconcile beginning cash with ending cash.
Note: AOL pays no dividends.
Hint: remember that ending cash must work out to $887, as in the balance sheet,
else you’ve made a mistake.
b. How is AOL financing its investments?
c.
If you were a supplier to AOL, would you feel comfortable continuing
trade relations with AOL? Or would
you want to stop dealing with it? Why
or why not?
|
Balance Sheet |
|
|
|
Outflows |
||
|
(In millions, except share data) |
6/30/99 |
6/30/98 |
Change |
Operating |
Investing |
Financing
|
|
ASSETS |
|
|
|
|
|
|
|
Cash and cash equivalents |
887 |
677 |
210 |
|
|
|
|
Short-term investments |
537 |
146 |
391 |
|
|
|
|
Trade accounts receivable |
323 |
192 |
131 |
|
|
|
|
Other receivables |
79 |
93 |
-14 |
|
|
|
|
Prepd expenses & oth current assets |
153 |
155 |
-2 |
|
|
|
|
Total current assets |
$1,979 |
$1,263 |
716 |
|
|
|
|
Property and equipment at cost, net |
657 |
503 |
154 |
|
|
|
|
Investments incl av-for-sale secs |
2,151 |
531 |
1620 |
|
|
|
|
Product development costs, net |
100 |
88 |
12 |
|
|
|
|
Goodwill, other intangible assets, net |
454 |
472 |
-18 |
|
|
|
|
Other assets |
7 |
17 |
-10 |
|
|
|
|
Total Assets |
$5,348 |
$2,874 |
2474 |
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Trade accounts payable |
74 |
120 |
-46 |
|
|
|
|
Oth accrued expenses and liabilities |
795 |
461 |
334 |
|
|
|
|
Deferred revenue |
646 |
420 |
226 |
|
|
|
|
Accrued personnel costs |
134 |
78 |
56 |
|
|
|
|
Deferred network services credit |
76 |
76 |
0 |
|
|
|
|
Total current liabilities |
$1,725 |
$1,155 |
570 |
|
|
|
|
Long-term liabilities: |
|
|
|
|
|
|
|
Notes payable |
348 |
372 |
-24 |
|
|
|
|
Deferred revenue |
30 |
71 |
-41 |
|
|
|
|
Other liabilities |
15 |
7 |
8 |
|
|
|
|
Deferred network services credit |
197 |
273 |
-76 |
|
|
|
|
Total liabilities |
$2,315 |
$1,878 |
437 |
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
Common stock, $.01 par value |
11 |
10 |
1 |
|
|
|
|
Additional paid-in capital |
2,703 |
1,431 |
1272 |
|
|
|
|
Unrealized gain on av-for-sale secs |
168 |
145 |
23 |
|
|
|
|
Retained earnings |
151 |
-590 |
741 |
|
|
|
|
Total stockholders' equity |
$3,033 |
$996 |
2037 |
|
|
|
|
Total Liabilities |
5,348 |
2,874 |
2474 |
|
|
|
Problem 2 (Spring 1999): Here are the balance sheet and income statement for Suprema, Inc. for 1996 and 1997:
| Data in ’000s of dollars | 1996 | 1997 | Change |
| Assets | |||
| Current assets: | |||
| Cash | 12 | 0 | -12 |
| Marketable Securities | 18 | 0 | -18 |
| Accounts receivable - net | 68 | 73 | 5 |
| Notes receivable | 30 | 50 | 20 |
| Inventories | 131 | 138 | 7 |
| Prepaid expenses | 12 | 14 | 2 |
| Total current assets | 271 | 275 | 4 |
| Fixed Assets: | |||
| Land | 25 | 25 | 0 |
| Plant and equipment | 268 | 306 | 38 |
| Less: Accumulated depreciation | 157 | 183 | 26 |
| Net plant and equipment | 111 | 123 | 12 |
| Total fixed assets | 136 | 148 | 12 |
| Total assets | 407 | 423 | 16 |
| Liabilities and Net Worth | |||
| Current liabilities: | |||
| Bank overdraft | 0 | 4 | 4 |
| Accounts payable | 73 | 97 | 24 |
| Notes payable | 100 | 70 | -30 |
| Accrued expenses | 13 | 22 | 9 |
| Deferred income taxes | 25 | 27 | 2 |
| Total current liabilities | 211 | 220 | 9 |
| Long-term liabilities: | |||
| Secured notes payable | 40 | 20 | -20 |
| Net Worth: | |||
| Preferred stock | 35 | 39 | 4 |
| Common Stock and Capital surplus | 100 | 120 | 20 |
| Retained earnings | 21 | 24 | 3 |
| Total net worth | 156 | 183 | 27 |
| Total liabilities and net worth | 407 | 423 | 16 |
Income Statement (in ’000s):
| 1996 | 1997 | |
| Sales | 1115 | 1240 |
| Cost of goods sold: | ||
| Material | 312 | 345 |
| Labor | 274 | 341 |
| Depreciation | 24 | 26 |
| Overhead | 158 | 210 |
| Cost of good sold | 768 | 922 |
| Gross profit | 347 | 318 |
| Expenses: | ||
| Selling and administrative expenses | 268 | 297 |
| Interest on debt | 9 | 7 |
| Total Expenses | 277 | 304 |
| Profit before taxes | 70 | 14 |
| Income taxes | 32 | 5 |
| Net Income | 38 | 9 |
Additional Information:
Prepare the Statement of Cash Flows for Suprema for the year 1997, and reconcile beginning cash with ending cash (Hint: remember that ending cash must work out to $0, as in the balance sheet, else you’ve made a mistake.)
Problem 3 (Spring 1999): You have the following financial statements for CMP Media, Inc. for the years 1996 and 1997. Construct a statement of cash flows for 1997 that will allow you to reconcile the change in cash from end-of-year 1996 to end-of-year 1997.
Income Statement
|
|
1996 |
1997 |
|
Net Sales |
900,893.00 |
990,982.30 |
|
Cost of Goods
Sold (excluding depreciation) |
709,000.00 |
781,100.00 |
|
Depreciation |
31,500.00 |
32,200.00 |
|
Gross Margin |
160,393.00 |
177,682.30 |
|
Expenses |
|
|
|
Selling Expenses |
82,912.20 |
89,545.18 |
|
General and Administrative Expenses |
30,104.43 |
33,415.92 |
|
Other Expenses |
22,200.00 |
25,000.00 |
|
Interest on debt |
9,700.00 |
14,300.00 |
|
Total
Expenses |
144,916.63 |
162,261.09 |
|
Profit (loss)
before taxes |
15,476.37 |
15,421.21 |
|
Federal
Income Tax |
6,500.08 |
6,476.91 |
|
Net income
(loss) |
8,976.29 |
8,944.30 |
Balance Sheet
|
Assets |
|
Liabilities
and net worth |
||||
|
|
1996 |
1997 |
|
|
1996 |
1997 |
|
Current
Assets |
|
|
|
Current
liabilities: |
|
|
|
Cash |
39,700.00 |
27,500.00 |
|
Accounts
payable |
71,200.00 |
83,000.00 |
|
Marketable
securities |
1,000.00 |
11,000.00 |
|
Notes payable |
50,000.00 |
140,000.00 |
|
Accounts
Receivable |
81,500.00 |
72,700.00 |
|
Accrued
Expenses |
33,400.00 |
36,300.00 |
|
Inventories |
181,300.00 |
242,000.00 |
|
Total current
liabilities |
154,600.00 |
259,300.00 |
|
Total current
assets |
303,500.00 |
353,200.00 |
|
Long-term
debt: |
|
|
|
Fixed Assets: |
|
|
|
Mortgage
payable |
106,000.00 |
90,800.00 |
|
Land |
112,000.00 |
112,000.00 |
|
Net worth: |
|
|
|
Plant &
equipment (net) |
445,200.00 |
464,800.00 |
|
Common stock |
225,000.00 |
230,000.00 |
|
Total fixed
assets |
557,200.00 |
576,800.00 |
|
Retained
earnings |
388,400.00 |
371,400.00 |
|
Other assets |
13,300.00 |
21,500.00 |
|
Total Net
Worth |
613,400.00 |
601,400.00 |
|
Total assets |
874,000.00 |
951,500.00 |
|
Total
Liabilities and Net Worth |
874,000.00 |
951,500.00 |
Dividends paid in 1996 were $20,000, while
dividends paid in 1997 were $25,944.30
Notes: No
common stock was repurchased during this period
No
plant and equipment was sold during this period
Problem 4:
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