Corporate Finance, 3e (Berk/DeMarzo)
Chapter 2 Introduction to Financial Statement Analysis
2.1 Firms’ Disclosure of Financial Information
1) U.S. public companies are required to file their annual financial statements with the U.S.
Securities and Exchange Commission on which form?
A) 10-A
B) 10-K
C) 10-Q
D) 10-SEC
2) Which of the following is NOT a financial statement that every public company is required to
produce?
A) Income Statement
B) Statement of Sources and Uses of Cash
C) Balance Sheet
D) Statement of Stockholders’ Equity
3) The third party who checks annual financial statements to ensure that they are prepared
according to GAAP and verifies that the information reported is reliable is the:
A) NYSE Enforcement Board.
B) Accounting Standards Board.
C) Securities and Exchange Commission (SEC).
D) auditor.
4) What is the role of an auditor in financial statement analysis?
5) What are the four financial statements that all public companies must produce?
2.2 The Balance Sheet
1) Which of the following balance sheet equations is INCORRECT?
A) Assets – Liabilities = Shareholders’ Equity
B) Assets = Liabilities + Shareholders’ Equity
C) Assets – Current Liabilities = Long Term Liabilities
D) Assets – Current Liabilities = Long Term Liabilities + Shareholders’ Equity
2) Cash is a:
A) long-term asset.
B) current asset.
C) current liability.
D) long-term liability.
3) Accounts payable is a:
A) long-term liability.
B) current asset.
C) long-term asset.
D) current liability.
4) A 30 year mortgage loan is a:
A) long-term liability.
B) current liability.
C) current asset.
D) long-term asset.
5) Which of the following statements regarding the balance sheet is INCORRECT?
A) The balance sheet provides a snapshots of the firm’s financial position at a given point in
time.
B) The balance sheet lists the firm’s assets and liabilities.
C) The balance sheet reports stockholders’ equity on the right hand side.
D) The balance sheet reports liabilities on the left hand side.
6) Dustin’s Donuts experienced a decrease in the value of the trademark of a company it acquired
two years ago. This reduction in value results in:
A) an impairment charge.
B) depreciation expense.
C) an operating expense.
D) goodwill.
7) Which of the following is an example of an intangible asset?
A) Brand names and trademarks
B) Patents
C) Customer relationships
D) All of the above are intangible assets.
8) On the balance sheet, short-term debt appears:
A) in the Stockholders’ Equity section.
B) in the Operating Expenses section.
C) in the Current Assets section.
D) in the Current Liabilities section.
9) On the balance sheet, current maturities of long-term debt appears:
A) in the Stockholders’ Equity section.
B) in the Operating Expenses section.
C) in the Current Assets section.
D) in the Current Liabilities section.
10) The firm’s assets and liabilities at a given point in time are reported on the firm’s:
A) income statement or statement of financial performance.
B) income statement or statement of financial position.
C) balance sheet or statement of financial performance.
D) balance sheet or statement of financial position.
11) The statement of financial position is also known as the:
A) balance sheet.
B) income statement.
C) statement of cash flows.
D) statement of stockholder’s equity.
Use the following information for ECE incorporated:
Assets $200 million
Shareholder Equity $100 million
Sales $300 million
Net Income $15 million
Interest Expense $2 million
12) If ECE’s stock is currently trading at $24.00 and ECE has 25 million shares outstanding, then
ECE’s market-to-book ratio is closest to:
A) 0.24
B) 4
C) 6
D) 30
Use the information for the question(s) below.
In November 2009, Perrigo Co. (PRGO) had a share price of $39.20. They had 91.33 million
shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in
outstanding debt, $163.82 million in net income, and cash of $257.09 million.
13) Perrigo’s market capitalization is closest to:
A) $952.16 million
B) $3,580.14 million
C) $4,168.06 million
D) $4,425.15 million
14) Perrigo’s book value of equity is closest to:
A) $952.16 million
B) $3,580.14 million
C) $4,168.06 million
D) $4,425.15 million
15) Perrigo’s enterprise value is closest to:
A) $952.16 million
B) $3,580.14 million
C) $4,168.06 million
D) $4,425.15 million
Use the table for the question(s) below.
Consider the following balance sheet:
Luther Corporation
Consolidated Balance Sheet
December 31, 2009 and 2008 (in $ millions)
Assets
2009
2008
Liabilities and
Stockholders’ Equity
2009
2008
Current Assets
Current Liabilities
Cash
63.6
58.5
Accounts payable
87.6
73.5
Accounts receivable
55.5
39.6
Notes payable/
short-term debt
10.5
9.6
Inventories
45.9
42.9
Current maturities of
long-term debt
39.9
36.9
Other current assets
6.0
3.0
Other current liabilities
6.0
12.0
Total current assets
171.0
144.0
Total current liabilities
144.0
132.0
Long-Term Assets
Long-Term Liabilities
Land
66.6
62.1
Long-term debt
239.7
168.9
Buildings
109.5
91.5
Capital lease obligations
—
—
Equipment
119.1
99.6
Total Debt
239.7
168.9
Less accumulated
depreciation
(56.1)
(52.5)
Deferred taxes
22.8
22.2
Net property, plant, and
equipment
239.1
200.7
Other long-term liabilities
—
—
Goodwill
60.0
—
Total long-term liabilities
262.5
191.1
Other long-term assets
63.0
42.0
Total liabilities
406.5
323.1
Total long-term assets
362.1
242.7
Stockholders’ Equity
126.6
63.6
Total Assets
533.1
386.7
Total liabilities and
Stockholders’ Equity
533.1
386.7
16) What is Luther’s net working capital in 2008?
A) $12 million
B) $27 million
C) $39 million
D) $63.6 million
17) If in 2009 Luther has 10.2 million shares outstanding and these shares are trading at $16 per
share, then Luther’s Market-to-book ratio would be closest to:
A) 0.39
B) 0.76
C) 1.29
D) 2.57
18) If in 2009 Luther has 10.2 million shares outstanding and these shares are trading at $16 per
share, then what is Luther’s Enterprise Value?
A) -$63.3 million
B) $353.1 million
C) $389.7 million
D) $516.9 million
19) If on December 31, 2008 Luther has 8 million shares outstanding trading at $15 per share,
then what is Luther’s market-to-book ratio?
20) If on December 31, 2008 Luther has 8 million shares outstanding trading at $15 per share,
then what is Luther’s enterprise value?
2.3 The Income Statement
1) Which of the following statements regarding the income statement is INCORRECT?
A) The income statement shows the earnings and expenses at a given point in time.
B) The income statement shows the flow of earnings and expenses generated by the firm
between two dates.
C) The last or “bottom” line of the income statement shows the firm’s net income.
D) The first line of an income statement lists the revenues from the sales of products or services.
2) Gross profit is calculated as:
A) Total sales – cost of sales – selling, general and administrative expenses – depreciation and
amortization
B) Total sales – cost of sales – selling, general and administrative expenses
C) Total sales – cost of sales
D) None of the above
3) Which of the following is NOT an operating expense?
A) Interest expense
B) Depreciation and amortization
C) Selling, general and administrative expenses
D) Research and development
Use the information for the question(s) below.
In November 2009, Perrigo Co. (PRGO) had a share price of $39.20. They had 91.33 million
shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in
outstanding debt, $163.82 million in net income, and cash of $257.09 million.
4) Perrigo’s earnings per share (EPS) is closest to:
A) $0.19
B) $1.79
C) $2.81
D) $3.76
5) The firm’s revenues and expenses over a period of time are reported on the firm’s:
A) income statement or statement of financial performance.
B) income statement or statement of financial position.
C) balance sheet or statement of financial performance.
D) balance sheet or statement of financial position.
6) The statement of financial performance is also known as the:
A) balance sheet.
B) income statement.
C) statement of cash flows.
D) statement of stockholder’s equity.
Use the table for the question(s) below.
Consider the following income statement and other information:
Luther Corporation
Consolidated Income Statement
Year ended December 31 (in $ millions)
2008
Total sales
578.3
Cost of sales
(481.9)
Gross profit
96.4
Selling, general, and
administrative expenses
(39.0)
Research and development
(22.8)
Depreciation and amortization
(3.3)
Operating income
31.3
Other income
—
Earnings before interest and taxes
(EBIT)
31.3
Interest income (expense)
(15.8)
Pre-tax income
15.5
Taxes
(5.3)
Net income
10.2
Price per share
$15
Shares outstanding (millions)
8.0
Stock options outstanding (millions)
0.2
Stockholders’ Equity
63.6
Total Liabilities and Stockholders’
Equity
386.7
7) For the year ending December 31, 2009 Luther’s earnings per share are closest to:
A) $0.96
B) $1.04
C) $1.28
D) $1.33
8) Assuming that Luther has no convertible bonds outstanding, then for the year ending
December 31, 2009 Luther’s diluted earnings per share are closest to:
A) $1.01
B) $1.04
C) $1.28
D) $1.33
2.4 The Statement of Cash Flows
1) Which of the following is NOT a section on the cash flow statement?
A) Income generating activities
B) Investing activities
C) Operating activities
D) Financing activities
2) Which of the following statements regarding net income transferred to retained earnings is
correct?
A) Net income = net income transferred to retained earnings – dividends
B) Net income transferred to retain earnings = net income + dividends
C) Net income = net income transferred to retain earnings + dividends
D) Net income transferred to retain earnings – net income = dividends
3) Which of the following is NOT a reason why cash flow may not equal net income?
A) Amortization is added in when calculating net income.
B) Changes in inventory will change cash flows but not income.
C) Capital expenditures are not recorded on the income statement.
D) Depreciation is deducted when calculating net income.
4) Which of the following adjustments to net income is NOT correct if you are trying to calculate
cash flow from operating activities?
A) Add increases in accounts payable
B) Add back depreciation
C) Add increases in accounts receivable
D) Deduct increases in inventory
5) Which of the following adjustments is NOT correct if you are trying to calculate cash flow
from financing activities?
A) Add dividends paid
B) Add any increase in long term borrowing
C) Add any increase in short-term borrowing
D) Add proceeds from the sale of stock
14
Use the tables for the question(s) below.
Consider the following financial information:
Luther Corporation
Consolidated Balance Sheet
December 31, 2009 and 2008 (in $ millions)
Assets
2009
2008
Liabilities and
Stockholders’ Equity
2009
2008
Current Assets
Current Liabilities
Cash
63.6
58.5
Accounts payable
87.6
73.5
Accounts receivable
55.5
39.6
Notes payable/
short-term debt
10.5
9.6
Inventories
45.9
42.9
Current maturities of
long-term debt
39.9
36.9
Other current assets
6.0
3.0
Other current liabilities
6.0
12.0
Total current assets
171.0
144.0
Total current liabilities
144.0
132.0
Long-Term Assets
Long-Term Liabilities
Land
66.6
62.1
Long-term debt
239.7
168.9
Buildings
109.5
91.5
Capital lease obligations
—
—
Equipment
119.1
99.6
Total Debt
239.7
168.9
Less accumulated
depreciation
(56.1)
(52.5)
Deferred taxes
22.8
22.2
Net property, plant, and
equipment
239.1
200.7
Other long-term liabilities
—
—
Goodwill
60.0
—
Total long-term liabilities
262.5
Other long-term assets
63.0
42.0
Total liabilities
406.5
323.1
Total long-term assets
362.1
242.7
Stockholders’ Equity
126.6
63.6
Total Assets
533.1
386.7
Total liabilities and
Stockholders’ Equity
533.1
386.7
Luther Corporation
Consolidated Income Statement
Year ended December 31 (in $ millions)
2008
Total sales
578.3
Cost of sales
(481.9)
Gross profit
96.4
Selling, general, and
administrative expenses
(39.0)
Research and development
(22.8)
Depreciation and amortization
(3.3)
Operating income
31.3
Other income
—
Earnings before interest and taxes
(EBIT)
31.3
Interest income (expense)
(15.8)
Pre-tax income
15.5
Taxes
(5.3)
Net income
10.2
Dividends Paid
5.0
Price per Share
$15
Shares outstanding (millions)
8.0
Stock options outstanding (millions)
0.2
Stockholders’ Equity
63.6
Total Liabilities and Stockholders’
Equity
386.7
6) For the year ending December 31, 2009 Luther’s cash flow from operating activities is:
7) For the year ending December 31, 2009 Luther’s cash flow from financing activities is:
2.5 Other Financial Statement Information
1) In addition to the balance sheet, income statement, and the statement of cash flows, a firm’s
complete financial statements will include all of the following EXCEPT:
A) Management discussion and analysis
B) Notes to the financial statements
C) Securities and Exchange Commission’s (SEC) commentary
D) Statement of stockholders’ equity
2) Off-balance sheet transactions are required to be disclosed:
A) in the management discussion and analysis.
B) in the auditor’s report.
C) in the Securities and Exchange Commission’s commentary.
D) in the statement of stockholders’ equity.
3) Details of acquisitions, spin-offs, leases, taxes, and risk management activities are given:
A) in the management discussion and analysis.
B) in the Securities and Exchange Commission’s commentary.
C) in the auditor’s report.
D) in the notes to the financial statements.
2.6 Financial Statement Analysis
Use the information for the question(s) below.
In November 2009, Perrigo Co. (PRGO) had a share price of $39.20. They had 91.33 million
shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in
outstanding debt, $163.82 million in net income, and cash of $257.09 million.
1) Perrigo’s market debt to equity ratio is closest to:
A) 0.24
B) 0.50
C) 0.75
D) 0.89
2) Perrigo’s debt to equity ratio is closest to:
A) 0.24
B) 0.50
C) 0.75
D) 0.89
18
Use the table for the question(s) below.
Consider the following balance sheet:
Luther Corporation
Consolidated Balance Sheet
December 31, 2009 and 2008 (in $ millions)
Assets
2009
2008
Liabilities and
Stockholders’ Equity
2009
2008
Current Assets
Current Liabilities
Cash
63.6
58.5
Accounts payable
87.6
73.5
Accounts receivable
55.5
39.6
Notes payable/
short-term debt
10.5
9.6
Inventories
45.9
42.9
Current maturities of
long-term debt
39.9
36.9
Other current assets
6.0
3.0
Other current liabilities
6.0
12.0
Total current assets
171.0
144.0
Total current liabilities
144.0
132.0
Long-Term Assets
Long-Term Liabilities
Land
66.6
62.1
Long-term debt
239.7
168.9
Buildings
109.5
91.5
Capital lease obligations
—
—
Equipment
119.1
99.6
Total Debt
239.7
168.9
Less accumulated
depreciation
(56.1)
(52.5)
Deferred taxes
22.8
22.2
Net property, plant, and
equipment
239.1
200.7
Other long-term liabilities
—
—
Goodwill
60.0
—
Total long-term liabilities
262.5
191.1
Other long-term assets
63.0
42.0
Total liabilities
406.5
323.1
Total long-term assets
362.1
242.7
Stockholders’ Equity
126.6
63.6
Total Assets
533.1
386.7
Total liabilities and
Stockholders’ Equity
533.1
386.7
3) When using the book value of equity, the debt to equity ratio for Luther in 2009 is closest to:
A) 0.43
B) 2.29
C) 2.98
D) 3.57
4) If in 2009 Luther has 10.2 million shares outstanding and these shares are trading at $16 per
share, then using the market value of equity, the debt to equity ratio for Luther in 2009 is closest
to:
A) 1.47
B) 1.78
C) 2.31
D) 4.07
5) Luther’s current ratio for 2009 is closest to:
A) 0.84
B) 0.92
C) 1.09
D) 1.19