Banking Chapter 2 Homework Introduction Financial Statement Analysis What Four Financial Statements Can Found Firms

4

Chapter 2

Introduction to Financial Statement

Analysis

2-1. What four financial statements can be found in a firm’s 10-K filing? What checks are there on

the accuracy of these statements?

2-2. Who reads financial statements? List at least three different categories of people. For each

category, provide an example of the type of information they might be interested in and discuss

why.

2-3. Find the most recent financial statements for Starbucks’ corporation (SBUX) using the following

sources:

a. From the company’s Web site www.starbucks.com (Hint: Search for “investor relations.”)

b. From the SEC Web site www.sec.gov. (Hint: Search for company filings in the EDGAR

database.)

c. From the Yahoo! Finance Web site http://finance.yahoo.com.

d. From at least one other source. (Hint: Enter “SBUX 10K” at www.google.com.)

2-7. Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year

2015 (filed in October 2015). Answer the following questions from their balance sheet:

a. How much cash did Costco have at the end of the fiscal year?

b. What were Costco’s total assets?

c. What were Costco’s total liabilities? How much debt did Costco have?

d. What was the book value of Costco’s equity?

2-8. In early 2012, General Electric (GE) had a book value of equity of $109 billion, 10.3 billion

shares outstanding, and a market price of $9.66 per share. GE also had cash of $40 billion, and

total debt of $530 billion. Three years later, in early 2015, GE had a book value of equity of $112

billion, 10.9 billion shares outstanding with a market price of $16.59 per share, cash of $85

billion, and total debt of $417 billion. Over this period, what was the change in GE’s

a. market capitalization?

b. market-to-book ratio?

c. enterprise value?

2-9. In early-2015, Abercrombie & Fitch (ANF) had a book equity of $1390 million, a price per share

of $25.52, and 69.35 million shares outstanding. At the same time, The Gap (GPS) had a book

equity of $2983 million, a share price of $41.19, and 421 million shares outstanding.

a. What is the market-to-book ratio of each of these clothing retailers?

b. What conclusions can you draw by comparing the two ratios?

2-10. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.

a. What is Mydeco’s market capitalization at the end of each year?

b. What is Mydeco’s market–to-book ratio at the end of each year?

c. What is Mydeco’s enterprise value at the end of each year?

Chapter 2/Introduction to Financial Statement Analysis 7

2-23. Can a firm with positive net income run out of cash? Explain.

2-24. Suppose your firm receives a $4.1 million order on the last day of the year. You fill the order

with $2.9 million worth of inventory. The customer picks up the entire order the same day and

pays $1.5 million upfront in cash; you also issue a bill for the customer to pay the remaining

balance of $2.6 million in 30 days. Suppose your firm’s tax rate is 0% (i.e., ignore taxes).

$1.5 million (cash).

2-25. Nokela Industries purchases a $38.5 million cyclo-converter. The cyclo-converter will be

depreciated by $7.7 million per year over four years, starting this year. Suppose Nokela’s tax

rate is 40%.

a. What impact will the cost of the purchase have on earnings for each of the next five years?

b. What impact will the cost of the purchase have on the firm’s cash flow for the next five

years?

2-26. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.

a. What were Mydeco’s retained earnings each year?

b. Using the data from 2012, what was Mydeco’s total stockholders’ equity in 2011?

Chapter 2/Introduction to Financial Statement Analysis 13

Year

2012

2013

2014

2015

2016

Net Income

$15.0

$4.3

$9.6

$11.8

$16.2

Dividends Paid

–$5.2

–$5.6

Retained Earnings (millions)

$9.8

–$0.9

$4.4

$6.6

$10.6

b. 2011 stockholders’ equity = 2012 stockholders’ equity – 2012 retained earnings = 255 – 9.8 =

$245.2 million.

2-27. Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year

2015 (filed in October 2015). Answer the following questions from the notes to their financial

statements:

a. How many stores did Costco open outside of the U.S. in 2015?

b. What property does Costco lease? What are the minimum lease payments due in 2016?

c. What was Costco’s worldwide member renewal rate for 2015? What proportion of Costco

cardholders had Gold Star memberships in 2015?

d. What fraction of Costco’s 2015 sales came from gas stations, pharmacy, food court, and

optical? What fraction came from apparel and small appliances?

2-28. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.

a. What were Mydeco’s gross margins each year?

b. Comparing Mydeco’s gross margin, EBIT margin, and net profit margin in 2012 and 2016,

which margins improved?

Year

2012

2013

2014

2015

2016

Revenue

$401.9

$361.6

$429.6

$513.6

$602.6

Gross Profit

$209.8

$186.2

$222.5

$265.3

$306.8

Gross Margin

52.2%

51.5%

51.8%

51.7%

50.9%

b. None of the margins improved from 2012 to 2016

Year

2012

2013

2014

2015

2016

Revenue

$401.9

$361.6

$429.6

$513.6

$602.6

Gross Profit

$209.8

$186.2

$222.5

$265.3

$306.8

EBIT

$55.5

$38.4

$46.7

$55.2

$65.8

Net Income

$15.0

$4.3

$9.6

$11.8

$16.2

Gross Margin

52.2%

51.5%

51.8%

51.7%

50.9%

EBIT Margin

13.8%

10.6%

10.9%

10.7%

10.9%

Net Profit Margin

3.7%

1.2%

2.2%

2.3%

2.7%

2-29. For fiscal year end 2015, Walmart Stores, Inc. (WMT) had revenue of $485.65 billion, gross

profit of $120.57 billion, and net income of $16.36 billion. Costco Wholesale Corporation (COST)

had revenue of $116.20 billion, gross profit of $15.13 billion, and net income of $2.38 billion.

a. Compare the gross margins for Walmart and Costco.

14 Berk/DeMarzo, Corporate Finance, Fourth Edition, Global Edition

b. Compare the net profit margins for Walmart and Costco.

c. Which firm was more profitable in 2015?

2-30. At the end of 2015, Apple had cash and short-term investments of $41.60 billion, accounts

receivable of $35.89 billion, current assets of $89.38 billion, and current liabilities of $80.61

billion.

a. What was Apple’s current ratio?

b. What was Apple’s quick ratio?

c. What is Apple’s cash ratio?

d. At the end of 2015, HPQ had a cash ratio of 0.35, a quick ratio of 0.73 and a current ratio of

1.15. What can you say about the asset liquidity of Apple relative to HPQ?

2-31. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.

a. How did Mydeco’s accounts receivable days change over this period?

b. How did Mydeco’s inventory days change over this period?

c. Based on your analysis, has Mydeco improved its management of its working capital during

this time period?

2-32 See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.

a. Compare accounts payable days in 2012 and 2016.

b. Did this change in accounts payable days improve or worsen Mydeco’s cash position in

2016?

Chapter 2/Introduction to Financial Statement Analysis 17

a. Compare the market capitalization–to-revenue ratio (also called the price–to-sales ratio) for

United Airlines and Southwest Airlines.

b. Compare the enterprise value–to-revenue ratio for United Airlines and Southwest Airlines.

c. Which of these comparisons is more meaningful? Explain.

2-39. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.

a. Compute Mydeco’s ROE each year from 2012 to 2016.

b. Compute Mydeco’s ROA each year from 2012 to 2016.

c. Which return is more volatile? Why?

2-40. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Was

Mydeco able to improve its ROIC in 2016 relative to what it was in 2012?

55.5 (1 0.35)

2012 ROIC 5.12%.

255.0 498.9 49.4

−

==

+−

65.8 (1 0.35)

2016 ROIC 5.39%.

279.8 597.5 83.6

−

==

+−

Mydeco was able to improve its ROIC in 2016 relative to 2012.

2-41. For fiscal year 2015, Costco Wholesale Corporation had a net profit margin of 2.05%, asset

turnover of 3.48, and a book equity multiplier of 3.15.

18 Berk/DeMarzo, Corporate Finance, Fourth Edition, Global Edition

a. Use this data to compute Costco’s ROE using the DuPont Identity.

b. If Costco‘s managers wanted to increase its ROE by one percentage point, how much higher

would their asset turnover need to be?

c. If Costco‘s net profit margin fell by one percentage point, by how much would their asset

turnover need to increase to maintain their ROE?

2-42. For fiscal year 2015, Walmart Stores Inc. (WMT) had total revenues of $484.65 billion, net

income of $16.36 billion, total assets of $203.49 billion, and total shareholder’s equity of $81.39

billion.

a. Calculate Wal-Mart’s ROE directly, and using the DuPont Identity.

b. Comparing with the data for Costco in problem 41, use the DuPont Identity to understand

the difference between the two firms’ ROEs.

2-43. Consider a retailing firm with a net profit margin of 3.1%, a total asset turnover of 1.85, total

assets of $44.4 million, and a book value of equity of $18.2 million.

a. What is the firm’s current ROE?

b. If the firm increased its net profit margin to 3.6%, what would be its ROE?

c. If, in addition, the firm increased its revenues by 23% (while maintaining this higher profit

margin and without changing its assets or liabilities), what would be its ROE?

2-44. Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year

2015 (filed in October 2015).

a. Which auditing firm certified these financial statements?

b. Which officers of Costco’s certified the financial statements?

2-45. WorldCom reclassified $3.85 billion of operating expenses as capital expenditures. Explain the

effect this reclassification would have on WorldCom’s cash flows. (Hint: Consider taxes.)

Chapter 2/Introduction to Financial Statement Analysis 19

WorldCom’s actions were illegal and clearly designed to deceive investors. But if a firm could

legitimately choose how to classify an expense for tax purposes, which choice is truly better for

the firm’s investors?