Exam 1: Overview of Financial Statement Analysis

While determining the most profitable company from the given number of companies, which of the following would be the best indicator of relative profitability?

Following is some financial information of Dell Inc. 2006 2005 Revenues \ 49,205 \ 41,444 Net income 3,043 2,645 Total assets 23,215 19,311 Shareholder's equity 6,485 6,280 Cash flow from operations 5,310 3,670 Basic earnings per share 1.21 1.03 Book value per share 2.61 2.46 Closing stock price 33.44 23.86 -What is Dell's profit margin for 2006?

You have been provided the following information about High Inc. (in thousands of dollars) 2005 2006 Current assets \ 158 \ 163 Long-term assets \ 453 \ 502 Current liabilities \ 102 \ 143 Long-term liabilities \ 302 \ 348 Net income \ 32 \ 42 -Return on common equity for 2006 is:

When comparing two companies, the company with the highest net income should normally have the highest stock price.

A security can be under- or overvalued, depending on the extent of an incorrect interpretation or faulty evaluation of available information by the aggregate market.

Theoretically, the value of a stock should equal the sum of the present value of future expected dividends, discounted at the cost of equity.

The semistrong efficiency of market implies that:

You want to prepare the balance sheet for Usher Inc. as of December 31, 2005. Use the following information. All information pertains to fiscal 2005 unless otherwise stated.• Retained earnings at December 31, 2004 is $234,000 • Sales (all credit sales) are $2.5 million • Days to sell inventory is 20 • Cash on hand is 1% of sales • All sales are paid 30 days after purchase • Noncurrent assets are $1 million • Long-term debt to equity ratio is 1 • All liabilities, other than long-term debt, are short-term liabilities • 20,000 shares outstanding issued at $10 in 2004 • No dividends are paid • Gross margin is 40% • Net profit margin is 8% • Assume there are 360 days in the year

a. It is January 1, 2006 and you are considering buying $20,000 of Hilever Company's 10% bonds, which come due on December 31, 2015. The bonds pay interest semiannually on June 30 and December 31 of each year. The prevailing interest rate on bonds of similar risk is 12%. How much would you be prepared to pay for the bond? b. If coupon rate was 12% on these bonds, how much would you be prepared to pay? c. If the coupon rate was 10% and the bonds were convertible into common equity (5 shares for every $1,000 face value coupon bond), and common stock is currently trading at $11 per share would this change your answer to part a? Why?

The explanatory notes (footnotes) accompanying the financial statements are generally of little value in aiding a financial analyst when interpreting the financial statements.

Earnings yield is the reciprocal of the price-to-earnings ratio.

Common-size statements are useful for intercompany comparisons.

In the table below is selected information for Sprigue Company. All figures are in thousands and represent expectations of the future. Year 2005 2006 2007 2008 2009 Net income \ 5,175 \ 6,210 \ 7,462 \ 8,570 \ 8,998 Dividends 773 932 1,118 1,285 2,250 Depreciation 621 702 793 896 1,013 Increase in working capital 675 1,035 1,242 1,118 428 Capital expenditures 5,625 8,625 10,350 9,315 3,571 New debt issued 900 4,500 5,500 3,900 0 Old debt retired 987 750 990 2,000 2,000 New equity issued 1,823 0 0 0 0 a. Calculate the expected free cash flow to equity for the years 2005 to 2009. b. Explain the expected changes in debt levels over the five years.

Which of the following, if increased by 10%, results in a lower stock price?

List ten different items you would expect to find in an average annual report to shareholders.

How much would you be prepared to pay for a $500 bond which comes due in 5 years and pays $80 interest annually assuming your required rate of return is 8% (pick closest answer)?

A capital-intensive company requires high cash turnover.

Fluno Corporation has 1 million shares outstanding at the end of fiscal 2005. Its stock is trading at $15 per share. It issued $0.6 million in dividends, and had net income of $1 million in fiscal 2005. At the end of 2005, its total assets, liabilities, and retained earnings were $25 million, $15 million, and $7.5 million, respectively. Fluno's price-to-book ratio and dividend yield ratios for 2005 are: $\quad$ $\quad$$\underline{\text { Price-to-book}} \quad\underline{\text { Dividend vield }}$ A. $\quad$ $\quad$ $\quad$ 2 $\quad$ $\quad$$\quad$$\quad$$\quad$ $\quad$ 60 % B. $\quad$ $\quad$ $\quad$ 1.5 $\quad$ $\quad$ $\quad$$\quad$ $\quad$ $\quad$ 60% C. $\quad$ $\quad$ $\quad$ 1.5 $\quad$ $\quad$ $\quad$$\quad$ $\quad$ $\quad$ 4% D. $\quad$ $\quad$ $\quad$ 2 $\quad$ $\quad$ $\quad$$\quad$ $\quad$ $\quad$ 4%

Which of the following statements is most correct?

Two otherwise equal companies have significantly different dividend payout ratios. Which of the following statements is most likely to be correct? The company with the higher dividend payout ratio: