Deck 9: Reorganizing the Financial Statements

Question 1

In computing free cash flow,include investments in capitalized operating leases in gross investment.

Answer 1

True

Question 2

How will an increase in invested capital (IC )in a given year affect free cash flow (FCF )and ROIC if all other things are kept equal?

A)It will decrease both FCF and ROIC.
B)It will increase both FCF and ROIC.
C)It will increase FCF but decrease ROIC.
D)It will decrease FCF but increase ROIC.

Answer 2

A

Question 3

Which metric is the best indicator of a company's operating performance?

A)ROE
B)ROA
C)ROIC
D)EPS

Answer 3

C

Question 4

Ratio Analysis: Consolidated Financial Statements
$\$$ million
$\begin{array}{lrrr} & \text { Company A } & \text { Company B } & \text { Company C } \\\hline \text { Income statement } & & & 150 \\\text { Operating profit } & 120 & 100 & (20) \\\text { Interest } & 0 & 0 & 130 \\\text { Earnings before taxes } & 120 & 100 & (33) \\\text { Taxes } & (30) & (25) & (33)\\\text { net income }&90&75&98\\ \text {Operating tax rate }&25.0 \% & 25.0 \% & 25.0 \%\\ \text { Balance sheet}\\\text { Inventory } & 125 & 100 & 150 \\\text { Property, plant, and equipment } & 400 & 400 & 365\\\text { Equity investments } & 0 & 50 & 0 \\\text { Total assets } & 525 & 550 & 515\\\text { Accounts payable } & 50 & 50 & 50 \\\text { Debt } & 0 & 0 & 190\\\text { Equity } & 475 & 500 & 275 \\\text { Liabilities and equity } & 525 & 550 & 515\\\end{array}$

-Based on the above preceding table,what are the returns on assets (ROAs )for Companiesy A,B,and C,respectively?

A)17 percent,14 percent,19 percent.
B)15 percent,14 percent,18 percent.
C)11 percent,10 percent,20 percent.
D)16 percent,13 percent,18 percent.

Question 5

Pension assets are considered an operating asset and part of invested capital.

Question 6

In computing return on invested capital,operating liabilities should be subtracted from operating assets to determine invested capital.

Question 7

Which of the following are operating liabilities?
I.Accounts payable.
II.Accrued salaries.
III.Deferred revenue.
IV.Income taxes payable.

A)I and II only.
B)II and III only.
C)I,III,and IV only.
D)I,II,III,and IV.

Question 8

With respect to goodwill and acquired intangibles,which of the following is most accurate concerning their treatment in computing ROIC when measuring the competiveness of the underlying business of a company?

A)Remove goodwill but not acquired intangibles from the computation.
B)Remove acquired intangibles but not goodwill from the computation.
C)Do not rRemove neither goodwill nor acquired intangibles from the computation.
D)Remove both goodwill and acquired intangibles from the computation.

Question 9

If the company wants to capitalize R&D,they it will deduct that period's expense from their revenue in order to get to NOPLAT.

Question 10

In calculating free cash flows,which of the following is/are not NOT an investment that should be subtracted from gross cash flows?

A)Change in operating working capital.
B)Change in debt outstanding.
C)Net capital expenditures.
D)Investment in goodwill and acquired intangibles.

Question 11

Which of the following would result in a change in operating deferred-tax assets or liabilities?
I.State income taxes.
II.Changes in goodwill.
III.Accrued self-insurance liabilities.
IV.Accelerated inventory deduction.

A)I and II only.
B)I,III,and IV only.
C)II,III,and IV only.
D)III and IV only.

Question 12

Which of the following are sources of financing?
I.Equity equivalents.
II.Debt equivalents.
III.Hybrid securities.
IV.Noncontrolling interest.

A)I and II only.
B)I,II,and III only.
C)III and IV only.
D)I,II,III,and IV.

Question 13

In order to adjust for currency fluctuations,one should conduct a line-by-line removal of the currency effects.

Question 14

Ratio Analysis: Consolidated Financial Statements
$\$$ million
$\begin{array}{lrrr} & \text { Company A } & \text { Company B } & \text { Company C } \\\hline \text { Income statement } & & & 150 \\\text { Operating profit } & 120 & 100 & (20) \\\text { Interest } & 0 & 0 & 130 \\\text { Earnings before taxes } & 120 & 100 & (33) \\\text { Taxes } & (30) & (25) & (33)\\\text { net income }&90&75&98\\ \text {Operating tax rate }&25.0 \% & 25.0 \% & 25.0 \%\\ \text { Balance sheet}\\\text { Inventory } & 125 & 100 & 150 \\\text { Property, plant, and equipment } & 400 & 400 & 365\\\text { Equity investments } & 0 & 50 & 0 \\\text { Total assets } & 525 & 550 & 515\\\text { Accounts payable } & 50 & 50 & 50 \\\text { Debt } & 0 & 0 & 190\\\text { Equity } & 475 & 500 & 275 \\\text { Liabilities and equity } & 525 & 550 & 515\\\end{array}$

-Based on the above same table,what are the returns on equity (ROEs )for Companiesy A,B,and C,respectively?

A)15 percent,14 percent,31 percent.
B)19 percent,15 percent,36 percent.
C)17 percent,15 percent,35 percent.
D)21 percent,9 percent,45 percent.

Question 15

Ratio Analysis: Consolidated Financial Statements
$\$$ million
$\begin{array}{lrrr} & \text { Company A } & \text { Company B } & \text { Company C } \\\hline \text { Income statement } & & & 150 \\\text { Operating profit } & 120 & 100 & (20) \\\text { Interest } & 0 & 0 & 130 \\\text { Earnings before taxes } & 120 & 100 & (33) \\\text { Taxes } & (30) & (25) & (33)\\\text { net income }&90&75&98\\ \text {Operating tax rate }&25.0 \% & 25.0 \% & 25.0 \%\\ \text { Balance sheet}\\\text { Inventory } & 125 & 100 & 150 \\\text { Property, plant, and equipment } & 400 & 400 & 365\\\text { Equity investments } & 0 & 50 & 0 \\\text { Total assets } & 525 & 550 & 515\\\text { Accounts payable } & 50 & 50 & 50 \\\text { Debt } & 0 & 0 & 190\\\text { Equity } & 475 & 500 & 275 \\\text { Liabilities and equity } & 525 & 550 & 515\\\end{array}$

-Based on the above same table,what are the ROICs for Companiesy A,B,and C,respectively?

A)18 percent,12 percent,19 percent.
B)19 percent,17 percent,21 percent.
C)18 percent,16 percent,20 percent.
D)19 percent,17 percent,24 percent.

Question 16

Which of the following are included in operating current assets?
I.Inventory.
II.Prepaid expenses.
III.Marketable securities.
IV.Accounts receivable.

A)I,II,and III only.
B)I,II,and IV only.
C)II,III,and IV only.
D)I,II,III,and IV.

Question 17

For a given leased asset using an operating lease,the rental expense will be $2,000 in the next period.The pretax cost of debt is 7.2 percent,and the asset has an expected life of six years.What is the estimated asset value in the current period?

A)$8,380
B)$8,640
C)$16,667
D)$21,127

Question 18

List the three components into which an analyst should reorganize financial statements to better assess economic performance and three common traps that the analyst wants to avoid in the assessment.

Question 19

To measure a company's ability to create value after paying acquisition premiums,which of the following adjustments should be made?
I.Adjust reported goodwill upward to recapture historical amortization and impairments.
II.Adjust acquired intangibles upward to recapture historical amortization and impairments.
III.Add the hypothetical accrued interest of the notional goodwill principle.

A)I and II only.
B)II and III only.
C)I and III only.
D)I,II,and III only.

Question 20

Nonconsolidated subsidiaries and equity investments should be measured and valued separately from invested capital.

Question 21

$\text { Dolphin: Income Statement and Balance Sheet }$
$\$ \text { million }$
$\begin{array}{lrr}\text { Ineome statement } & \text { Last year } & \text { Current year } \\\hline \text { Revenues } & 1,100 & 1,210 \\\text { Cost of sales } & (770) & (871) \\\text { Selling, general, and administrative } & (165) & (182) \\\text { Depreciation } & (33) &(36) \\\text { EBIT } & 132 & 121 \\\text { Interest expense } & (15)& (15)\\ \text {Gain/(loss) on sale of assets }&-&(10)\\ \text {EBT }&117&96\\\text {Taxes }&(35)&(29)\\\text {Net income }&82&67\\\\\text {Dividends }&33&27\\\end{array}$

$\begin{array}{lrr}\text { Balance sheet } & \text { Last year } & \text { Current year } \\\hline \text { Operating cash } & 22 & 24 \\\text { Excess cash and marketable securities } & 91 & 74 \\\text { Accounts receivable } & 220 & 242 \\\text { Inventory } & 330 & 363 \\\text { Current assets } & 663 & 703\\\\\text {Property, plant, and equipment }&440&484\\\text { Equity investments }&50&50\\\\ \text { Total assets}& 1,153 & 1,237 \\\\\text { Accounts payable } & 275 & 303 \\\text { Short-term debt } & 90 & 90 \\\text { Accrued expenses } & 165 & 182 \\\text { Current liabilities } & 530 & 574\\\\\text { Long-term debt } & 210 & 210 \\\text { Common stock } & 100 & 100 \\\text { Retsined earnings } & 313 & 353\\\\\text { Total liabilities and equity } & 1,153 & 1,237 \\\end{array}$
Refer to the preceding income statement and balances sheet for Dolphin, Inc. to answer the following question. Dolphin is a $600 million event promotion company that operates with a 30 percent operating tax rate.

-What are Dolphin's NOPLAT and ROIC for the current year,using average invested capital?

A)$82,13.6 percent.
B)$108.9,18.1 percent.
C)$92,15.4 percent.
D)$85,14.1 percent.

Question 22

$\text { Dolphin: Income Statement and Balance Sheet }$
$\$ \text { million }$
$\begin{array}{lrr}\text { Ineome statement } & \text { Last year } & \text { Current year } \\\hline \text { Revenues } & 1,100 & 1,210 \\\text { Cost of sales } & (770) & (871) \\\text { Selling, general, and administrative } & (165) & (182) \\\text { Depreciation } & (33) &(36) \\\text { EBIT } & 132 & 121 \\\text { Interest expense } & (15)& (15)\\ \text {Gain/(loss) on sale of assets }&-&(10)\\ \text {EBT }&117&96\\\text {Taxes }&(35)&(29)\\\text {Net income }&82&67\\\\\text {Dividends }&33&27\\\end{array}$

$\begin{array}{lrr}\text { Balance sheet } & \text { Last year } & \text { Current year } \\\hline \text { Operating cash } & 22 & 24 \\\text { Excess cash and marketable securities } & 91 & 74 \\\text { Accounts receivable } & 220 & 242 \\\text { Inventory } & 330 & 363 \\\text { Current assets } & 663 & 703\\\\\text {Property, plant, and equipment }&440&484\\\text { Equity investments }&50&50\\\\ \text { Total assets}& 1,153 & 1,237 \\\\\text { Accounts payable } & 275 & 303 \\\text { Short-term debt } & 90 & 90 \\\text { Accrued expenses } & 165 & 182 \\\text { Current liabilities } & 530 & 574\\\\\text { Long-term debt } & 210 & 210 \\\text { Common stock } & 100 & 100 \\\text { Retsined earnings } & 313 & 353\\\\\text { Total liabilities and equity } & 1,153 & 1,237 \\\end{array}$
Refer to the preceding income statement and balances sheet for Dolphin, Inc. to answer the following question. Dolphin is a $600 million event promotion company that operates with a 30 percent operating tax rate.

-What is the average invested capital (IC )for Dolphin for the current year?

A)$609
B)$600
C)$667
D)$527