Exercises
Drill Exercises
E1.1. Calculating Enterprise Value
Enterprise Value = $1,800 million
E1.2. Calculating Value Per Share
Equity Value =
... [Show More] $1,800
E1.3 Buy or Sell?
Value = $850 + $675
= $1,525 million
Value per share = $1,525/25 = $61
Market price = $45
Therefore, BUY!
Applications
E1.4. Finding Information on the Internet: Dell Computer and General Motors
This is an exercise in discovery. The links on the book’s web site will help with the
search. Here is the link to yahoo finance:
http://finance.yahoo.com
E1.5. Enterprise Market Value: General Mills and Hewlett-Packard
(a) General Mills
Market value of the equity =
Book value of total (short-term and long-term) debt =
Enterprise value
Note three points:
(i) Total market value of equity = Price per share × Shares outstanding.
(ii) The book value of debt is typically assumed to equal its market value, but
financial statement footnotes give market value of debt to confirm this.
(iii) The book value of equity is not a good indicator of its market value. The price-tobook
ratio for the equity can be calculated from the numbers given:
$20,925/$6,215.8 = 3.37.
(b) This question provokes the issue of whether debt held as assets is part of enterprise value
(a part of operations) or effectively a reduction of the net debt claim on the firm. The issue arises
in the financial statement analysis in Part II of the book: are debt assets part of operations or part
of financing activities? Debt is part of financing activities if it is held to absorb excess cash
rather than used as a business asset. The excess cash could be applied to buying back the firm’s
debt rather than buying the debt of others, so the net debt claim on enterprise value is what is
important. Put another way, HP is not in the business of trading debt, so the debt asset is not part
of enterprise operations. The calculation of enterprise value is as follows:
Market value of equity = $47 × 2,473 million shares = $116,231 million
Book value of net debt claims:
Short-term borrowing $ 711 million
Long-term debt 7,688
Total debt $8,399 million
Debt assets 11,513 (3,114)
Enterprise value 113,117 million
E1.6. Identifying Operating, Investing, and Financing Transactions
(a) Financing
(b) Operations
(c) Operations; but advertising might be seen as investment in a brand-name asset
(d) Financing
(e) Financing
(f) Operations
(g) Investing. R& D is an expense in the income statement, so the student might be
inclined to classify it as an operating activity; but it is an investment.
(h) Operations. But an observant student might point out that interest – that is a part
of financing activities – affects taxes. Chapter 9 shows how taxes are allocated
between operating and financing activities in this case.
(i) Investing
(j) Operations
CHAPTER TWO
Introduction to the Financial Statements
Exercises
Drill Exercises
E2.1. Applying Accounting Relations: Balance Sheet, Income Statement and Equity
Statement
a. Liabilities = $150 million
b. Net Income = $205 million
c. Ending equity = $32 million
As net income (in the income statement) is $30 million, $2 million was reported as “other
comprehensive income” in the equity statement.
d. Net payout = Dividends + Share repurchases – Share issues
As there were no share issues or repurchases, dividend = $12.
E2.2. Applying Accounting Relations: Cash Flow Statement
Change in cash = $195 million
E2.3. The Financial Statements for a Savings Account
a.
___________________________________________________________________________
BALANCE SHEET INCOME STATEMENT
Assets (cash) $100 Owners’ equity $100 Revenue $5
Expenses 0
Earnings $5
STATEMENT OF CASH FLOWS STATEMENT OF OWNERS’ EQUITY
Cash from operations $5 Balance, end of Year 0 $100
Cash investment 0 Earnings, Year 1 5
Cash in financing activities: Dividends (withdrawals), Year 1 (5)
Dividends (5) Balance, end of Year 1 $100
Change in cash $ 0
b. As the $5 in cash is not withdrawn, cash in the account increases to $105, and owners’
equity increases to $105. Earnings are unchanged.
______________________________________________________________________
BALANCE SHEET INCOME STATEMENT
Assets (cash) $105 Owners’ equity $105 Revenue $5
Expenses 0
Earnings $5
STATEMENT OF CASH FLOWS STATEMENT OF OWNERS’ EQUITY
Cash from operations $5 Balance, end of Year 0 $100
Cash investment 0 Earnings, Year 1 5
Cash in financing activities: Dividends (withdrawals), Year 1 (0)
Dividends (0) Balance, end of Year 1 $105
Change in cash $ 5
______________________________________________________________________
c. With the investment of cash flow from operations in a mutual fund, the financial
statements would be as follows:
_______________________________________________________________________
BALANCE SHEET INCOME STATEMENT
Assets [Show Less]