Corporate finance linking theory to what companies do 3e graham scott b smart william solutions manual and test bank

Corporate finance linking theory to what companies do 3e graham scott b smart william solutions manual and test bank


Sample of solutions manual  and thest bank
 
the first chapter is the solutions manual ,the other chapter is for the test bank

Chapter 2: Financial Statement and Cash Flow Analysis

Answers to End of Chapter Questions

2-1. Financial statement analysis provides information about the company’s financial health, and its strengths and weaknesses. Using standardized GAAP rules does add validity by making comparisons between companies easier.

2-2. The Sarbanes-Oxley Act of 2002 (SOX) established the Public Company Accounting Oversight Board (PCAOB), which effectively gives the SEC authority to oversee the accounting profession’s activities. Possible shortcomings of relying solely on financial statement analysis include:
· If a company is in multiple lines of business it may be difficult to make comparisons.
· The accounting data may not be accurate.
· Average performance may not be a good measure, especially if the industry is in a slump.
· It is possible to manipulate accounting numbers.

2-3. Data on a company’s performance over a reporting period: income statement, statement of cash flows, statement of retained earnings (how much additional retained earnings will be added to existing retained earnings). Data about the company’s current position: balance sheet. Notes to the financial statements contain details about the composition and cost of the company’s debt, any liabilities such as lawsuits that are still pending, revenue recognition, taxes, significant clients, detailed breakdowns of fixed asset accounts, executive compensation, and descriptions of employee benefit plans. An example of a situation in which the notes would be essential to valuation would be a company that relied on a few clients, rather than a wide base of clients. The notes would detail current and expected revenue from those clients and how that revenue would be recognized. An analyst would need this information to develop a set of cash flows for the company which would provide the basis of a company valuation.

2-4. An analyst looking at granting a loan request would be most interested in the company’s balance sheet, which he or she could use to compute liquidity ratios (current and quick ratios) and debt ratios. A credit analyst would also want an income statement with EBIT and interest in order to compute times interest earned. Times interest earned is a measure of how well a company can pay its interest obligations, while liquidity and debt ratios show what assets are available to repay debt.

2-5. The two definitions are different because the new definition will be less than the textbook definition by interest expense*tax rate (i.e., the tax break generated by interest). Should the firm not have any debt, the two definitions are equal because the tax break from debt is zero.

2-6. This has a positive effect on free cash flow because ΔA/P is more likely to be larger than the change in inventory which is a component of ΔCA.

2-7. Yes, it is credible that Firm Q takes a large amount of depreciation making its times interest earned ratio relatively low. The gross profit margin ratio is not revealing because gross profit is not affected by depreciation expense.

2-8. This has no effect on operating cash flow but has a positive effect on free cash flow.

2-9. One would expect the times interest earned ratio to be high, the debt-to-equity ratio to be low, and the equity multiplier to be low.

2-10. The DuPont system is useful in breaking down ROE and ROA into its component parts. If ROE is increasing (decreasing), a manager can see if the cause is a higher (lower) profit margin, a higher (lower) asset turnover or a higher (lower) equity multiplier. Then if one of the components is improving (declining) the firm can take steps to pay attention to that area of the business. ROE is equal to ROA times the equity multiplier. It would be possible to raise ROE by choosing to finance the firm more aggressively, even if ROA remained the same.

Solutions to End of Chapter Problems

2-1. Answers to parts (a) through (j):

a. $400,000, or $140,000 in Cash plus $260,000 in Marketable Securities
b. $3,780,000
c. $2,620,000, or $1,060,000 in current liabilities plus $1,560,000 in Total long-term debt
d. $480,000
e. $6,900,000
f. $1,610,000, of the sum of the Common stock (at par), Paid-in capital in excess of par and Retained Earnings balances
g. $600,000
h. $355,000
i. $85,800
j. 124,615, or $178,200 ÷ $1.43

2-2. Internet exercise

2-3. The answers to parts (a) through (d):

a) Tax rate = 1,300 / (1,300 + 2,400) = 35.135%
NOPAT = EBIT (1-T) = $4,500 (1-0.35135) = $2,919

b) Operating cash flow (OCF) = NOPAT + depreciation
= $2,919 + $1,600 = $4,519

c) Free cash flow (FCF) = OCF - DFA - (DCA - DA/P - Daccruals)

= $4,519 - ($31,500 - $30,100) -
[($16,200 - $14,800) - ($3,600 - $3,500) - ($1,200 - $1,300)]
= $4,519 – $1,400 – [$1,400 – $100 – (-$100)]
= $4,519 - $1,400 – $1,400
= $1,719

d) Operating cash flow is higher than NOPAT because OCF adds back depreciation (a non-cash expense), which is subtracted when calculating profitability measures such as EBIT and NOPAT. FCF not only looks at operations, but also whether a company has added assets or reduced liabilities (outflows of cash) or reduced assets and increased liabilities (inflows of cash).