Financial Reporting, Financial Statement Analysis and Valuation(7e) 第一章答案

Chapter 1 Overview of Financial Reporting, Financial Statement Analysis, and Valuation Chapter 1 Overview of Financial Reporting, Financial Statement Analysis, and Valuation CHAPTER 1 OVERVIEW OF FINANCIAL REPORTING, FINANCIAL STATEMENT ANALYSIS, AND VALUATION Solutions to Questions, Exercises, and Problems, and Teaching Notes to Cases 1.1 Value Chain Analysis Applied to the Timber and Timber Products Industry. Exhibit 1.A below contains a depiction of the value chain. The links in the value chain are as follows: 1. Timber Tracts: Plant and maintain timber tracts (Weyerhaeuser) 2. Logging: Harvests timber (Weyerhaeuser) 3a. Sawmills: Cut timber into various grades of wood (Weyerhaeuser) 3b. Pulp and Paper Manufacturing: Grinds timber into pulp and converts the pulp into various grades of paper and cardboard (International Paper) 4a. Intermediate Users of Wood: Engage in construction and furniture manufacturing (Masco) 4b. Intermediate Users of Paper: Manufacture containers and packaging (Owens-Illinois) and various commodity and specialty papers (Georgia-Pacific) 5a. Retailers of Lumber and Wood Products: Sell such products to the final consumer (Home Depot) 5b. Retailers of Paper Products: Sell such products to the final consumer (Office Depot). Exhibit 1.A Value Chain for the Timber and Timber Products Industry 1.2 Porter’s Five Forces Applied to the Air Courier Industry. Buyer Power. Air courier services are a commodity. Firms in the industry offer similar overnight or two-day deliveries. Firms also provide opportunities to track shipments. Business customers can negotiate favorable shipping terms based on the volume of shipments. Thus, buyer power among large corporate customers is high. Supplier Power. The principal inputs are labor services, equipment, and information systems. Except for pilots and some information processing specialists, the skill required to offer air courier services is relatively low. Therefore, competition for jobs reduces supplier power. The principal items of equipment are airplanes, trucks, and sorting equipment. The number of suppliers of this equipment is relatively small, but the equipment offered is largely a commodity. Thus, equipment supplier power is relatively low. Information systems are critical to scheduling, tracking, and delivering parcels. Hiring individuals with the education and skills needed to design and maintain this information system is not difficult because these skills and education are not unique. Thus, supplier power is low. Rivalry among Existing Firms. Seven air couriers now carry a 90 percent market share. Fed Ex and UPS have the largest market shares and compete heavily. Smaller firms compete more in particular geographical or customer markets. Thus, rivalry is relatively high. Threat of New Entrants. The cost of acquiring equipment, developing national and international delivery networks, and overcoming entrenched firms in an already crowded market makes the threat of new entrants low. Threat of Substitutes. The main threat to transportation of letter parcels is digital transmission, and that threat is high. The threat of substitutes for transportation of packages is low. 1.3 Economic Attributes Framework Applied to the Specialty Retailing Apparel Industry. Demand. Firms attempt to compete on design, colors, and other product attributes, but apparel is largely a commodity. Demand is somewhat cyclical with economic conditions; customers tend to delay purchases or trade down during economic downturns. Demand is seasonal within the year. Demand grows at the growth rate in population, which suggests that apparel retailing is a relatively mature market. To the extent that retailers can generate customer loyalty, demand is not highly price-sensitive. However, given the similarity of product offerings across firms, firms cannot price their goods too much out of line with those of their competitors. Supply. In most markets, there are many firms selling similar apparel. The barriers to entry are not particularly high because an apparel line and retail space are the most important ingredients. Manufacturing. The manufacturing process is labor-intensive. The manufacturing process is relatively simple, and firms source their apparel from Asia, which has low wages. Marketing. Because of the large number of suppliers selling similar products, apparel-retail firms must stimulate demand with attractive store layouts, colorful product offerings, and various sales promotions. Investing and Financing. Firms must finance inventory, usually with a combination of supplier and bank financing. The risk of inventory obsolescence is somewhat high if the product offerings in a particular season do not sell. Firms tend to rent retail space in shopping malls, so they need to engage in extensive long-term borrowing. 1.4 Identification of Commodity Businesses. Dell. Dell’s products—computers, servers and printers—are commodities. Dell tends not to develop the technologies underlying these products. Instead, it purchases the components from firms that develop the technologies (semiconductors and computer software). Dell’s direct-to-customer marketing strategy is not unique, but the extent to which Dell performs this strategy better than anyone else in the industry gives it a competitive advantage. Its size, purchasing power, quality control, and efficiency permit it to operate as a low-cost provider. Southwest Airlines. Airline transportation is a commodity service in the sense that seats on one airline cannot be differentiated from seats on another airline. Southwest Airlines’ strategy is to be the lowest cost provider of such services, thereby differentiating itself on low prices. Microsoft. The basic idea of a commodity product is that the product offerings of one firm are so similar to those of other firms that customers can easily switch to competitors’ products if price becomes an issue. The technological attributes of computer software are duplicated relatively easily, a commodity attribute. However, Microsoft’s size permits it to invest in new technology development and keep it on the leading edge of new technologies. Microsoft also has a huge advantage in terms of installed base, meaning that most customers almost have to purchase its software to be able to use application programs and to communicate with other computer users. Thus, its products are inherently commodities but Microsoft is able to overcome some of the disadvantages of commodity status. Johnson & Johnson. Johnson & Johnson operates in three business segments: consumer healthcare, pharmaceuticals, and medical equipment. It derives the majority of its revenue and profits from the latter two industries. Patents protect the products of these two industries, which give the firm a degree of market power. Until another firm creates a new product that dominates the patented product of Johnson & Johnson, its product is not a commodity. However, rapid technological change makes most products obsolete before the end of the patent’s life. Johnson & Johnson’s products probably have fewer commodity attributes than the other three firms in this exercise. One of the purposes of this exercise is to illustrate that firms can pursue product differentiation strategies and low-cost leadership strategies and, if performed well, can gain “most admired status.” 1.5 Identification of Company Strategies. The strategies of Home Depot and Lowe’s are marked more by their similarities than by their differences. Both firms sell to the do-it-yourself homeowner and the professional builder, plumber, or electrician at competitively low prices. Their in-store product offerings are similar, roughly evenly split between building materials, electrical and plumbing supplies, hardware, paint, and floor coverings. Their store sizes are approximately the same. Both use sales personnel with expertise in a particular home improvement area to offer advice to customers. Both rely on third-party credit cards for a large portion of their sales to customers. Home Depot is slightly less than twice the size of Lowe’s in terms of number of stores. Home Depot’s stores span the United States, whereas Lowe’s tends to locate in the eastern United States. However, Lowe’s is expanding westward. 1.6 Researching the FASB Website. The answer will change over time as the FASB updates its activities. The purpose of the exercise is to familiarize students with the FASB website and the kinds of information they can find there. 1.7 Researching the IASB Website. The answer will change over time as the IASB updates its activities. The purpose of the exercise is to familiarize students with the IASB website and the kinds of information they can find there. 1.8 Effect of Industry Economics on Balance Sheet. Among the three firms, Intel faces the greatest risk of technological change for its products. Although the manufacture of semi-conductors is capital-intensive, Intel does not add financial risk to its already high business risk. Thus, Firm B is Intel. The revenues of American Airlines and Walt Disney change with changes in economic conditions, subjecting them to cyclical risk and, thereby, reducing their use of long-term debt. Besides producing movies and family entertainment, Disney operates theme parks, which the firm does not include in property, plant, and equipment. This will reduce its property, plant, and equipment to total assets percentage. American Airlines has few assets other than its flight and ground support equipment. Thus, Firm A is Disney and Firm C is American Airlines. It may seem strange that Disney has smaller proportions of long-term debt in its capital structure compared to American Airlines. One possible explanation is that the assets of American Airlines have a more ready market in case a lender repossesses and sells them than does the more unique assets of Disney. The more ready market reduces the borrowing cost. In this case, however, the explanation lies in the fact that American Airlines has operated at a net loss for several years and has negative shareholders’ equity. The result is a higher ratio of long-term debt to assets for American Airlines than for Disney. 1.9 Effect of Business Strategy on Common-Size Income Statement. Firm A is Dell and Firm B is Apple Computer. The clues appear next. Cost of Goods Sold to Sales Percentages. One would expect Dell to have a higher cost of goods sold to sales percentage because it adds less value, essentially following an assembly strategy, and competes based on low prices. Apple Computer can obtain a higher markup on its manufacturing costs because it creates more unique products with a somewhat unique consumer following. Selling and Administrative Expense to Sales Percentages. Both Dell and Apple Computer engage in extensive promotion to market their products to consumers, thereby increasing their selling expenses. One might expect Apple Computer to spend more on marketing and advertising than Dell would spend. One also might expect Dell, as a producer of commodities, to be more focused on controlling costs such as administrative expenses. So it is interesting that Apple’s selling and administrative expense are considerably smaller than Dell’s. Research and Development Expense to Sales Percentages. Apple Computer is more of a technology innovator than Dell, thereby giving Apple Computer a higher R&D (research and development) expense to sales percentage. Net Income to Sales Percentages. These percentages are consistent with the strategies of these firms. Compared to Dell, Apple Computer has a much higher profit margin. 1.10 Effect of Business Strategy on Common-Size Income Statements. Firm A is Dollar General and Firm B is Macy’s. Department stores sell branded products for which the stores can obtain a higher markup on their acquisition cost. Discount stores price low in an effort to gain volume. Thus, the cost of goods sold to sales percentage of Macy’s should be lower than that of Dollar General. Department stores engage in advertising and other promotions to stimulate demand. Also, their cost for space is higher. These factors should increase their selling and administrative expense to sales percentage. Dollar General maintains a high level of debt, so interest expense (included in all other items) is much higher than it is for Macy’s. One would expect that the department stores have a higher net income to sales percentage. 1.11 Effect of Industry Characteristics on Financial Statement Relationships. There are various strategies for approaching this problem. One strategy begins with a particular company, identifies unique financial characteristics (for example, hotel and casino companies have a high proportion of property, plant, and equipment among their assets), and then searches the common-size data in Exhibit 1.22 to identify the company with that unique characteristic. Another approach begins with the common-size data in Exhibit 1.22, identifies unusual financial statement relationships [for example, Firm (8) has a high proportion of receivables], and then looks over the list of companies to identify the one most likely to have substantial receivables among its assets. We follow both strategies here. All of the data are scaled by total revenues (except for the final data item, which is cash flow from operations over capital expenditures); so throughout this discussion when we refer to a “percentage,” it is a percentage of revenues. The data from Exhibit 1.22 in the text, with company names as column headings, are presented at the end of this solution in Exhibit 1.B. The two financial services firms will have balance sheets dominated by cash, securities, and loans receivable. Firms (8) and (1) meet this description. Cash and securities present 2,256 percent for Firm (1), typical of a securities firm, suggesting that it is Goldman Sachs. Firm (8) also has a high percentage of cash and securities (2,198 percent), consistent with Citigroup’s involvement in a wide range of financial services. In addition, receivables comprise a higher percentage for Firm (8) than for Firm (1) [1,384 percent for Firm (8) versus 352 percent for Firm (1)], distinguishing that Firm (8) as Citigroup and Firm (1) as Goldman Sachs. Neither firm is fixed-asset-intensive, reporting immaterial amounts of PP&E relative to revenues. Firms (2), (5), and (7) have high percentages of property, plant, and equipment and are clearly fixed-asset-intensive. These firms are Carnival Corporation (2), Verizon Communications (5), and MGM Mirage (7). These firms are capital-asset-intensive business models—operating cruise ships, telecommunications networks, and hotel and casino chains, respectively. Firm (2) and Firm (7) have similar property, plant, and equipment percentages and depreciation and amortization expense percentages. Firm (5) has the highest depreciation and amortization expense percentage, which implies a shorter depreciable life for its depreciable assets compared to Firm (2) and Firm (7). Due to technological obsolescence, the depreciable assets of Verizon likely have a shorter life than the casinos and hotels of MGM or the ships of Carnival. Thus, Firm (5) is Verizon. Note that Verizon does not amortize its wireless licenses, meaning amortization of these licenses will not explain the higher depreciation and amortization expense to revenues percentage for Firm (5). The percentage of accumulated depreciation to the cost of property, plant, and equipment also is much higher for Firm (5) than for Firm (2) or Firm (7), a consequence of Firm (5)’s higher depreciation and amortization expense. Another distinguishing characteristic of Firm (5) is that it has a lower cost of sales percentage than does Firm (2) or Firm (7). Verizon’s services are more capital-intensive, not labor-intensive, compared to those of Carnival and MGM, which lowers Verizon’s operating expense line. Also, Carnival and MGM sell meals as part of their services, including the cost in cost of sales. Of the three firms, Firm (5) has the highest selling and administrative expense to revenues percentage. Telecommunication services are more competitive than luxury entertainment, which increases marketing expenses and lowers revenues for Verizon. To distinguish Firm (2) (Carnival) from Firm (7) (MGM Mirage), recognize that Firm (7) finances more heavily with long-term debt, consistent with hotel and casino properties supporting higher leverage than cruise ships. Firm (7)’s higher proportion of long-term debt might suggest that compared to ships, hotels and casinos serve as better collateral for loans. Another possibility is that MGM simply chose to use debt more extensively than did Carnival. Firm (7) has a higher selling and administrative expense percentage and thereby a lower net income percentage. Distinguishing these two firms is a close call. The land-based services of MGM are probably more competitive because of the direct competition located nearby and the low switching costs for customers. Once customers commit to a cruise, their switching costs are higher. Thus, one would expect MGM to have higher marketing costs and a lower net income to revenues percentage. This reasoning suggests that Firm (7) is MGM and Firm (2) is Carnival. Three firms have R&D expenses: Firms (3), (6), and (12). These firms are Johnson & Johnson, Cisco Systems, and eBay, respectively. All three firms have high profit margins; high proportions of cash and marketable securities; low proportions of property, plant, and equipment; and low long-term debt. All are consistent with technology-based firms. These firms differ on their R&D percentages, with Firm (12) having the lowest percentage. Both Johnson & Johnson and Cisco invest in R&D to create new products, whereas eBay invests in technology to support the offering of its online services. The clue suggests that eBay is Firm (12). In addition, Firm (12) differs from Firm (6) and Firm (3) in that it has no inventory, consistent with eBay’s business model of being a market-making intermediary rather than a producer. Firm (12) also differs from Firm (6) and Firm (3) in the amount of intangibles. Intangibles dominate the balance sheet of Firm (12). The problem indicates that eBay has grown its network of online services largely by acquiring other firms, which increases goodwill and other intangibles. Thus, Firm (12) is eBay. It is difficult to distinguish Firm (3) as Johnson & Johnson and Firm (6) as Cisco. A few subtle differences between the percentages for these two firms are as follows: As a high-tech company, Cisco requires more R&D than Johnson & Johnson does, which generates revenues from branded over-the-counter consumer health products, which do not require as much R&D investment. This suggests that Johnson & Johnson is Firm (3) and Cisco is Firm (6). In the same vein, Cisco will turn over inventory faster than Johnson & Johnson will, which is revealed in Cisco’s having a lower inventory percentage compared to Johnson & Johnson. This leaves four firms: Firms (4), (9), (10), and (11). The four remaining firms are Kellogg’s, Amazon.com, Molson Coors, and Yum! Brands, respectively. Amazon.com is likely the least fixed-asset-intensive of the firms. It must invest in information systems but does not need manufacturing or retailing assets, as the other three do. In addition, Amazon will require the highest levels of R&D among the four firms. This suggests that Firm (9) is Amazon.com. Firm (9) also has the highest cost of sales percentage of the four firms, consistent with Amazon.com’s low value added for its online services. It is interesting to compare the cost of sales to revenues percentages for Amazon.com and eB