bkmsolch199e corrected 85文档格式.docx

bkmsolch199e corrected 85文档格式.docx

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=NetprofitmarginAssetturnoverLeverageratio

=5.5%2.02.2=24.2%

8.a.Lowerbaddebtexpensewillresultinhigheroperatingincome.

b.LowerbaddebtexpensewillhavenoeffectonoperatingcashflowuntilGalaxyactuallycollectsreceivables.

9.A.CertainGAAPrulescanbeexploitedbycompaniesinordertoachievespecificgoals,whilestillremainingwithintheletterofthelaw.Aggressiveassumptions,suchaslengtheningthedepreciablelifeofanasset（whichareutilizedtoboostearnings）resultinalowerqualityofearnings.

10.A.Offbalance-sheetfinancingthroughtheuseofoperatingleasesisacceptablewhenusedappropriately.However,companiescanusethemtooaggressivelyinordertoreducetheirperceivedleverage.Acomparisonamongindustrypeersandtheirpracticesmayindicateimproperuseofaccountingmethods.

11.A.Awarningsignofaccountingmanipulationisabnormalinventorygrowthascomparedtosalesgrowth.Byoverstatinginventory,thecostofgoodssoldislower,leadingtohigherprofitability.

12.

13

14.

a.CashFlowsfromInvestingActivities

SaleofOldEquipment

$72,000

PurchaseofBus

（33,000）

NetCashUsedinInvestingActivities

39,000

b.CashFlowsfromFinancingActivities

RepurchaseofStock

$（55,000）

CashDividend

（80,000）

NetCashUsedinFinancingActivities

（135,000）

c.CashFlowsfromOperatingActivities

CashCollectionsfromCustomers

$300,000

CashPaymentstoSuppliers

（95,000）

CashPaymentsforInterest

（25,000）

NetCashProvidedbyOperatingActivities

$180,000

NetIncreaseinCash

$84,000

CFAPROBLEMS

1.SmileWhitehashigherqualityofearningsforthefollowingreasons:

SmileWhiteamortizesitsgoodwilloverashorterperiodthandoesQuickBrush.SmileWhitethereforepresentsmoreconservativeearningsbecauseithasgreatergoodwillamortizationexpense.

SmileWhitedepreciatesitsproperty,plantandequipmentusinganaccelerateddepreciationmethod.Thisresultsinrecognitionofdepreciationexpensesoonerandalsoimpliesthatitsincomeismoreconservativelystated.

SmileWhite’sbaddebtallowanceisgreaterasapercentofreceivables.SmileWhiteisrecognizinggreaterbad-debtexpensethanQuickBrush.Ifactualcollectionexperiencewillbecomparable,thenSmileWhitehasthemoreconservativerecognitionpolicy.

2.a.

=NetprofitmarginTotalassetturnoverAssets/equity

b.

c.g=ROEplowback

3.a.CFfromoperatingactivities=$260–$85–$12–$35=$128

b.CFfrominvestingactivities=–$8+$30–$40=–$18

c.CFfromfinancingactivities=–$32–$37=–$69

4.a.QuickBrushhashadhighersalesandearningsgrowth（pershare）thanSmileWhite.Marginsarealsohigher.ButthisdoesnotmeanthatQuickBrushisnecessarilyabetterinvestment.SmileWhitehasahigherROE,whichhasbeenstable,whileQuickBrush’sROEhasbeendeclining.WecanseethesourceofthedifferenceinROEusingDuPontanalysis:

Component

Definition

QuickBrush

SmileWhite

Taxburden（1–t）

Netprofits/pretaxprofits

67.4%

66.0%

Interestburden

Pretaxprofits/EBIT

1.000

0.955

Profitmargin

EBIT/Sales

8.5%

6.5%

Assetturnover

Sales/Assets

1.42

3.55

Leverage

Assets/Equity

1.47

1.48

ROE

Netprofits/Equity

12.0%

21.4%

Whiletaxburden,interestburden,andleveragearesimilar,profitmarginandassetturnoverdiffer.AlthoughSmileWhitehasalowerprofitmargin,ithasafarhigherassetturnover.

Sustainablegrowth=ROEplowbackratio

Plowbackratio

Sustainable

growthrate

Ludlow’sestimateofgrowthrate

1.00

30%

0.34

7.3%

10%

Ludlowhasoverestimatedthesustainablegrowthrateforbothcompanies.QuickBrushhaslittleabilitytoincreaseitssustainablegrowth–plowbackalreadyequals100%.SmileWhitecouldincreaseitssustainablegrowthbyincreasingitsplowbackratio.

b.QuickBrush’srecentEPSgrowthhasbeenachievedbyincreasingbookvaluepershare,notbyachievinggreaterprofitsperdollarofequity.AfirmcanincreaseEPSevenifROEisdecliningasistrueofQuickBrush.QuickBrush’sbookvaluepersharehasmorethandoubledinthelasttwoyears.

Bookvaluepersharecanincreaseeitherbyretainingearningsorbyissuingnewstockatamarketpricegreaterthanbookvalue.QuickBrushhasbeenretainingallearnings,buttheincreaseinthenumberofoutstandingsharesindicatesthatithasalsoissuedasubstantialamountofstock.

5.a.ROE=operatingmargininterestburdenassetturnoverleveragetaxburden

ROEforEastover（EO）andforSouthampton（SHC）in2010arefoundasfollows:

profitmargin=

SHC:

EO:

145/1,793=

795/7,406=

8.1%

10.7%

interestburden=

137/145=

600/795=

0.94

0.75

assetturnover=

1,793/2,104=

7,406/8,265=

0.85

0.90

leverage=

2,104/1,167=

8,265/3,864=

1.80

2.14

taxburden=

91/137=

394/600=

0.66

7.8%

10.2%

b.ThedifferencesinthecomponentsofROEforEastoverandSouthamptonare:

ProfitmarginEOhasahighermargin

InterestburdenEOhasahigherinterestburdenbecauseitspretaxprofitsarealowerpercentageofEBIT

AssetturnoverEOismoreefficientatturningoveritsassets

LeverageEOhashigherfinancialleverage

TaxBurdenNomajordifferenceherebetweenthetwocompanies

ROEEOhasahigherROEthanSHC,butthisisonlyinpartduetohighermarginsandabetterassetturnover--greaterfinancialleveragealsoplaysapart.

c.Thesustainablegrowthratecanbecalculatedas:

ROEtimesplowbackratio.ThesustainablegrowthratesforEastoverandSouthamptonareasfollows:

Plowbackratio*

Eastover

0.36

3.7%

Southampton

0.58

4.5%

*Plowback=（1–payoutratio）

Plowback=（1–0.64）=0.36

Plowback=（1–0.42）=0.58

Thesustainablegrowthratesderivedinthismannerarenotlikelytoberepresentativeoffuturegrowthbecause2010wasprobablynota“normal”year.ForEastover,earningshadnotyetrecoveredto2007-2008levels;

earningsretentionofonly0.36seemslowforacompanyinacapitalintensiveindustry.Southampton’searningsfellbyover50percentin2010anditsearningsretentionwillprobablybehigherthan0.58inthefuture.Thereisadanger,therefore,inbasingaprojectionononeyear’sresults,especiallyforcompaniesinacyclicalindustrysuchasforestproducts.

6.a.Theformulafortheconstantgrowthdiscounteddividendmodelis:

ForEastover:

Thiscompareswiththecurrentstockpriceof$28.Onthisbasis,itappearsthatEastoverisundervalued.

b.Theformulaforthetwo-stagediscounteddividendmodelis:

g1=0.12andg2=0.08

D0=1.20

D1=D0（1.12）1=$1.34

D2=D0（1.12）2=$1.51

D3=D0（1.12）3=$1.69

D4=D0（1.12）3（1.08）=$1.82

ThisapproachmakesEastoverappearevenmoreundervaluedthanwasthecaseusingtheconstantgrowthapproach.

c.Advantagesoftheconstantgrowthmodelinclude:

（1）logical,theoreticalbasis;

（2）simpletocompute;

（3）inputscanbeestimated.

Disadvantagesinclude:

（1）verysensitivetoestimatesofgrowth;

（2）gandkdifficulttoestimateaccurately;

（3）onlyvalidforg<

k;

（4）constantgrowthisanunrealisticassumption;

（5）assumesgrowthwillneverslowdown;

（6）dividendpayoutmustremainconstant;

（7）notapplicableforfirmsnotpayingdividends.

Improvementsofferedb