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Gypsy

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发表于 2012-3-29 10:28 | 只看该作者
Falcon Financial Group is considering the purchase of Company A or Company B based on a low price-to-book investment strategy that also considers differences in solvency. Selected financial data for both firms, as of December 31, 20X7, follows:

in millions, except per-share data
Company A
Company B

Current assets

$3,000

$5,500


Fixed assets

$5,700

$5,500


Total debt

$2,700

$3,500


Common equity

$6,000

$7,500


Outstanding shares

500

750


Market price per share

$26.00

$22.50


The firms’ financial statement footnotes contain the following:
  • Company A values its inventory using the first in, first out (FIFO) method.
  • Company B’s inventory is based on the last in, first out (LIFO) method. Had Company B used FIFO, its inventory would have been $700 million higher.
  • Company A leases its manufacturing plant. The remaining operating lease payments total $1,600 million. Discounted at 10%, the present value of the remaining payments is $1,000 million.
  • Company B owns its manufacturing plant.

To make the firms financials ratios comparable, calculate the adjusted price-to-book ratios for Company A and Company B.
Company A Company B
A)
$2.17 $2.81
B)
$1.63 $2.06
C)
$2.17 $2.06


Company A should be adjusted for the operating lease liability and the related assets; however, adding the present value of the lease payments to both assets and liabilities does not change equity (book value). Thus, Company A’s adjusted P/B ratio is 2.17 = [$26 price / ($6,000 million equity / $500 million shares)]. Company B’s inventory should be adjusted back to FIFO by adding the LIFO reserve to both assets and equity. Thus, Company B’s P/B ratio is 2.06 = $22.50 / [($7,500 million equity + $700 million LIFO reserve) / 750 million shares].

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Gypsy

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12#
发表于 2012-3-29 10:28 | 只看该作者
At the end of 2007, Decatur Corporation reported last-in, first-out (LIFO) inventory of $20 million, cost of goods sold (COGS) of $64 million, and inventory purchases of $58 million. If the LIFO reserve was $6 million at the end of 2006 and $16 million at the end of 2007, compute first-in, first-out (FIFO) inventory at the end of 2007 and FIFO COGS for the year ended 2007.
FIFO InventoryFIFO COGS
A)
$36 million$54 million
B)
$26 million$54 million
C)
$36 million$74 million


2007 FIFO inventory was $36 million ($20 million LIFO inventory + $16 million reserve). 2007 FIFO COGS was $54 million ($64 million LIFO COGS – $10 million increase in LIFO reserve).

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Gypsy

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13#
发表于 2012-3-29 10:29 | 只看该作者
Patch Grove Nursery uses the LIFO inventory accounting method. Maria Huff, president, wants to determine the financial statement impact of changing to the FIFO accounting method. Selected company information follows:
  • Year-end inventory: $22,000
  • LIFO reserve: $4,000
  • Change in LIFO reserve: $1,000
  • LIFO cost of goods sold: $18,000
  • After-tax income: $2,000
  • Tax rate: 40%

Under FIFO, the nursery’s ending inventory and after-tax profit for the year would have been:
FIFO ending inventoryFIFO after-tax profit
A)
$18,000$2,600
B)
$26,000$2,600
C)
$26,000$1,400


FIFO ending inventory = LIFO ending inventory + LIFO reserve = 22,000 + 4,000 = $26,000
FIFO after-tax profit = LIFO after-tax profit + (change in LIFO reserve)(1 − t) = $2,000 + ($1,000)(1 − 0.4) = $2,000 + $600 = $2,600

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terpsichorefan

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14#
发表于 2013-4-17 20:30 | 只看该作者
thanks for sharing

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