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Q9. After restating Bingaman’s 2004 financials, Schindler and Killen analyze the firm’s financial ratios in order to compare Bingaman ffice ffice" />
to other firms in its industry. In discussing the impact of the restatement on the financial ratios, Schindler makes the following
four statements:
Statement 1: Bingaman’s return on assets will be lower after restating the financials.
Statement 2: Bingaman’s return on equity will be lower after restating the financials.
Statement 3: The current ratio will remain unchanged after restating the financials.
Statement 4: The long-term debt to total asset ratio will increase after restating the financials.
After their conversation, Killen tells Schindler that he needs to redo some of his calculations because at least one of his assessments are wrong. Which of the following describes Schindler’s statements?
A) Statements 1 and 2 are correct, but Statements 3 and 4 are incorrect.
B) Statements 1 and 4 are correct, but Statements 2 and 3 are incorrect.
C) Statements 1, 2, and 3 are correct, but Statement 4 is incorrect.
Correct answer is B)
Statement 1 is correct. Adjusting for operating leases and adding the LIFO reserve will cause total assets to be higher, which will reduce return on assets (net income/assets). Note that the proportionate increase in assets is higher than the increase in adjusted income, so ROA will decline.
Statement 2 is incorrect. The firm’s equity increased from $590 million to $633 million, while the net income increased from $50 million to $56 million. 50 / 590 = 0.0847 or 8.47%, 56 / 633 = 0.0885 or 8.85%. Summary of the change in equity: + LIFO reserve + decline in value of the firm’s debt ? litigation exposure ? goodwill = 60 + 15 ? 12 ? 20 = $43 million. Change in net income = change in LIFO reserve × (1 ? T) = 10 (1 ? 0.4) = $6 million.
Statement 3 is incorrect. The value of inventory will be increased by the LIFO reserve, which will result in a higher level of current assets and a higher current ratio.
Statement 4 is correct. Total assets before restatement = $770 million; after restatement = $910 million. Long-term debt before restatement = $120; after restatement = $217. Long-term debt to total assets before restatement = 120 / 770 = 0.156 or 15.6%; after restatement = 217 / 910 = 0.238 or 23.8%. Summary of change in total assets: prior assets + LIFO reserve + PV of leases ? goodwill = $770 + $60 + $100 ? $20 = $910 million. Summary of change in LT debt: prior LT debt + PV of leases + litigation exposure ? change in market value of debt = $120 + $100 + $12 ? $15 = $217 million.
Q10. Schindler has determined that fixed capital expenditures for Bingaman are $80 million. What is the free cash flow to the firm
(FCFF) ignoring any effects from capitalizing the operating leases?
A) ?$39,000,000.
B) $31,000,000.
C) $46,000,000.
Correct answer is C)
FCFF = CFO + [Interest expense × (1 ? tax rate)] ? FCInv
FCFF = 120 + [10 × (1 ? 0.40)] ? 80
FCFF = 120 + 6 ? 80
FCFF = $46 million
Q11. The analyst team at Zirconia has been investigating the concept of comprehensive income as a tool for capturing economic
changes to equity. Schindler has been put in charge of the project and has prepared a memo listing adjustments that must be
made to equity in order to compute comprehensive income. Which of the following adjustment items listed in Schindler’s memo
is least likely required under U.S. GAAP in order to calculate comprehensive income?
A) Unrealized gains and losses on available for sale securities.
B) Minimum pension liabilities.
C) Deferred taxes.
Correct answer is C)
Comprehensive income is an income figure that allows for all changes in equity during a period, excluding those resulting from investments from and distributions to owners. Adjustments to made to equity under U.S. GAAP to calculate comprehensive income include:
· Minimum pension liability.
· Unrealized gains and losses on available for sale securities.
· Cumulative foreign currency translation adjustments.
· Deferred gains and losses on cash flow hedges.
Note that many analysts make adjustments beyond those prescribed by U.S. GAAP, which could include adjustment items such as deferred taxes.
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发表于 2009-5-21 22:30
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