Reading 30: Analysis of Financial Statements: A Synthesis L net, statements, indicate, reports, black

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1.National Chemical Corp. (NCC) reports 2003 net earnings of $354.2 million. NCC’s financial statements and disclosures also indicate pretax impairment charges of $78.1 million and pretax amortization of $24.9 million. NCC also reports an after-tax loss of $23.4 million on the early retirement of debt and receipt of $118 million after-tax from an insurance claim. NCC effective tax rate is 36 percent. What are the normal operating earnings of NCC?

A)   $414.68 million.

B)   $480.60 million.

C)   $598.60 million.

D)   $325.52 million.

2.An investor relations spokesperson for the Square Door Corporation was quoted as saying that Square Door shares were a bargain, selling at a price-to-earnings (P/E) ratio of 12, relative to the S& 500 average P/E of 15.3. The financial statements reported net earnings of $126 million, or $4.00 per share. The notes to the financial statements included a statement that income for the year included a $31.5 million (after-tax) gain from the reclassification of certain assets from its investment portfolio to its trading portfolio. What would be the normalized P/E?

A)   13.

B)   14.

C)   16.

D)   15.

3.Endrun Company reported net income of $4.7 million in 1999, and $4.3 million in 2000. In reviewing the annual report an analyst notices that the Endrun took a charge of $2.4 million in 1999 for the costs of relocating its main office, and in 2000 booked a gain of $900,000 on the sale of its previous office building. What would “normalized earnings” be for 1999 and 2000 if we assume a tax rate of 36 percent for both years?

A)   $7.1 million and $5.2 million.

B)   $3.99 million and $2.54 million.

C)   $9.656 million and $7.07 million.

D)   $6.236 million and $3.724 million.

4.ABC Tie Company reports income for the year 2001 as $450,000. The notes to its financial statements state that the firm uses the last in, first out (LIFO) convention to value its inventories, and that had it used first in, first out (FIFO) instead, inventories would have been $62,000 greater for the year 2000 and $78,000 greater for the year 2001. If earnings were restated using FIFO to determine the cost of goods sold (COGS), what would the net income be for the year 2001? Assume a tax rate of 36 percent. Net income would have been:

A)   $439,760.

B)   $444,240.

C)   $460,240.

D)   $455,760.

5.An analyst finds return-on-equity (ROE) a good measure of management performance and wants to compare two firms: Firm A and Firm B. Firm A reports net income of $3.2 million and has a ROE of 18. Firm B reports income of $16 million and has an ROE of 16. A review of the notes to the financial statements for Firm A, shows that the earnings include a loss from smelting operations of $400,000 and that the firm has exited this business. In addition, the firm sold the smelting equipment and had a gain on the sale of $300,000. A similar review of the notes for Firm B discloses that the $16 million in net income includes $2.6 million gain on the sale of no longer needed office property. Assume that the tax rate for both firms is 36 percent, and that the notes describe pre-tax amounts. What would be the “normalized” ROE for Firm A and for Firm B? (respectively)

A)   16.0 and 18.0.

B)   17.1 and 16.9.

C)   18.4 and 14.3.

D)   15.8 and 17.7.

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答案和详解如下：

1.National Chemical Corp. (NCC) reports 2003 net earnings of $354.2 million. NCC’s financial statements and disclosures also indicate pretax impairment charges of $78.1 million and pretax amortization of $24.9 million. NCC also reports an after-tax loss of $23.4 million on the early retirement of debt and receipt of $118 million after-tax from an insurance claim. NCC effective tax rate is 36 percent. What are the normal operating earnings of NCC?

A)   $414.68 million.

B)   $480.60 million.

C)   $598.60 million.

D)   $325.52 million.

The correct answer was D)

NCC’s normal operating earnings are calculated as:

Net income		354.20
+ After-tax impairment charge	78.1 * (1-0.36) =	49.98
+ After-tax amortization charge	24.9 * (1-0.36) =	15.94
+ After-tax loss on debt retirement		23.40
- After-tax insurance settlement		118.00
Normal operating earnings		325.52

Recall that all adjustments are made on an after-tax basis.

2.An investor relations spokesperson for the Square Door Corporation was quoted as saying that Square Door shares were a bargain, selling at a price-to-earnings (P/E) ratio of 12, relative to the S& 500 average P/E of 15.3. The financial statements reported net earnings of $126 million, or $4.00 per share. The notes to the financial statements included a statement that income for the year included a $31.5 million (after-tax) gain from the reclassification of certain assets from its investment portfolio to its trading portfolio. What would be the normalized P/E?

A)   13.

B)   14.

C)   16.

D)   15.

The correct answer was C)

Since the P/E ratio was 12 and EPS was $4, the price of the stock was $48 (12*4).  After removing the nonrecurring gain, earnings will be $94.5 million (126 - 31.5).  We know the number of shares is 31.5 million (126 Million / 4).  So the new EPS number is 3 (94.5 million / 31.5 million) and new P/E ratio is 16 (48 / 3).

3.Endrun Company reported net income of $4.7 million in 1999, and $4.3 million in 2000. In reviewing the annual report an analyst notices that the Endrun took a charge of $2.4 million in 1999 for the costs of relocating its main office, and in 2000 booked a gain of $900,000 on the sale of its previous office building. What would “normalized earnings” be for 1999 and 2000 if we assume a tax rate of 36 percent for both years?

A)   $7.1 million and $5.2 million.

B)   $3.99 million and $2.54 million.

C)   $9.656 million and $7.07 million.

D)   $6.236 million and $3.724 million.

The correct answer was D)

You will increase 1999 earnings by the tax-adjusted value of the 2.4 million one-time charge (2.4 * (1 - 0.36) = +1.536), and you would decrease Y2000 earnings by the tax-adjusted amount of the $0.9 million one-time gain (0.9 * (1 - 0.36) = -0.576).

4.ABC Tie Company reports income for the year 2001 as $450,000. The notes to its financial statements state that the firm uses the last in, first out (LIFO) convention to value its inventories, and that had it used first in, first out (FIFO) instead, inventories would have been $62,000 greater for the year 2000 and $78,000 greater for the year 2001. If earnings were restated using FIFO to determine the cost of goods sold (COGS), what would the net income be for the year 2001? Assume a tax rate of 36 percent. Net income would have been:

A)   $439,760.

B)   $444,240.

C)   $460,240.

D)   $455,760.

The correct answer was C)

The reduction in COGS would result in an increase in net income (62,000 - 78,000) * (1 - 0.36).

5.An analyst finds return-on-equity (ROE) a good measure of management performance and wants to compare two firms: Firm A and Firm B. Firm A reports net income of $3.2 million and has a ROE of 18. Firm B reports income of $16 million and has an ROE of 16. A review of the notes to the financial statements for Firm A, shows that the earnings include a loss from smelting operations of $400,000 and that the firm has exited this business. In addition, the firm sold the smelting equipment and had a gain on the sale of $300,000. A similar review of the notes for Firm B discloses that the $16 million in net income includes $2.6 million gain on the sale of no longer needed office property. Assume that the tax rate for both firms is 36 percent, and that the notes describe pre-tax amounts. What would be the “normalized” ROE for Firm A and for Firm B? (respectively)

A)   16.0 and 18.0.

B)   17.1 and 16.9.

C)   18.4 and 14.3.

D)   15.8 and 17.7.

The correct answer was C)

The ROE for firm A is adjusted for the 400,000 loss on discontinued operations and the 300,000 non-recurring gain. The ROE for firm B is adjusted to remove the effects of the 2.6 million one-time gain.