財(cái)務(wù)報(bào)表分析（英文版 middot;第11版）Solutions-Manua答案l匯總 Comprehensive-Case -Chap011 Equity Analysis and Valuation

Chapter01-OverviewofFinancialStatementAnalysis

Chapter01-OverviewofFinancialStatementAnalysis

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Copyright?2014McGraw-HillEducation.Allrightsreserved.NoreproductionordistributionwithoutthepriorwrittenconsentofMcGraw-HillEducation.

ComprehensiveCase

ApplyingFinancialStatementAnalysis

REVIEW

AcomprehensivecaseanalysisofthefinancialstatementsandnotesofCampbellSoupCompanyisourfocus.Thebookhaspreparedustotackleallfacetsoffinancialstatementanalysis.Thiscomprehensivecaseanalysisprovidesustheopportunitytoillustrateandapplytheseanalysistoolsandtechniques.Thiscasealsogivesustheopportunitytoshowhowwedrawconclusionsandinferencesfromdetailedanalysis.Wereviewthebasicstepsofanalysis,thebuildingblocks,andtheattributesofanexpertanalysisreport.Throughoutthecaseweemphasizeapplicationsandinferencesassociatedwithfinancialstatementanalysis.

OUTLINE

StepsinAnalyzingFinancialStatements

BuildingBlocksofFinancialStatementAnalysis

ReportingonFinancialStatementAnalysis

SpecializationinFinancialStatementAnalysis

ComprehensiveCase:CampbellSoupCompany

PreliminaryFinancialAnalysis

ShortTermLiquidity

CapitalStructureandSolvency

ReturnonInvestedCapital

AnalysisofAssetUtilization

AnalysisofOperatingPerformanceandProfitability

Forecastingandvaluation

SummaryEvaluationandInferences

ANALYSISOBJECTIVES

Describethestepsinanalyzingfinancialstatements.

Reviewthebuildingblocksoffinancialstatementanalysis.

Explainimportantattributesofreportingonfinancialstatementanalysis.

Describeimplicationstofinancialstatementanalysisfromevaluatingcompaniesinspecializedindustriesorwithuniquecharacteristics.

AnalyzeinacomprehensivemannerthefinancialstatementsandnotesofCampbellSoupCompany.

QUESTIONS

1. Thesixmajor"buildingblocks"offinancialanalysisthatwehavestudiedare:

i. Shorttermliquidity—theabilitytomeetshort-termobligations.

ii. Cashanalysisandforecasting—futureavailabilityanddispositionofcash.

iii. Capitalstructureandsolvency—abilitytogeneratefuturerevenuesandmeetlong-termobligations.

iv. Returnoninvestedcapital—abilitytoprovidefinancialrewardssufficienttoattractandretainfinancing.

v. Assetutilization(turnover)—assetintensityingeneratingrevenuestoreachasufficientprofitabilitylevel.

vi. Operatingperformanceandprofitability—successatmaximizingrevenuesandminimizingexpensesfromoperatingactivitiesoverthelongrun.

Theinitialstepinapplyingthebuildingblockstofinancialstatementanalysisinvolves:

i. Determiningthespecificobjectivesoftheanalysistask.

ii. Arrivingatajudgmentaboutwhichofthesixmajorareasofanalysismustbeevaluatedwithwhatdegreeofemphasisandinwhatorderofpriority.

Financialstatementanalysisisorientedtowardtheachievementofspecificobjectives.Sothatananalysiscanbestservetheseobjectives,thefirststepistodefinethemcarefully.Thethinkingandclarificationleadinguptothedefinitionofobjectivesisanimportantpartoftheanalyticalprocessasitinsuresaclearunderstandingofobjectives,ofwhatispertinentandrelevant,andthusleadstoavoidanceofunnecessarywork.Thisisindispensabletoaneffectiveaswellasanefficientanalysis.Effectiveness,giventhespecificobjectives,isenhancedbecauseofafocusonthemostimportantelementsofthefinancialstatementsinlightofthedecisiontask.Itisalsoefficientinthatitleadstoananalysiswithmaximumeconomyoftimeandeffort.

Ananalystoffinancialstatementdatamustalwaysbearinmindthatfinancialstatementsareatbestanabstractionofanunderlyingreality.Furthermathematicalmanipulationoffinancialdatacanresultinsecond,third,andevenfurtherlevelsofabstractions.Asthebookmentioned,nosetofphotosoftheRockyMountainscanfullyconveythegrandeuroftheterrain.Onehastoseethemtofullyappreciatethem.Thisisbecausephotos,likefinancialstatements,areatbest,abstractions.Thatiswhyanalystsmust,atsomepoint,leavethefinancialstatementsand“visitthecompanies”togetafullunderstandingofthephenomenaunderlyingbytheanalysis.Thisisparticularlytruebecauseofthestaticnatureoftheabstractionsfoundinthefinancialstatements.Incontrast,businessrealityisdynamicandconstantlychanging.

4. Thefinancialanalystmustrecognizethatthereareindustrieswithdistinctaccountingtreatmentsthatariseeitherfromtheirspecializednatureorfromthespecialconditionsinwhichtheyoperate(suchasgovernmentalregulations).Theanalysisofthefinancialstatementsofsuchacompanyrequiresathoroughunderstandingoftheaccountingpeculiaritiestowhichtheyaresubject.Accordingly,theanalystmustbepreparedforthistaskbystudyingandunderstandingthespecializedareasofaccountingwhichaffecttheanalysis.Examplesofspecializedindustriesincludeoilandgas,lifeinsurance,andpublicutilities.Asinanyfieldofendeavor,specializedareasofinquiryrequirethatspecializedknowledgebebroughttobearuponthem.Financialstatementanalysisis,ofcourse,noexception.

5. Agoodanalysishighlightsforthereadertheinterpretationsandconclusionsoftheanalysisfromthefactsanddatauponwhichtheyarebased.Thishelpstodistinguishfactfromopinionsandestimates.Italsoenablesthereadertofollowtherationaleoftheanalyst'sconclusionsandallowshim/hertomodifythemasjudgmentdictates.Tothisend,theanalysisshouldcontaindistinctsectionsdevotedto:

i. Abrief"SummaryandConclusion"(executivesummary)sectionaswellasatableofcontentstohelpthereaderdecidehowmuchofthereporthe/shewantstoreadandwhichpartsofittoemphasize.

ii. Generalbackgroundmaterialontheenterpriseanalyzed,theindustryofwhichitisapart,andtheeconomicenvironmentinwhichitoperates.

iii. Financialandotherevidentialdatausedintheanalysisaswellasratios,trends,andotheranalyticalmeasuresthathavebeendevelopedfromthem.

iv. Assumptionsastothegeneraleconomicenvironmentandotherconditionsonwhichestimatesandprojectionsarebased.

v. Alistingofpositiveandnegativefactors,quantitativeandqualitative,byareaofanalysis.

vi. Projections,estimates,interpretations,andconclusionsbasedontheaforementioneddata.

EXERCISES

ExerciseCC-1(30minutes)

ThefactorsthatwoulddeterminetherelativePEratiosare:

a.

Growthinearningspershare Axel Bike

Year5to6 21% 20%

Year2to6 150% 54%

Assumingnetincomeiscomparableasfarasaccountingpracticesgo,AxelwouldbelikelytohaveahigherPEratiobecauseofgreaterhistoricgrowthinearningspershare.

b.

Leverageincapitalstructure Axel Bike

33%ofitstotal Nodebt

capitalisdebt

Axel'searningsarelikelytobegreater,relativetoBike,becauseofthisleverage(assumingsuccessfultradingontheequity).Accordingly,itsgrowthinpershareearningsislikelytobefaster,producinggreatermarketappreciation.ThisislikelytoproduceahigherPEforAxel.However,Axeldoeshavegreaterfinancialrisk,whichwouldtendtoreduceitsPEdifferential.

c.

Returnoncommonequity Axel Bike

Year6 $2,125 $2,250

$20,000=10.6% $30,000=7.5%

Axel'sgreaterROCEismainlyduetotheleverageinitscapitalstructure.ThiswilltendtoproduceahigherPEforthestock(assumingsuccessfultradingontheequity).Thiswillresultinlargergrowthinretainedearningsaslongasdividendpoliciesareaboutthesame,andshouldyieldfastergrowthofthestockholders'investment.Itshouldalsoreducetheneedtofinanceexpansionwithfurtherstockissuancesandthepotentialdilutionofearningspershare.

ExerciseCC-1—continued

d.

Netincomeas%ofsales Axel Bike

$2,125 $2,250

$30,000=7.1% $30,000=7.5%

ThedifferenceisduetoAxel'suseofdebtinitscapitalstructure.Ifwecalculatenetincomebeforetaxandinterest(assuminga50%taxrate),Axelisseentobemoreprofitableasshownhere:

Axel Bike

NIbeforetaxandinterest $4,750,000 $4,500,000

Interestexpense 500,000 

NIbeforetax 4,250,000 4,500,000

NIbeforetax&interestas%ofsales 15.8% 15.0%

Axel'sinterestpaymentcanbeconsideredbytheanalystasacostofservicingthecapitalstructure.Therefore,abettermeasureofoperatingprofitabilityistheratioofnetincomebeforetaxandinteresttosales.ThisshowsAxeltobemarginallymoreprofitableinYear6,whichwilltendtoproduceafastergrowthinearningspershareandPE.

e.

Ratios Axel Bike

1. Currentratio 2.85 2.97

Nosignificantdifference.

2. Receivablesturnover 6.00 8.00

ImpliesBikehasamoreefficientandstrictcollectionpolicy.

3. Ratioofsalestonetplantandequip. 2.30 1.88

SuggestsAxelismoreefficientinutilizingitsplant.

f.

Patentposition

Axelseemstohaveastrongerpatentposition,buttoaccuratelydeterminethisonewouldneedtoknowthepolicyinaccountingforpatents.Theseincludeanswersforquestionssuchas:WillamortizationofAxel'spatents’costbeadrainonfutureearnings?Dothepatents’bookvaluesrepresentmarketvalues?

ExerciseCC-1—concluded

g.

Returnonlong-termfixedassets

Axel: $2,125,000/$13,000,000=16.35%

Bike: $2,250,000/$15,900,000=14.15%

Theresultsfromthereturnonlong-termassetsincreaseAxel'sreturntoanevenmorefavorablecomparisonwithBike—implyinghigherPEforAxel.

OtherconsiderationsthatonewouldwanttoexamineforPEinclude

a. Reputationofthecompany.

b. Qualityofmanagement.

c. Productrangeanditspotential.

d. Accountingpolicies—inventory,depreciation,amortizationofintangibles,etc.

e. Dividendpayoutandpolicies(thesepoliciescouldmarkedlyaffectthe

relativePEforthesecompaniesifthereweresignificantdifferences).

f. Capitalexpenditureprograms—WillAxelneednewplantsoon?

g. Expansionprogram—internalandviaacquisition.

OverallAnalysis:Onmostfactors,AxelappearstobemoreefficientandprofitablethanBike.ThegreaterprospectsforincreasesinAxel'searningspershareandmarketvaluearelikelytoproduceahigherPEratioforAxel.

ExerciseCC-2(25minutes)

Company

a. (6)

b. (2)

c. (8)

d. (1)

e. (9)

f. (3)

g. (5)

h. (7)

i. (4)

ExerciseCC-2—concluded

IdentificationStrategy

Industry ExpectedCharacteristics Company#

Pharmaceuticals HighR&D 2

Healthcare Noinventory 8

Highplantandequipment

Noadvertisingexpense

Highcostofgoodssold

Utilities Highplantandequipment 1

Largedebt(financedwithbonds)

Lowinventories

Investmentadvising Noinventory 9

Lowplantandequipment

High"other"assets(investments)

Highinterestexpense

Lowcostofgoodssold

Grocerystores LowNIas%ofsales 5

Lowreceivables

Lowplantandequipment

(operatingleases)

Computingequipment HighR&D 7

Higherinventorythan

pharmaceuticalcompany

Publicopinionsurveys Noinventory 4

NoR&D

Todistinguishbetweenthetobaccomanufacturer(6)andthebrewery(3),recognizethatthetobaccomanufacturerwouldkeephigherinventories,whileabrewerywouldmaintainahigherinvestmentinplantandequipment.Thisimpliesthatcompany(6)isthetobaccomanufacturer,andcompany(3)isthebrewerycompany.

AlternativeSolution—Explanationsforidentification:

i. Threefirmshavezeroinventory—(4),(8)and(9).Theselikelycorrespondtofirmsthathaveoperatingexpensesinsteadofcostofgoodssold—specifically,investmentadvising,healthcare,andpublicsurveycompanies.Sincecompany(8)hasaveryhighproperty,plantandequipmentaccount,itismostlikelythehealthcarecompany.Company(9)haslarge"Otherassets,"whichprobablyrepresentsinvestments,andhighcurrentliabilities—itismostlikelytheinvestmentadvisingcompany.Byprocessofelimination,company(4)isthepublicopinionsurveycompany.

ii. Company(1)hasalargeplantandequipmentaccount,aswellashighlongtermdebtandinterestexpense.Itistheutilitycompany.

iii. Companies(2)and(7)havehighR&Dexpense.Thiswouldcorrespondtothepharmaceuticalcompanyandthecomputingequipmentcompany.Sincedrugstypicallyhaveashortershelflifethancomputerequipment,thepharmaceuticalcompanywillhavelowerinventoryrelativetosales.Company(2)is,therefore,thepharmaceuticalcompany,whilecompany(7)manufacturescomputerequipment.

iv. Company(5)mustbethegrocerystorecompanysinceitshowsverylowreceivables(fewsalesonaccount),andverylownetincomerelativetosales(typicalfortheindustry).

v. Ofthetwofirmsleft(tobaccomanufacturerandbrewery),tobaccoproductsrequireaging.Thetobaccomanufacturerwouldkeephigherinventories,whileabrewerywouldrepresentahigherinvestmentinplantandequipment.Company(6)isthetobaccomanufacturer,andcompany(3)isthebrewerycompany.

PROBLEMS

ProblemCC-1(55minutes)

a. 1. BrewingindustrycomparedwiththeS&P400

ThebrewingindustryandtheS&P400aresimilarintermsofshorttermliquidityasindicatedbythecurrentratioandquickratio—theratiosaresimilarinbothabsolutevalueandtrend(bothratiosareaboutthesameasinYear2).However,therearesubstantialdifferencesinlongtermfinancialrisk.Whiletheindustryhasexperiencedadeclineintheproportionofdebt,theaggregatemarketdataindicatesahigherlevelofdebt.Thisdivergenceintrendisalsoevidentintheflowratios.Whilethebrewingindustryincreasedinterestcoverageandrelativecashflowratios,theaggregatemarketexperiencedadeclineincoverageandrelativecashflow.Inturningtototalassetturnoverratios,theresultsaresimilaralthoughtheindustryisbetter.Bothexperiencedanincreaseinnetprofitmargin,buttheindustrylookedbetterinthemostrecentyear.Moreover,theindustryincreaseditsreturnontotalassetsovertime,whilethereturnforthemarketdeclined.Inthemostrecentyear,theindustry'sreturnwasalmosttwiceaslargeastheS&P(7.90percentvs.3.97percent).Tosummarize,thebrewingindustryshowedprogressinreducingitsfinancialriskandincreasingitsprofitsandreturnonassets.Ithadabettertrendandfinalpositionthanthemarket.

2. AnheuserBuschcomparedwiththebrewingindustry

Regardingshorttermliquidity,BUDisaboutthesameinYear6asinYear2—moreover,itsratiosareconsistentlybelowtheindustry.Whilethereisnodeterioration,thefirmislessliquidthanisnormalfortheindustry.ItisimportanttodeterminewhyBUDisabletomaintainsuchatightshorttermposturecomparedtotherestoftheindustry.BUD'slongtermdebtposturehasimprovedslightlyovertimeasevidencedbythedebttoassetratios.Theindustryalsohasimproved,soonarelativebasistheyareaboutthesameasinYear2.BUD'sinterestcoverageratiohasdeclinedinabsolutetermsandrelativetotheindustry.InYears2,3,and4,BUDhadcoverageofabout12-13versus7-8fortheindustry;inYear6itisabout10timesforBUDversus11fortheindustry.BUD’scashflowratioshaveimprovedalongwiththeindustry.TotalassetturnoverhasincreasedforbothBUDandtheindustry.Theprofitmarginperformancefortheindustryissomewhatbetter—itwentfrom5.36percentto6.16percent,whileBUDisstable(6.30%versus6.17%).Notably,thisstabilityintheprofitmarginisimpressiveconsideringthesalesgrowthandindustrymarketsharegainedbyBUDduringthistimeperiod.Finally,thereturnontotalassetsforBUDhasincreasedovertimeandhasbeenconsistentlyabovethereturnsfortheindustry.Insummary,BUDislessliquidthantheindustry,butisstableonarelativebasis.Itsfinancialriskismixed—itsdebtratiosdeclined,itsinterestcoveragedeclinedonanabsoluteandrelativebasisalthoughitisstillaveryhealthy10times,anditscashflowratiosimproved.BUD'sprofitmarginisconstantbutdeclinedonarelativebasis,anditsreturnontotalassetsimprovedbutwasconstantonarelativebasis.

ProblemCC-1—concluded

3. AnheuserBuschcomparedwiththeS&P400

BUDhasmaintaineditsshorttermliquidityposition,butitsliquidityratiosareconsistentlybelowthemarket.Itslongtermfinancialleveragedeclinedovertimewhileitsmarketleverageincreased—byYear6,BUDwasbetteronthisfactor.Thispositionisalsoreflectedininterestcoverage,whichdeclinedsomewhatbutisstillmorethantwicethemarketnumber.Also,thecashflowratiosforBUDarethesameorlowerthanthemarketinYear2,butaresubstantiallybetterabsolutelyandrelativetothemarketinYear6.BUD'stotalassetturnoverincreasedwhilethemarketdeclinedslightlyoverthisperiod.Thenetprofitmarginperformanceissimilar—themarketandBUDexperiencedsmalldeclinesovertheperiod.BUDdidhavealargerreturnonassetsinYear2andincreaseditsspreadbyYear6whenitwastwiceaslarge(8.89percentvs.3.97percent).Insummary,withtheexceptionoftheshorttermliquidityratios,BUDissuperiorinanabsolutesenseandgenerallyexperiencedabettertrend.Asaresult,thefirmhasmuchlowerfinancialriskandamuchhigherreturnonassets.

b. ThereshouldbenoproblemwithextendingcredittoBUDgivenitsdecliningdebtratios,itsstronginterestcoverageratios,anditsstrongcashflowratiothatisalreadybetterthanthemarketandtrendingupwardcomparedtoadeclineforthemarket.Withtheloneexceptionoftheinterestcoverageratio,whichdeclinedinYear6,allthefinancialriskmeasureshaveimprovedonanabsolutebasisandrelativetothemarket.Eveninthecaseofthecoverageratio,itisstillquitelargeandabout2.5timesthecoveragefortheaggregatemarket.Therefore,onewouldnotexpectachangeinthecreditratingofBUDbasedonthesefinancialratios.

ProblemCC-2(65minutes)

a. [Note:ForecastdatatakenfromExhibitIofCase10-5.]

ABEXChemicals

ForecastedOperatingIncome

ForYearEndedYear10

Petrochemicals Pipeline Total

Segmentrevenues(volumexprice)

4,950x$0.470 $2,326.50

6,290x$0.187 $1,176.23

Segmentoperatingcosts(volumexcost)

4,950x$0.37 1,831.50

$1,176.23x(1-27%) 858.65

Segmentoperatingincome $495.00 $317.58

Totaloperatingincome($495+$317.58) $812.58

b. Additionalinformationnecessarytoprepareaforecastofnetincomeincludes:

1. Scheduleofdebtoutstandingincludinginterestcostestimates.

2. Estimateforadministrationcost(suchasthetrend).

3. Estimateforrentalexpenses.

4. Estimateforinvestmentincome.

5. Taxrates.

6. Scheduleofpreferredsharesoutstandingincludingdividendrates.

7. Averagenumberofsharesoutstanding.

Thisinformationcanbeobtainedfromthefollowingprimarysources:(1)quarterlyreports,(2)annualreports,(3)companyinformationpackages,(4)prospectuses,(5)managementinterviews,(6)10-Kfilings,and(7)10-Qfilings.

ProblemCC-2—concluded

c. 1. IncrementalEPS= Incrementaloperatingincomex(1-taxrate)

Sharesoutstanding

VolumexPriceincreaseperpoundx(1-taxrate)

Sharesoutstanding

=[4,950lbs.x($0.47)(8%)x(1-0.44)]/305

=$0.34pershareincrease

2. IncrementalEPS= Volumeincreasex(Price-Cost)x(1-taxrate)

Sharesoutstanding

=[(4,950lbs.)(8%)x($0.47-$0.37)x(1-0.44)/305

=$0.07pershareincrease

Inthiscase,an8%increaseinpricehasamuchgreaterimpactthanan8%increaseinvolume.Thisisbecausehighervolumecreatesanincreaseinvariablecosts.Ifcostsriseasmuchasprices,thentheimpactonEPSisreduced.Notethathigherpricesoftencoincidewithhighervolumeifbothoccurduetoanincreaseindemandthatisgreaterthananincreaseincapacity.Thisiswhyitisparticularlyimportantforanalyststopayattentiontoindustryconditionsofsupply,demand,capacity,inventories,prices,andcosts.

ProblemCC-3(75minutes)

a. Theprincipallimitationofthefourratioscomputedisthattheysaylittleaboutthecompany'sabilitytogeneratecash.Itisalackofcashthatultimatelyforcesacompanyintobankruptcy.First,let’slookatthequickratio.NoticethatFGCisabletomaintainitsquickratioovertheperiod.Thisoccurswhileitsworkingcapitaldeclinesfrom$448.7millioninYear4tonegative$8.3millioninYear5to$5.4millionbythemiddleofYear6.Similarly,neitherthereceivablesturnovernortheinventoryturnoverhelpinrevealingthisdeclineinliquidity.Addingtothedeclineinliquidityisthecompany’sincreasingrelianceonexternalfinancing.Thisisevidencedbythemarkedincreaseinlong-termdebt.Again,thefourratioscomputedignorethisimplicationtoliquidity—thatis,interestcostsmustbepaid.Finally,itsoperatingmargintrendoverthe21/2yearsisequallydeceptiveinnotrevealingthedeclineinliquidity.Thisisprimarilybecausethismarginiscomputedbeforeinterestandtaxes.Consequently,itfailstoreflectthedramaticincreaseininterestexpensesoverthisperiod.Theoperatingprofitmarginafterinterestexpensewouldreflectthisdeclineinliquidity.Insummary,thesefourratiosdonotreflectthedeclineinFGC’sliquidity.

Severalbettermeasuresofliquidityandoperatingperformanceexist(oratleastcansupplementthefourratioscomputed).TherearetwosuchmeasuresreportedinFGC’s"SelectedCashFlowData"schedule:(i)Cashflowfromoperationsand(ii)Netliquidbalance.

TheoperatingcashflowdataclearlyshowadeclineinFGC'sliquidityovertherecent21/2years.Moreover,thecomponentsofthismeasurealsoevidenceadeclineinliquidity.Specifically,noticethatearningsfromcontinuingoperationsfallsfrom$173.2millionforYear4toonly$10.4millionforthefirst6monthsofYear6.Furthermore,noncashworkingcapital—whichdeclinesinYears4and5(therebyactingasasourceofcash)—increasesinthefirsthalfofYear6,reflectingafurther$84.1milliondrainoncash(admittedly,seasonalfactorscouldexplainsomeofthisdecline).

Thenetliquidbalancereflectsthatpartofworkingcapitalthatismostliquid—itexcludesitemsofworkingcapitalthatarelessliquid.InthecaseofFGC,thenetliquidbalancewasalreadynegativeinYear4,evenbeforetherecapitalizationofFGC.ThissuggeststhatFGCwasoverdependentonshorttermexternalsourcesoffinancing.Thismeasureremainednegativethroughoutthisperiod.Indeed,thenetliquidbalanceappearstobeagoodleadingindicatorofdefaultrisk—atleastinthecaseofFGC.

Otherpotentiallyusefulmeasuresaretimesinterestearned,returnonassets,andreturnoncommonequity.Timesinterestearnedreflectstheabilityofoperatingincometocovertheexpenseoflong-termdebt.Thecomputationofthisratiorevealsadramaticdeclinefromacomfortable5.4inYear4toonly1.1inthefirsthalfofYear6.Avaluelessthan1.0isaredflagforsolvencyrisk.Returnonassetsandreturnon

ProblemCC-3—concluded

equityalsoreflectFGC'slongtermfinancialprospects.Withoutsufficientreturns,thecompany'sdebtholderscannotexpectsecurityfortheirclaimsonincomeorassets.Returnonassetsslippedfrom10.9%inYear4to6.4%inthefirsthalfofYear6.BothmetricsrevealthedeclineinFGC’sliquidity.

c. Basedontheinformationprovided,youshouldseektosellthebonds.Indeed,youshouldprobablyacceptbidpricesaslowasthelower50s.Thebondsaresubordinateddebentures,meaningtheydonothavefirstclaimonassetsincaseofbankruptcy.Also,thedefaultriskforthesebondsappearstobeunacceptablyhigh.Industryconditionsappeartohavedeterioratedduetoacombinationoflowerdemandandincreasedsupply.Reducedcapacityutilizationhasputdownwardpressureonprices.ThefactthatFGC'smajorcompetitorisalsohighlyleveragedmayreducetheriskofunbridledpricecompetition.Ontheotherhand,itcouldleadtoaggressivepricingpoliciesintheeventbothcompaniesbecomedesperatetospursalestoservicetheirlargedebtloads.Theindustryiscyclical,sobeinghighlyleveragedplacesanevengreaterriskonFGC.Italsocallsintoquestionthepastdecisionsofmanagement.GiventhepoorabilityofFGCtogeneratecashanditsweaknetliquidbalance—alongwithitsheavyrelianceonexternal,shorttermfinancing—youarewelladvisedtorecommendthesaleofitsbonds.

CASES

CaseCC-1(90minutes)

Theanswerstothecasedependonthecompanyselectedforanalysis.ThecomprehensivecaseanalysisofCampbellSoupCompanyshouldserveasexcellentguidanceforastudentincompletingtherequirementsofthiscase.

CaseCC-2(120minutes)

a. $7,000=Netincome-Cashdividends=$10,000-$3,000

(Note:The10%stockdividendhasnoeffectontotalstockholders'equity.)

b. Twoaccountsareincreasedbythefollowingamounts:

Property,plant&equipment $1,000

Longtermdebt $1,000

Theseaccountsareincreasedtorecordtheseleasesatthepresentvalueoftheirfuturerentalpayments.

Theseleasesarereflectedinthestatementofcashflowsasaseparatedisclosureasasignificantnoncashactivity.

c.

Long-TermDebt(includescurrentportion)

RepaidinYear6 2,500

16,200 Beginningbalance

7,500 IssuanceperSCF

4,800 FromTROacquisition

1,000 Capitallease(noncash)

27,000 Endingbalance

ZETA'sstatementofcashflows(SCF)reports"Reductioninlong-termdebt"at$1,500.Theonlywayanexternalanalystcouldarriveatthisamountistoassumethatthecapitalleaseisincludedinthe$7,500issuanceoflong-termdebt.Unresolvedisthequestionofwhythecapitalizedlease,anoncashtransaction,isseeminglyincludedinthisamount.

CaseCC-2—continued

d. 1.and2.

ZETA'schangeinaccountingforinventorieshadthefollowingeffects:

(1) (2)

BalanceSheet Effectofchange Analyticalchange

tonewmethodin torestateYear5

Year6 tonewmethod

Inventories $2,800* $2,000

Incometaxespayable 1,400** 1,000

Retainedearnings 1,400 1,000

* Cumulativepre-taxeffectof$2,000pluspre-taxeffectonYear6incomefromcontinuingoperations(pernote5,statutorytaxrateis50%).

** 50%of$2,800restatementofcumulativeincome.

RetainedEarnings

Beginningbalance $0 $700*

Netincome 1,400 300*

Endingbalance $1,400 $1,000

* ProformaincomedatashowsthatYear5incomefromcontinuingoperationsisincreasedby$3