财务报表分析与运用 杰拉尔德 课后答案英文版第十章

1、 Chapter 10 - SolutionsOverview:Problem LengthProblem #sS1 - 2, 6 - 22, and 25M3 - 5, and 23 - 241.Sa.When full-coupon debt is issued, interest paid reduces cash from operations (CFO). When zero-coupon debt is issued, however, no cash interest is paid. CFO is unaffected, and is therefore higher than

2、 when full-coupon debt is issued. In addition, when imputed interest on zero-coupon debt is tax deductible, CFO is further increased by the tax benefit.b.When full-coupon debt is issued, the proceeds are included in cash from financing (CFF). When that debt matures, the amount paid reduces CFF. Assu

3、ming the debt is issued and redeemed at par, the net effect on CFF is zero over the life of the debt.Zero-coupon debt is issued at a discount; CFF is below the full-coupon case. However at maturity the full face amount is paid (same as full-coupon case). The net amount of CFF (outflow) is therefore

4、greater than when full-coupon debt is issued.c.No effect.d.Interest on the zero-coupon bond rises each year as the carrying amount rises, increasing the base on which each years interest expense is computed. All other things being equal, net income declines each year.2.S(i)Net income declines as int

5、erest expense increases, reflecting the higher level of interest rates.(ii)The market value of the firms debt should remain unchanged. As the interest rate adjusts to changes in market rates, investors will pay the face amount for the debt, assuming no change in credit risk.3.Ma. Reported dataAMR Co

6、rpUS Airways1998199919981999Cash and short-term investments$ 2,073 $ 1,791 $ 1,210 $ 870 Net receivables 1,543 1,134 355 387 Inventories 596 708 228 226 Other current assets 663 791 571 613 Current assets$ 4,875 $ 4,424 $ 2,364 $ 2,096 Accounts payable 1,152 1,115 430 474 Accrued liabilities 2,122 1

7、,956 1,016 1,276 Air traffic liability 2,163 2,255 752 635 Notes payable and current portion LT debt 202 538 71 116 Current liabilities$ 5,639 $ 5,864 $ 2,269 $ 2,501 Net working capital (764) (1,440) 95 (405)Current ratio0.860.751.040.84Quick ratio0.640.500.690.50Cash ratio0.370.310.530.35b.Unlike

8、other payables, the air traffic liability will not require cash outlays (other than low marginal costs); instead this obligation is satisfied as customers use their tickets on flights. The air traffic liability should therefore be excluded from computations of short-term liabilities.c. Adjusted data

9、AMR CorpUS Airways1998199919981999Current liabilities (reported) $5,639 $5,864 $2,269 $2,501 Air traffic liability (2,163) (2,255) (752) (635)Current liabilities (adjusted) $3,476 $3,609 $1,517 $1,866 Net working capital (adjusted)1,399 815 847 230Current ratio1.401.231.561.12Quick ratio1.040.811.03

10、0.67Cash ratio0.600.500.800.47As expected, all of American Airlines liquidity measures improve when the air traffic liability is removed from current liabilities.However the adjustments in the table above overstate the firms liquidity, especially for AMR. A portion of the air traffic liability relat

11、es to frequent flyer programs (37% of AMRs 1999 liability and 13% of US Airways 1999 liability). AMRs frequent flyer obligation is based on the incremental costs of fuel, food, and reservations/ticketing costs (US Airways approach is similar but includes insurance and other compensation). Thus some

12、portion of the air traffic liability does represent near-term cash outlays.d.US Airways short-term liquidity position appears to be stronger than Americans at December 31, 1999 as its current ratio and cash ratio are both higher and the quick ratio is that same. However, the higher current and quick

13、 ratios evaporate when the air traffic liability is eliminated. This liability is lower for US Airways (relative to total current liabilities). The adjusted data show that all three liquidity ratios are higher for AMR than for US Airways.While not part of the question, it is worth noting that two of

14、 the three 1998 ratios are higher for US Airways than for AMR. While the ratios of both companies declined in 1999, the decline in US Airways ratios was greater.e.The 1999 decline in US Airways air traffic liability indicates that fewer customers were willing to purchase tickets in advance, presumab

15、ly due to the deterioration in the companys financial position. In contrast, Americans air traffic liability increased, although the growth should be compared to past fluctuations and to growth for the rest of the industry.US Airways filed for bankruptcy in August 2002.4.(Ma.Proceeds equal $100,000/

16、(1.12)5 = $56,742b.20002001200220032004EBITCFO beforeinterest & taxesInterest expenseCFOTimes interestearned$50,00060,0006,80960,0007.34$50,00060,0007,62660,0006.56$50,00060,0008,54160,0005.85$50,00060,0009,56660,0005.23$50,00060,00010,71460,0004.67Times interestearned (cashbasis)Infinite, since no

17、interest is paid. In 2004, when the bond is retired, the payment will be reported as a financing cash outflow.c.For a full-coupon bond, annual interest expense paid in cash would be $56,742 x .12 = $6,80920002001200220032004EBITCFO beforeinterest & taxesInterest expenseCFOTimes interestearnedTimes i

18、nterestearned (cash basis)$50,00060,0006,80953,1917.348.81$50,00060,0006,80953,1917.348.81$50,00060,0006,80953,1917.348.81$50,00060,0006,80953,1917.348.81$50,00060,0006,80953,1917.348.81d.Cash flow from operations is higher when zero-coupon bonds are issued because interest is never reported as an o

19、perating cash outflow. Note the infinite cash-basis coverage ratio. Interest coverage, however, is lower after the first year, and declines as interest expense increases over time, reflecting the steadily increasing principal amount. Full-coupon bonds (if sold at par) result in a constant cash outfl

20、ow from operations and constant interest expense. Given the Null Companys steady state, the interest coverage ratio is constant on both accrual and cash flow bases.e.Given the tax deductibility of accrued but unpaid interest on zero-coupon bonds, cash flow from operations will be higher for both cas

21、es. The reported cash flow differences will remain unchanged. For the zero-coupon case, cash flow from operations is even more misleading as the firm must generate sufficient cash from operations to repay the debt at maturity. The obligation must be repaid, regardless of its cash flow classification

22、.5.Ma.The $US carrying amount = 1,282/1.37 = $936 million.b.Because the notes have no coupon, they were issued at a discount. The difference between the face amount and the amount computed in part a must be unamortized discount.c.Interest expense (CHF millions) would be 7% X 1,282 = CHF 90d.Adding t

23、he 1999 interest computed in part c to the carrying amount at December 31, 1998: 90 + 1,282 =CHF 1,372 millione.The most obvious explanation is the change in the exchange rate from 1.37 to 1.60.In $US, 1999 interest expense = 7% X $936 = $65 million, making the carrying amount at December 31, 1999 e

24、qual to $1,001 million $936 + $65. This is much closer to the carrying amount computed at 1,618/1.60 = $1,011 million.A second factor is that interest expense in CHF is computed quarterly, based on average rates for each period. The CHF carrying value at December 31, 1999 equals the 1998 carrying va

25、lue + 1999 interest expense + translation loss Swiss franc decline increases the CHF debt amount.f.(i)Cash from operations is higher each year when zero coupon notes are issued because there is no cash interest.(ii) Interest expense rises each year (excluding the effect of exchange rates) because it

26、 is based on a (rising) $US carrying amount.g.The rise in the value of the dollar (decline in Swiss franc) increases interest expense in CHF.6.S(i)Interest expense= Interest paid + change in bonddiscount $8,562= $7,200+ $1,362(ii)= Market rate x face value - discount= .12 x face value - $8,652Theref

27、ore, face value = ($8,562/.12) + $8,652 = $80,000(iii)Coupon rate= interest paid/face value= $7,200/$80,000 = 9%7.Sa.An interest rate rise would decrease the market value of the fixed rate bonds but have no effect on the variable rate bonds. The effect on the fixed rate bonds would depend on their d

28、uration.b.An interest rate rise would increase FIFs interest expense because more than half of its bonds have variable rates as well as a small portion of its bank loans.c.A finance company seeks to match the interest rate sensitivity of its debt to that of its earning assets. It is likely that FIFs

29、 fixed rate receivables increased over the 1996 2000 period and the company increased its fixed rate debt to lock in the spread between fixed rate interest income and expense.d.For a finance company, an analyst is interested in knowing how well the company has matched the interest rate sensitivity o

30、f its financial assets and liabilities. When fair value estimates of financial assets are not provided the fair value of debt has very limited usefulness.8.Sa.FIF has swapped variable rate interest payments for fixed rate (5.2%) payments on a notional amount of $25 million.b.($ thousands)19992000Int

31、erest received$ 1,375$ 1,750Interest paid (1,300) (1,300)Net receipt$ 75 $ 450Interest received = $25 million X receive rateInterest paid = $25 million X 5.2% (both years)c.The swap reduced the sensitivity to changes in interest rates by converting part of the variable rate obligation to one with fi

32、xed rates.9.Sa. and b. In millionsYears19981999% increaseIssue2.14%, 20056,2486,3561.72%1.73%, 20036,1346,3563.61%The yen amounts were obtained by multiplying the dollar amounts by the exchange rate. For example, for the 2.14% bond at December 31, 1998, $55 X 113.60 = 6,248. Note: the yen amounts ar

33、e rounded.c.It appears that both bonds were issued at a discount, creating amortization that increases the carrying amount each year. If we add the 1999 increase to the coupon rate, it appears that the effective interest rates are 3.86% and 5.34% respectively.d.One possible motivation is to finance

34、Japanese operations that are conducted in yen. A second is that, as a well-known company, BMY may be able to borrow more cheaply by borrowing in yen and swapping the yen proceeds into US dollars.10.Sa.The advantage is that, when Takedas share price rose, the debt was converted into equity, strengthe

35、ning the balance sheet. As convertible notes are issued with a conversion price that exceeds the then market price, the company effectively sold common shares at a premium. In addition, because of the conversion feature, the interest rate would have been below the rate required by nonconvertible not

36、es.The disadvantage is that the debt was converted into common shares at a time when Takeda could have sold new shares at a much higher price, obtaining the same capital at a lower cost. b.Reported data (Yen millions)19981999Total debt 44,482 21,338Equity829,381 907,373Total capital873,863 928,711De

37、bt/total capital5.1%2.3%The more than 50% debt decrease was the largest factor reducing the debt/total capital ratio.c.As the market price of Takeda shares was well above the conversion price in 1998, the convertible debt should be classified as equity. After that adjustment (subtracting 22,000 from

38、 debt and adding the same amount to equity) Takedas debt was virtually unchanged from 1998 to 1999 and the decline in the debt/total capital ratio was small:Adjusted data (Yen millions)1998Total debt22,482Equity851,381 Total capital873,863 Debt/total capital2.6% This analysis underscores the discuss

39、ion in the chapter; the analyst must classify convertible debt based on market considerations. Proper classification results in a more appropriate leverage measure.11.Sa.There were two benefits: a lower interest rate than on nonconvertible debt of the same maturity and the possibility of future conv

40、ersion. If conversion takes place Roche will have sold shares for 25% more than their then market price.b.First, you must compute the effective rate on the bonds considering their coupon rate and the discount from face value at which they were sold. Interest expense for 2000 would equal the effectiv

41、e rate multiplied by the issue amount of 101.22 billion Yen (105 x 96.4%) prorated for the portion of the year for which the bonds were outstanding.The carrying amount at December 31, 2000 would equal the issue amount (101.22) plus the excess of interest expense over interest at the coupon rate.c.If

42、 the Yen appreciates (declines) against the Swiss franc, then both interest expense and the carrying amount of the debt will rise (fall).d.At the issue date the bonds should be considered debt because their conversion price is well above the market price. They should be considered equity only when t

43、he market price is sufficiently above the market price that conversion can be considered highly likely.12.Sa.The advantages to Network Associates compared with full-coupon nonconvertible bonds were:(i) Lower interest rate(ii) No cash interest expense(iii) Higher cash flow from operations(iv) The lik

44、elihood that the debt would be converted to common shares before its maturity in 20 yearsb.The first year interest expense on the bonds is $16.44 million 4.75% X $346 million (39.106% X $885). As the bonds were issued in February 1998 interest expense for 1998 would have been below that amount. Assu

45、ming 1998 interest expense of $15 million results in a carrying amount of $361 million ($346 + $15).Thus 1999 interest expense can be estimated as $17.15 million (4.75% X $361 million), close to the amount in the cash flow statement. This represents, therefore, the noncash interest expense for 1999.

46、c.At a common stock price of $66.25, the conversion value of the bonds was: $1,280 million $885 X ($66.25/$45.80) At this price conversion is highly likely and the convertible bonds should be treated as equity.d.At a common stock price of $4, the conversion value of the bonds was $77.3 million $885

47、X ($4/$45.80). At this price conversion is highly unlikely and the convertible bonds should be treated as debt.e.Issuing bonds with an embedded put option has the advantage of lowering the interest rate, as investors will accept a lower rate in return for the put option. The disadvantage is that NET

48、 may be required to redeem some or all of the bonds if bondholders exercise the put option. As option exercise is likely only if the companys financial condition has weakened and the shares are selling at a low price, option exercise may strain the companys financial condition further. 13.S(i)If Mun

49、ich Re had sold its shares of Allianz in June 2000 it would have incurred a large capital gains tax. In addition, it would have had to sell the large block of shares at a discount to the market price of Allianz.By selling the exchangeable notes, Munich has postponed the effective sale date, in the e

50、xpectation that capital gains taxes would be reduced (they were). In addition, assuming the bonds are exchanged for Allianz shares, it sold those shares at a premium of 28% to the market price.The major disadvantage is that Munich Re retains the risk of ownership of Allianz shares. If Allianz shares

51、 do not rise by the maturity date of the notes, Munich will still hold the shares and will be required to repay the debt. In addition, Munich will have to pay interest expense on the notes until they mature or are exchanged, although it will also receive any dividends declared by Allianz. Note: in D

52、ecember 2002 the market price of Allianz shares was 100, far below the 509 price at which the bonds are exchangeable.(ii)If Munich Re had sold notes without the exchange feature it would have had to offer a higher interest rate, incurring higher interest expense. In addition, if the notes are exchan

53、ged, Munich Re will not have to repay the debt and interest expense will decline as bonds are exchanged for Allianz shares.The disadvantage is that Munich Re has given up the possibility of a large increase in the value of Allianz shares. Munich has also lost the flexibility of being able to choose

54、the period in which is recognizes the gain on the sale of Allianz shares.14.Sa.Future redemption depends on conditions in the credit markets at each “reset” date. Investors would choose redemption if more attractive Swiss franc (SFR) investments were available. That would be the case, for example, i

55、f PepsiCos credit rating had declined.PepsiCo would redeem bonds if alternative financing sources are available or if SFR debt is no longer desirable. The latter depends on PepsiCos exposure to SFR assets at that time or, if the debt was swapped for debt in another currency, conditions in the swap market at that time.b.The obligations should be classified as