财务报表分析与运用 杰拉尔德 课后答案英文版第七章

1、Chapter 7 SolutionsOverview:Problem LengthProblem #sS2, 3, 5, 8, and 10M1, 4, 6, 7, 9, 11, 12, and 13AppendicesM7A-1 and 7B-1L7A-2 and 7B-21.MExhibit 7S-1 contains the calculations required.Exhibit 7S-1. ChevronAdjustments for Capitalization of InterestAmounts in $ millionspart cYear1995199619971998

2、19991999/95As reportedInterest expense $ 401 $ 364 $ 312 $ 405 $ 472 1.18Pretax income 1,789 4,740 5,502 1,834 3,648 2.04Net income 930 2,607 3,256 1,339 2,070 2.23Capitalized interest 141 108 82 39 59 Amortization of capitalized interest 47 24 28 35 9 a. CalculationsEBIT$2,190 $5,104 $5,814 $2,239

3、$4,120 Times interest earned5.4614.0218.635.538.731.60b. AdjustedNet capitalized interest $ 94 $ 84 $ 54 $ 4 $ 50 After 35% income tax 61 55 35 3 33 Interest expense 542 472 394 444 531 0.98EBIT 2,237 5,128 5,842 2,274 4,129 (i) Times interest earned4.1310.8614.835.127.781.88(ii) % reduction from re

4、ported ratio-24.4%-22.5%-20.4%-7.4%-10.9%Pretax income$1,695 $4,656 $5,448 $1,830 $3,598 2.12(iii) Net income 869 2,552 3,221 1,336 2,038 2.34% reduction from reported-6.6%-2.1%-1.1%-0.2%-1.6%b.(iv)Expensing all interest reduces net income for each year. However the effect diminishes over time.c.(i)

5、Because the amount of interest capitalized declined over time, restatement reduces the rate of increase in interest expense.(ii)While the interest coverage ratio is lower after restatement, its trend improves due to the lower growth rate of interest expense.(iii)Both pretax and net income are lower

6、after restatement but their growth rate improves due to the lower growth rate of interest expense.d.The restated data are more useful for financial analysis because they are based on actual interest expense. They provide better comparability with firms that do not capitalize interest. 2.Sa.(i)Intere

7、st cost can be capitalized on borrowings directly associated with the project or when the company has debt equal to or exceeding the cost of construction.(ii) Start-up costs must be expensed under U.S. GAAP.(iii) Shipping costs are considered part of the cost of acquisition.(iv) Increases in the mar

8、ket value of land and buildings may not be recognized under U.S. GAAP.b.(i)While the benchmark treatment under IAS 23 is to expense all interest, capitalization of borrowing costs directly attributable to a project is an allowed alternative.(ii) Same as U.S. GAAP except that the benchmark The capita

9、lization of interest is an allowed alternative under IAS 23 (paragraph 11)(iii) Same as U.S. GAAP.(iv) While revaluation is an allowed alternative under IAS 16, it must be applied to all assets in a particular class and could be selectively applied to a particular project.3.Sa.Under SFAS 86 (text pa

10、ge 242), computer software development costs can be capitalized only when economic feasibility has been established.b.Under IAS 38 (paragraph 45), intangible assets such as computer software can be recognized when the enterprise can demonstrate technical and economic feasibility. 4.MExhibit 7S-2 con

11、tains the calculations required by parts a through c.Exhibit 7S-2EricssonAmounts in SEK millions199719981999Development costs for software to be sold:Opening balance 7,398 10,744 Capitalization 5,232 7,170 7,898 Amortization (3,934) (3,824) (4,460)Writedown (989)Year-end balance 7,398 10,744 13,193

12、Development costs for software for internal use:Opening balance Capitalization 1,463 Amortization (152)Year-end balance 1,311 a. Under Swedish GAAP:Net sales 167,740 184,438 215,403 Pretax income 17,218 18,210 16,386 Total assets 147,440 167,456 202,628 Stockholders equity 52,624 63,112 69,176 Avera

13、ge total assets157,448 185,042 Average equity 57,868 66,144 Average stockholders equity 57,868 66,144Asset turnover1.171.16Pretax ROE0.310.25b. Adjustments:Development costs for software to be sold:Capitalization 5,232 7,170 7,898 Amortization (3,934)(3,824) (4,460)Write down (989)Net effect 1,298 3

14、,346 2,449 Development costs for software for internal use:Capitalization 1,463 Amortization (152)Net effect - - 1,311 Total pretax effect 1,298 3,346 3,760 Adjusted pretax income 18,516 21,556 20,146 (i) % change8%18%23%Exhibit 7S-2 (continued)Year-end balances:Software to be sold 7,398 10,744 13,1

15、93 Internal use software 1,311 Total 7,398 10,744 14,504 Less: deferred tax 35% (2,589) (3,760)(5,076)Increase in equity 4,809 6,984 9,428 Adjusted total assets154,838 178,200 217,132 (ii) % change5.0%6.4%7.2%Adjusted equity 57,433 70,096 78,604 (iii) % change9.1%11.1%13.6%c:Adjusted average assets1

16、66,519 197,666 Adjusted average equity 63,764 74,350 (i) Adjusted asset turnover1.111.09(ii) Adjusted pretax ROE0.340.27d.The adjustments for Ericsson show that capitalization of software development costs can have a significant effect on reported income and equity, and on financial ratios. Therefor

17、e comparability requires that all firms be restated to the same basis.e.The amounts capitalized highlight expenditures and enable the analyst to inquire about the new products under development. The amortization period used may be useful as a forecast of the useful life of the product. In both cases

18、 (capitalization and amortization) significant changes from prior periods may provide useful signals of impending change.5.Sa.The capitalization of the investment in displays delays their impact on income as compared with expensing. In addition, cash from operations is permanently increased as the e

19、xpenditures are classified as cash flows for investment. Finally, if these expenditures are volatile, capitalization and amortization smoothes the impact on reported income.b.(i)In 2000, the capitalized amount increased by $1,648,000. Had promotional displays been expensed, net income would be $1,07

20、1,200 (after 35% tax) lower. Expensing would have reduced net income by 7.4% ($1,071.2/$14,467).(ii) Shareholders equity would be reduced by 65% of $10,099,000 equal to $6,564,350 or 7.1%.(iii) Reported return on (average) assets equals $14,467/($166,656 + $140,609)/2 = 9.42%Adjusted return on (aver

21、age) assets equals ($14,467 $1,071)/($166,656 - $10,099) + ($140,609 - $8,451)/2 = 9.28% as assets must be reduced by the investment in promotional displays.6.Ma.Brand names are clearly an asset. However, it is not clear that these assets should be shown on corporate balance sheets.One advantage of

22、recognizing brand names is completeness; a balance sheet that ignores major firm assets is of limited use for analysis. Another advantage is that the cost of acquiring or developing a brand name should be recorded as an investment (asset) in order to properly match revenues and expenses. The major d

23、isadvantage of brand name recognition is the difficulty of proper measurement. As each brand name is unique, market transactions are not available to value the brand. Thus, the value recognized is subjective; differences across firms may reflect either real differences in the value of the brands or

24、different measurement decisions. One approach involves capitalization of the acquisition cost (for purchased brands) or the advertising and other development costs (for internally developed brands). In the latter case, it is unlikely that the value of the brand will be equal to the cost of developme

25、nt. A successful brand will be worth much more than the cost of its development; an unsuccessful brand may have no value at all. (These characteristics may also describe acquired brands.)Further, the value of brands changes over time. Despite the quotation from Laing, brands can also become dilapida

26、ted if they are neglected, if the advertising is poor, or if the products are defective. The value of brands will also be affected by changes in market conditions, e.g., pricing decisions and the inroads made by generic products. From the point of view of financial analysis, therefore, it is not cle

27、ar that reporting managements estimate of brand value would be helpful. The proof of the pudding is in the eating and a valuable brand should be highly profitable. The evaluation of that profitability might be better left to the marketplace.b.The advantage of amortization is that the income statemen

28、t should reflect all expenses that help produce income. If profitability is due to the brand name, the amortization of its acquisition cost should be an element of expense. On the other hand, given the subjectivity of brand name valuation, the amortization amount (also affected by the choice of meth

29、od and life) may be a poor measure of the expired value. In addition, brand names may not decline in value over time; any decline is likely to be irregular.For purposes of analysis, therefore, the amortization of brand name intangible assets should be excluded from income. The evaluation of profitab

30、ility, however, should consider the role of brand names. Exhibit 7S-3Norsk Hydro1998 Reconciliation from Norwegian GAAP to US GAAPAmounts in NOK millionsPretax income:Shareholders equity:Norwegian GAAP 6,292 Norwegian GAAP 43,532 Capitalized exploration costs (107)Property, plant, equipment 7,999 De

31、preciation (729)Other differences (net) (3,290)Capitalized interest 614 US GAAP 48,241 Other differences (net) (239)US GAAP 5,831 Total debt 30,842 Parts a and b:(i) Pretax ROE:(ii) Debt-to-equity ratio:Norwegian GAAP14.5%Norwegian GAAP0.71US GAAP12.1%US GAAP0.64Part c:Capitalized exploration costs

32、(107)Property, plant, equipment 7,999 Depreciation (729)Deferred tax 35% (2,800)Capitalized interest 614 Net effect on equity 5,199 Net effect (222)Norwegian GAAP adjusted:Pretax income 6,070 Shareholders equity: 48,731 (i) ROE12.5%(ii) Debt-to-equity ratio:0.637.M Exhibit 7S-3 (previous page) conta

33、ins the calculations required by parts a through c.d.Capitalization policy can significantly affect both pretax income and shareholders equity. Capitalization rather than expensing always increases equity and, therefore, reduces the debt-to-equity ratio. The effect on ROE varies as capitalization in

34、creases both return and equity.In the case of Norsk Hydro, Norwegian GAAP adjusted to exclude non-capitalization produces the lowest debt-to-equity ratio as the expensing of exploration, environmental, and interest costs increases reported equity. ROE is highest under Norwegian GAAP (unadjusted) as

35、income is highest and equity lowest. US GAAP produces the lowest ROE as income is lowest and equity highest.e.The negative adjustment means that exploration costs were higher under US GAAP than under Norwegian GAAP. This suggests that exploration costs that Norwegian GAAP expenses (but US GAAP capit

36、alizes) were below normal. As a result the amortization of past expenditures capitalized under US GAAP exceeded the current years capitalized expenditures.8.Sa.(i)Given rapidly rising expenditures, Nokia will report higher net income as current year capitalization will exceed amortization of prior y

37、ear capitalized amounts.(ii)Regardless of trend, Nokia will report higher cash from operations as expenditures are reported as cash for investment and never affects cash from operations (see Figure 7-4 on page 232).(iii)Capitalization of development costs results in higher equity for Nokia, regardle

38、ss of the trend of expenditures.b.(i)Capitalization of development cost increases operating income (EBIT) and, therefore, the interest coverage ratio.(ii)Higher equity under capitalization reduces the debt-to-equity ratio.c.These steps are described in Box 7-2 of the chapter. One can adjust Nokias r

39、eported amounts to those for an “expensing” firm by: Eliminating the capitalized costs from assets Eliminating the capitalized costs (net of taxes) from equity Deducting the (tax-adjusted) difference between expenditures and amortized cost from income Transferring expenditures from CFI to CFOAlterna

40、tively, one can adjust Ericssons reported results by assuming that it capitalizes development costs and: Choosing an appropriate amortization period Increasing assets by the unamortized portion of previous years expenditures Increasing equity by the (tax adjusted) assets calculated above Adding the

41、(tax-adjusted) difference between expenditures and amortized cost to income Transferring expenditures from CFO to CFI9.M Exhibit 7S-4 (page 10) contains the calculations required by parts a and b.a.R&D is clearly very important to Pfizers business. Its R&D expenditures are very high relative to sale

42、s and the percentage has been growing even though sales growth is rapid. These expenditures, at least in the short run, reduce Pfizers reported earnings given the long time lag between discovery and profitable sales of prescription drugs.c.Capitalization and amortization of R & D increases net incom

43、e each year, the expected result given rising expenditures. There is little impact on ROE as higher equity offsets higher net income. (This latter result is not surprising given the findings of Sarath et. al, discussed in footnote 3 on page 233.)d.(i)Asset turnover will decline under capitalization

44、due to the higher level of assets; sales are unchanged.(ii)Cash from operations will rise under capitalization as R&D expenditures will be classified as investing cash flows and will never be reported as a component of cash flows from operations.Exhibit 7S-4PfizerYears ended December 31 Amounts in $

45、millions19951996199719981999Net sales$ 8,684 $ 9,864 $ 10,739 $ 12,677 $ 14,133 R & D expense 1,340 1,567 1,805 2,279 2,776 a. % sales15.4%15.9%16.8%18.0%19.6%Pretax income$ 2,017 $ 2,528 $ 2,867 $ 2,594 $ 4,448 Tax expense (609) (758) (775) (642) (1,244)Total assets 12,339 14,251 14,991 18,302 20,5

46、74 Average assets 11,568 13,295 14,621 16,647 19,438 Shareholders equity 5,506 6,954 7,933 8,810 8,887 Average equity 4,915 6,230 7,444 8,372 8,849 Asset turnover0.750.740.730.760.73b. Adjustments3 year amortization:1/3 current year$ 602 $ 760 $ 925 1/3 prior year 522 602 760 1/3 2nd prior year 447

47、522 602 Total amortization$ 1,571 $ 1,884 $ 2,287 Expense less amortization (234) (395) (489)Adjusted pretax income$ 3,101 $ 2,989 $ 4,937 Adjusted tax expense (857) (780) (1,415)(i) Adjusted net income$ 2,244 $ 2,209 $ 3,522 Reported net income 2,092 1,952 3,204 R & D asset (net)$ 1,239 $ 1,491 $ 1

48、,726 $ 2,121 $ 2,610 Adjusted total assets#REF!#REF!#REF!#REF!#REF!Adjusted ATA#REF!#REF!#REF!#REF!#REF!Adjusted asset turnover#REF!#REF!#REF!#REF!#REF!Earnings increment $ - $ - $ 152 $ 257 $ 318 Cumulative 640 640 792 1,049 1,367 R & D asset after-tax 805 969 1,122 1,379 1,697 Shareholders equity

49、5,506 6,954 7,933 8,810 8,887 Adjusted equity$ 6,311 $ 7,923 $ 9,055 $10,189 $10,584 Adjusted average equity 5,637 7,117 8,489 9,622 10,386 (ii) Adjusted ROE26.4%23.0%33.9%Reported ROE28.1%23.3%36.2%10.Sa.Because SB expenses the cost of developing new drugs, their carrying amount on SBs balance shee

50、t is extremely low. As a result, the proceeds of sale are virtually all profit.b.The drugs were developed over a number of years and the income from their sale was really earned during that time period rather than completely in the year of sale.c.For valuation purposes, it would be more logical to s

51、pread the sale income over the time period during which the drug was developed. Valuation based on 2000 income that includes the entire gain will overvalue the company.11.Ma.Debt to total assets= $15,431/$65,585= 23.5%Debt to equity= $15,431/$32,660= 47.2%b.Debt to total assets= $15,431/$61,056= 25.3%Debt to equity= $15,431/$28,131= 54.8%c.(i)Because the revaluation increment increases equity, and has no effect on income, ROE is reduced.(ii)Because the revaluation increment increases assets, and has no effect on sales, asset turnover is reduced.(iii)There is no effect on EPS as income is un