Self-Study Exercise 1

EF4314 Self-study Exercise 1
Question 1
Applying Accounting Relations: Balance Sheet, Income Statement, Equity Statement,
and Cash Flow Statement
The following questions pertain to the same firm.

a. The balance sheet reports $400 million in total assets and $250 million in shareholders'
equity at the end of a fiscal period. What are the firm's liabilities?
b. The income statement reports $30 million in net income and $175 million in total
expenses for the period. What are the firm's revenues?
c. The shareholders' equity statement has a beginning balance for the period of $230
million and the firm had a net payout to shareholders of $12 million. What is the firm's
comprehensive income for the year? How much income is reported in the equity
statement rather than the income statement?
d. The firm reported $130 million increase in cash over a year. It also reported $400
million in cash flow from operations, and a net $75 million paid out to claimants in
financing activities. How much did the firm invest in operations?
Question 2
Preparing an Income Statement and Statement of Shareholders' Equity
From the following information for the year 2012, prepare an income statement and a statement
of shareholders' equity, for a company with shareholders' equity at the beginning of 2012 of
$3,270 million. Amounts are in millions.
Also, calculate comprehensive income and net payout. Income taxes are negative. How can
this be?
Question 3
Violations of the Matching Principle
Generally accepted accounting principles (GAAP) notionally follow the matching principle.
However, there are exceptions. Explain why the following accounting rules, required under
GAAP, violate the matching principle.
a. Expenditures on research and development into new drugs are expensed in the income
statement as they are incurred.
b. Advertising and promotion costs for a new product are expensed as incurred.
c. Film production costs are expensed prior to the release of films to theaters.
Question 4
Using Accounting Relations to Check Errors
A chief executive reported the following numbers for fiscal year 2012 to an annual meeting of
shareholders (in millions):
Show that at least one of these numbers must be wrong because it does not obey accounting
relations.
Question 5
Calculating a Price from Comparables
A firm trading with a total equity market value of $100 million reported earnings of $5 million
and book value of $50 million. This firm is used as a comparable to price an IPO firm with
earnings per share of $2.50 and book value per share of $30 per share. Neither firm pays
dividends. What per-share IPO price does the comparable firm imply?
Question 6
Unlevered (Enterprise) Multiples
A firm reported $250 million in total assets and $140 in debt. It had no interest-bearing
securities among its assets. In the income statement it reported $560 million in sales. The firm's
80 million shares traded at $7 each. Calculate
a. The price-to-book ratio (P/B)
b. The unlevered price-to-sales ratio (P/S)
c. The enterprise price-to-book ratio
Question 7
Measuring Value Added
a. Buying a stock. A firm is expected to pay an annual dividend of $2 per share forever.
Investors require a return of 12 percent per year. The firm's shares trade for $19 each.
What is the value added for investors by buying a share at $19?
b. An investment within a firm. The general manager of a soccer club is considering
paying $2.5 million per year for five years for a "star" player, along with a $2 million
upfront signing bonus. He expects the player to enhance gate receipts and television
advertising revenues by $3.5 million per year with no added costs. The club requires a
9 percent return on its investments. What would be the value added from the acquisition
of the player?
Question 8
Share Issues and Market Prices: Is Value Generated or Lost by Share Issues?
a. XYZ Corporation had 158 million shares outstanding on January 1, 2012. On February
2, 2012, it issued an additional 30 million shares to the market at the market price of
$55 per share. What was the effect of this share issue on the price per share?
b. On February 28, 2012, directors of the same XYZ Corporation exercised stock options
to acquire 12 million shares at an exercise price of $30 per share. Prior to this
transaction the stock traded at $62 per share. What was the effect of the share issue to
the directors on the per-share value of the firm?

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EF4314 Self-study Exercise 1

The following questions pertain to the same firm.

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