Ask Basic Finance Expert

problem 1

          The following are partial financial statements for an industrial firm that you are required to analyze and value. All amounts are in millions of dollars.

Income Statement for Fiscal Year 2004

Given in attachment

The firm's statutory tax rate is 35.3%.

(a.) Supply the missing numbers, A to J.

          A =

          B =

          C =

          D =

          E =

          F =

          G =

          H =

           I =

           J =

 

(If you are unable to find out one of these numbers, make a reasonable guess before

proceeding to part (b) of the problem.)

                                                                    
(b)  find out the following for 2004. Use beginning of year balance sheet numbers in denominators.

(i)   Comprehensive income

(ii)  Core operating income, after tax

(iii)  Net financial expense, after tax

(iv)  Return on net operating assets (RNOA)

(v)  Core return on net operating assets (Core RNOA)

(vi)  Net borrowing cost (NBC)

(vii)  Free cash flow

(viii)  Net payments to debt holders and debt issuers

(c) Show that the following relation holds for this firm:

ROCE = RNOA + (Financial Leverage x Operating Spread)

(d) Show that the following relation holds for this firm. Use 3% for the short-term borrowing rate. ROOA is return on operating assets.

RNOA = ROOA + [Operating Liability Leverage x (ROOA - Short-Borrowing Rate)]

                                                           
(e) Forecast ROCE for 2005 for the case where RNOA is expected to be the same as core RNOA in 2004 and the net borrowing cost is expected to be the same as in 2004.

(f) Value the equity under a forecast that

(i) Return on net operating assets in the future will be the same as core

     RNOA in 2004.

(ii) Sales are expected to grow at 4% per year.

(iii) Asset turnovers will be the same as in 2004.

The required return for operations is 9%.

 

(g) find out the intrinsic levered price-to-book ratio and enterprise price-to-book and show that the two are related in the following way:

Levered P/B = Enterprise P/B + [Financial Leverage × (Enterprise P/B - 1)](h) find out the intrinsic trailing levered P/E and the trailing enterprise P/E. Show that the two are related in the following way:

 

Levered P/E = Enterprise P/E + [Earnings Leverage ×   (Enterprise P/E - 1/NBC - 1)]                                                               

problem 2: At the end of the fiscal year ending June 30, 2003, Microsoft reported common equity of $64.9 billion on its balance sheet, with $49.0 billion invested in financial assets (in the form of cash equivalents and short term investments) and no financing debt. For fiscal year 2004, the firm reported $7.4 billion in comprehensive income, of which $1.1 billion was after-tax earnings on the financial assets.

          This month Microsoft is distributing $34 billion of financial assets to shareholders in the form of a special dividend.

a.     find out Microsoft's return on common equity (ROCE) for 2004.

b.     Holding all else constant what would Microsoft's ROCE be after the payout of $34 billion?

c.      Would you expect the payout to increase or decrease earnings growth in the future? Why?

d.     What effect would you expect the payout to have on the value of a Microsoft share?

Attachment:- Assignment_Download.docx

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M914274
  • Price:- $70

Priced at Now at $70, Verified Solution

Have any Question?


Related Questions in Basic Finance

Question utilizing the concepts learned throughout the

Question: Utilizing the concepts learned throughout the course, write a Final Paper on one of the following scenarios: • Option One: You are a consultant with 10 years experience in the health care insurance industry. A ...

Discussion your initial discussion thread is due on day 3

Discussion: Your initial discussion thread is due on Day 3 (Thursday) and you have until Day 7 (Monday) to respond to your classmates. Your grade will reflect both the quality of your initial post and the depth of your r ...

Question financial ratios analysis and comparison

Question: Financial Ratios Analysis and Comparison Paper Prior to completing this assignment, review Chapter 10 and 12 in your course text. You are a mid-level manager in a health care organization and you have been aske ...

Grant technologies needs 300000 to pay its supplier grants

Grant Technologies needs $300,000 to pay its supplier. Grant's bank is offering a 210-day simple interest loan with a quoted interest rate of 11 percent and a 20 percent compensating balance requirement. Assuming there a ...

Franks is looking at a new sausage system with an installed

Franks is looking at a new sausage system with an installed cost of $375,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped ...

Market-value ratios garret industries has a priceearnings

(?Market-value ratios?) Garret Industries has a? price/earnings ratio of 19.46X a. If? Garret's earnings per share is ?$1.65?, what is the price per share of? Garret's stock? b. Using the price per share you found in par ...

You are planning to make annual deposits of 4440 into a

You are planning to make annual deposits of $4,440 into a retirement account that pays 9 percent interest compounded monthly. How large will your account balance be in 32 years?  (Do not round intermediate calculations a ...

One year ago you bought a put option on 125000 euros with

One year ago, you bought a put option on 125,000 euros with an expiration date of one year. You paid a premium on the put option of $.05 per unit. The exercise price was $1.36. Assume that one year ago, the spot rate of ...

Common stock versus warrant investment tom baldwin can

Common stock versus warrant investment Tom Baldwin can invest $6,300 in the common stock or the warrants of Lexington Life Insurance. The common stock is currently selling for $30 per share. Its warrants, which provide f ...

Call optionnbspcarol krebs is considering buying 100 shares

Call option  Carol Krebs is considering buying 100 shares of Sooner Products, Inc., at $62 per share. Because she has read that the firm will probably soon receive certain large orders from abroad, she expects the price ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As