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Revision - Additional Exercises

This document provides examples of financial statement analysis. Example 1 shows a statement of cash flows prepared from balance sheet and income statement data. Example 2 shows calculations for the cost of equity, weighted average cost of capital, unlevered beta, and new cost of equity given a change in capital structure. Example 3 involves valuing a company using residual income, free cash flows, and dividend discount models.

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Đào Huyền Trang 4KT-20ACN
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58 views

Revision - Additional Exercises

This document provides examples of financial statement analysis. Example 1 shows a statement of cash flows prepared from balance sheet and income statement data. Example 2 shows calculations for the cost of equity, weighted average cost of capital, unlevered beta, and new cost of equity given a change in capital structure. Example 3 involves valuing a company using residual income, free cash flows, and dividend discount models.

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Đào Huyền Trang 4KT-20ACN
Copyright
© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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FINANCIAL STATEMENT ANALYSIS – PRACTICAL EXAMPLES

Statement of Cashflows
Example 1: Use Olive Corporation’s two most recent balance sheets and most recent income statement to prepare a
statement of cash flows for 2020. The company paid dividends of $6,250 during 2020.
Balance Sheet
As of December 31, 2020 2019
Assets:
Cash and cash equivalents $41,900 $25,000
Accounts Receivable 24,000 6,250
Inventory 30,000 36,000
Current Assets 95,900 67,250

Equipment 42,000 38,500


Less: Accumulated depreciation -14,000 -7,000
Land 25,000 10,000

Total assets $148,900 $108,750

Liabilities
Accounts Payable $17,500 $22,500
Accrued Salaries Payable 5,500 8,000
Rent Expense Payable 2,200 1,000
Income Tax Payable 6,900 4,000
Current Liabilities 32,100 35,500
Long-term note payable 50,000 30,000
Total Liabilities 82,100 65,500

Stockholders’ Equity:
Common stock 42,000 30,000
Retained earnings 24,800 13,250

Total liabilities and stockholders’ equity $148,900 $108,750

Income Statement
For the year ended December 31, 2020
Revenues $147,000
Cost of goods sold -84,000
Gross Profit $63,000
Operating Expenses
Depreciation expense -7,000
Salary expense -14,600
Insurance Expense -2,500
Rent Expense -10,000
Interest Expense -4,200
Total Operating Expenses -38,300
Income from Operations 24,700
Income Tax Expense -6,900

Net income $17,800


Example 2: Watson manufactures and sells appliances. Intro develops and manufactures computer technology. Trenton
operates general merchandise retail stores. Selected data for these companies appear in the following table (dollar amounts
in millions). For each firm, assume that the market value of the debt equals its book value.

($ amounts in millions) Watson Intro Trenton


Total Assets $13,532 $109,524 $44,106
Interest-Bearing Debt $ 2,597 $ 33,925 $18,752
Average Pretax Borrowing Cost 6.1% 4.3% 4.9%
Common Equity:
Book Value $ 3,006 $ 13,465 $13,712
Market Value $ 2,959 $110,984 $22,521
Income Tax Rate 35.0% 35.0% 35.0%
Market Equity Beta 2.27 0.78 1.2
a. Assume that the intermediate-term yields on U.S. Treasury securities
are roughly 3.5 percent. Assume that the market risk premium is 5.0 percent.
Compute the cost of equity capital for each of the three companies.
b. Compute the weighted average cost of capital for each of the three companies.
c. Compute the unlevered market (asset) beta for each of the three companies.
d. Assume that each company follow each other to change the capital structure to 40% debt and 60% equity. How much
will be the new cost of equity?

Example 3: The following exhibit presents selected hypothetical data from projected financial statements for Steak ‘n
Shake for Year +1 to Year +11. The amounts for Year +11 reflect a long-term growth assumption of 3%. The cost of
equity capital is 9.34%. Assume net income and comprehensive income will be identical
a. Compute the value of Steak ‘n Shake as of January 1, Year +1, using the residual income model.
b. Repeat Requirement a using the present value of expected free cash flows to the common equity shareholders.
c. Repeat Requirement a using the dividend discount model.

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