MSAF 670 Final Exam

1. (10 points) Refer to Chapter 8 in your text. Recalculate the forecasts in Tables 8-2 assuming that the ratio of net operating working capital to sales is 3 percent, and the ratio of net long-term assets to sales holds steady at 33.4 percent for all the years from fiscal 2011 to fiscal 2020. Keep all the other assumptions unchanged. Show the effects on all items.

2. (15 points)In early 2003, Bristol-Myers Squibb announced that it would have to restate its financial statements as a result of stuffing as much as $3.35 billion worth of products into wholesalers' warehouses 1999 through 2001. The company’s sales and cost of sales during this period was as follows:

	2001	2000	1999
Net sales	$ 18,139	$ 17,695	$ 16,502
Cost of products sold	5,454	4,729	4,458

The company’s marginal tax rate during the three years was 35%.

What adjustments are required to correct Bristol-Myers Squibb’s balance sheet for December 31, 2001? What assumptions underlie your adjustments? How would you expect the adjustments to affect Bristol-Myers Squibb’s performance in the coming few years?

3.Refer to Chapter 4. (20 points) Refer to the Lufthansa example on asset depreciation estimates. What adjustments would be required if Lufthansa’s aircraft depreciation were computed using an average life of 25 years and salvage value of 5% (instead of the reported values of 12 years and 15%)? Show the adjustments to the 2008 and 2009 balance sheets, and to the 2009 income statement.

4.(10 Points) Consider the following two earnings forecasting models:

Model 1: E_t(EPS_t+1) = EPS_t

Model 2: E_t(EPS_t+1) =

E_t(EPS) is the expected forecast of earnings per share for year t+1, given information available at t. Model 1 is usually called the random walk Model for earnings, whereas Model 2 is called the mean-reverting model. The earnings per share for Ford Motor Co. for the period 1990 to 1994 are as follows:

Year	1	2	3	4	5
EPS	$0.93	$(2.40)	$(0.73)	$2.27	$4.97

a. What would be the year 6 forecast for earnings per share for each of the two earnings forecasting models?

b. Actual earnings per share for Ford in year 6 were $3.58. Given this information, what would be the year 7 forecast for earnings per share for each model? Why do the two models generate quite different forecasts? Which do you think would better describe earnings per share patterns

Why?

5. ?(45 points) Use the sample templates in Tables 4-1, 4-2, and 4-3 as a reference to recast the financial statements for Amazon.com below. Step 1 is to classify the lines appropriately, then step 2 is to aggregate like items to produce the standardized

Helpful Notes:(a) fulfillment costs – these are viewed as cost of sales for most retailers; (b) stock option costs – these are probably for senior management and hence should probably be classified as SG&A; and (c) in the cash flow statement gains and losses on currency translations (shown at the end of the statement are shown as operating factors that imply that cash from operations in the standardized format does not equate to that reported by the firm.

See Week 4 Discussion forum for example.

Income Statement

Classifications		2002	2001	2000
	Net sales	$3,932,936	$3,122,433	$2,761,983
	Cost of sales	2,940,318	2,323,875	2,106,206
	Gross profit	992,618	798,558	655,777
	Operating expenses:
	Fulfillment	392,467	374,250	414,509
	Marketing	125,383	138,283	179,980
	Technology and content	215,617	241,165	269,326
	General and administrative	79,049	89,862	108,962
	Stock-based compensation	68,927	4,637	24,797
	Amortization of goodwill and other intangibles	5,478	181,033	321,772
	Restructuring-related and other	41,573	181,585	200,311
	Total operating expenses	$928,494	$1,210,815	$1,519,657
	Income (loss) from operations	64,124	-412,257	-863,880
	Interest income	23,687	29,103	40,821
	Interest expense	-142,925	-139,232	-130,921
	Other income (expense), net	5,623	-1,900	-10,058
	Other gains (losses), net	-96,273	-2,141	-142,639
	Total non-operating expenses, net	($209,888)	($114,170)	($242,797)
	Loss before equity in losses of equity-method investees	-145,764	-526,427	-1,106,677
	Equity in losses of equity-method investees, net	-4,169	-30,327	-304,596
	Loss before change in accounting principle	($149,933)	($556,754)	($1,411,273)
	Cumulative effect of change in accounting principle	801	-10,523
	Net loss	($149,132)	($567,277)	($1,411,273)

Balance Sheet

Classifications	Year Beginning January 1, ($000's)	2003	2002
	Current assets:
	Cash and cash equivalents	$738,254	$540,282
	Marketable securities	562,715	456,303
	Inventories	202,425	143,722
	Accounts receivable, net & other current assets	112,282	67,613
	Total current assets	$1,615,676	$1,207,920
	Fixed assets, net	239,398	271,751
	Goodwill, net	70,811	45,367
	Other intangibles, net	3,460	34,382
	Other equity investments	15,442	28,359
	Other assets	45,662	49,768
	Total assets	$1,990,449	$1,637,547
	LIABILITIES AND STOCKHOLDERS' DEFICIT
	Current liabilities:
	Accounts payable	618,128	444,748
	Accrued expenses and other current liabilities	314,935	305,064
	Unearned revenue	47,916	87,978
	Interest payable	71,661	68,632
	Current portion of long-term debt and other	13,318	14,992
	Total current liabilities	$1,065,958	$921,414
	Long-term debt and other	2,277,305	2,156,133
	Shareholders’ deficit
	Common stock, $0.01 par value: Authorized shares 5,000,000 Issued and outstanding shares -- 387,906 and 373,218 shares, respectively	3,879	3,732
	Additional paid-in capital	$1,649,946	$1,462,769
	Deferred stock-based compensation	-6,591	-9,853
	Accumulated other comprehensive income (loss)	9,662	-36,070
	Accumulated deficit	-3,009,710	-2,860,578
	Total stockholders' deficit	($1,352,814)	($1,440,000)
	Total liabilities and stockholders' deficit	1,990,449	1,637,547

Chapter 4

Use the template to recast the income statement for Nordstrom, Inc.

Income Statement Standardization (mapping)

	$ in millions
	Fiscal year	2010	2009	2008
Sales	Net sales	$ 9,310	$ 8,258	$ 8,272
Sales	Credit card revenues	390	369	301
	Total revenues	9,700	8,627	8,573
Cost of sales	Cost of sales and related buying and occupancy costs	(5,897)	(5,328)	(5,417)
	Selling, general and administrative expenses:
SG&A	Retail	(2,412)	(2,109)	(2,103)
SG&A	Credit	(273)	(356)	(274)
	Earnings before interest and income taxes	1,118	834	779
Interest expense	Interest expense, net	(127)	(138)	(131)
	Earnings before income taxes	991	696	648
Tax expense	Income tax expense	(378)	(255)	(247)
	Net earnings	$ 613	$ 441	$ 401

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The resulting standardized income statement sheet is as follows:

Nordstrom Standardized Income Statement

Fiscal Year

$ in millions	2010	2009	2008
Sales	$	$	$ 8,573
Cost of sales		5,328
Gross profit	3,803
SG&A		2,465
Operating income
Net interest expense (income)	127
Pre-tax income			648
Tax expense		255
Net income	$	$	$ 401

Cash Flow Statement

Classifications	Year Ended December 31, ($000's)	2002	2001	2000
	OPERATING ACTIVITIES:
	Net loss	($149,132)	($567,277)	($1,411,273)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
	Depreciation of fixed assets and other amortization	82,274	84,709	84,460
	Stock-based compensation	68,927	4,637	24,797
	Equity in losses of equity-method investees	4,169	30,327	304,596
	Amortization of goodwill and other intangibles	5,478	181,033	321,772
	Non-cash restructuring-related and other	3,470	73,293	200,311
	Gain on sale of marketable securities, net	-5,700	-1,335	-280
	Other losses (gains), net	96,273	2,141	142,639
	Non-cash interest expense and other	29,586	26,629	24,766
	Cumulative effect of change in accounting principle	-801	10,523
	Changes in operating assets and liabilities:
	Inventories	-51,303	30,628	46,083
	Accounts receivable, net and other cur. assets	-32,948	20,732	-8,585
	Accounts payable	156,542	-44,438	22,357
	Accrued expenses and other current liabilities	4,491	50,031	93,967
	Unearned revenue	95,404	114,738	97,818
	Amortization of previously unearned revenue	-135,466	-135,808	-108,211
	Interest payable	3,027	-345	34,341
	Net cash provided by (used in) operating activities	$174,291	($119,782)	($130,442)
	Year Ended December 31, ($000's)	2002	2001	2000
	INVESTING ACTIVITIES:
	Sales/maturities of marketable securities and investments	553,289	370,377	545,724
	Purchases of marketable securities	-635,810	-567,152	-184,455
	Purchases of fixed assets, including internal-use software	-39,163	-50,321	-134,758
	Investments (including in equity-method investees)		-6,198	-62,533
	Net cash provided by (used in) investing activities	($121,684)	($253,294)	$163,978
	FINANCING ACTIVITIES:
	Proceeds from exercise of stock options and other	121,689	16,625	44,697
	Proceeds from issuance of common stock, net of issue costs		99,831
	Proceeds from long-term debt and other		10,000	681,499
	Repayment of capital lease obligations and other	-14,795	-19,575	-16,927
	Financing costs			-16,122
	Net cash provided by financing activities	$106,894	$106,881	$693,147
	Effect of exchange-rate changes on cash and cash equivalents	38,471	-15,958	-37,557
	Net increase (decrease) in cash and cash equivalents	$197,972	($282,153)	$689,126