CH02 - Chapter 2 Introduction to Financial Statement...

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Chapter 2 Introduction to Financial Statement Analysis Note: A box ( ± ) indicates problems available in MyFinanceLab. An asterisk (*) indicates problems with a higher level of difficulty. 1. Each method will help find the same SEC filings. Yahoo! Finance also provides some analysis such as charts and key statistics. 2. a. Long-term liabilities would decrease by $20 million, and cash would decrease by the same amount. The book value of equity would be unchanged. b. Inventory would decrease by $5 million, as would the book value of equity. c. Long-term assets would increase by $10 million, cash would decrease by $5 million, and long-term liabilities would increase by $5 million. There would be no change to the book value of equity. d. Accounts receivable would decrease by $3 million, as would the book value of equity. e. This event would not affect the balance sheet. f. This event would not affect the balance sheet. 3. Global Conglomerate’s book value of equity increased by $1 million from 2006 to 2007. An increase in book value does not necessarily indicate an increase in Global’s share price. The market value of a stock does not depend on the historical cost of the firm’s assets, but on investors’ expectation of the firm’s future performance. There are many events that may affect Global’s future profitability, and hence its share price, that do not show up on the balance sheet. 4. a. At the start of 2007, Peet’s had cash and cash equivalents of $7.692 million. b. Peet’s total assets were $153.005 million. c. Peet’s total liabilities were $25.566 million, and it had no debt. d. The book value of Peet’s equity was $127.439 million. 5. Plan: The problem presents us with some raw financial information for General Electric. While useful, this raw financial information is not well suited to support financial analysis of General Electric and answer such questions as: How has the stock market valued GE? How much debt does GE use relative to the equity financing that GE uses? How valuable, in today’s dollars, is GE? To answer these and other questions we must compute key ratios and current market values as opposed to historical cost values.
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4 Berk/DeMarzo/Harford • Fundamentals of Corporate Finance Execute: a. Market capitalization 10.3 billion $38 $391.4 billion = 391.4 Market-to-book ratio 3.35 117 == b. 467 Book debt-equity ratio 3.99 117 467 Market debt-equity ratio 1.19 391.4 c. Enterprise value 391.4 467 16 842.4 =+ = Evaluate: GE has a market-to-book ratio of 3.35. Overtime equity investors invested $117B in GE; today that equity investment is worth $391.4B (or 3.35 times more). This indicates that GE’s management has run the firm well, and equity investors expect excellent results in the future. GE has a book debt-equity ratio of 3.99. Overtime equity investors invested $117B in GE and debt investors invested $467B (or 3.99 times more). This would indicate that GE is very heavily financed with debt. But remember these are book values. In part (a) above, we calculated that GE’s equity is valued at $391.4B in today’s dollars. A very different picture.
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This note was uploaded on 02/09/2010 for the course FINA 3001 taught by Professor Molly during the Spring '10 term at University of Minnesota Duluth.

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CH02 - Chapter 2 Introduction to Financial Statement...

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