Reference no: EM131064489

Question 1

The following is a comparative balance sheet for a firm for fiscal year 2015 (in millions of dollars):

	2015	2014			2015	2014
Operating cash	60	50		Accounts payable	1,200	1,040
Short-term investments (at market)	550	500		Accrued liabilities	390	450
Accounts receivable	940	790		Long-term debt	1,840	1,970
Inventory	910	840
Property and plant	2,840	2,710		Common equity	1,870	1,430
	5,300	4,890			5,300	4,890

The following is the statement of common shareholders' equity for 2015 (in millions of dollars):

Balance, end of fiscal year 2014	1,430
Share issues from exercised employee stock options	810
Repurchase of 24 million shares	(720)
Cash dividend	(180)
Tax benefit from exercise of employee stock options	12
Unrealized gain on investments	50
Net income	468
Balance, end of fiscal year 2015	1,870

The firm's income tax rate is 35%. The firm reported $15 million in interest income and $98 million in interest expense for 2015. Sales revenue was $3,726 million.

a. Calculate the loss to shareholders from the exercise of employee stock options during 2015.

b. The shares repurchased were in settlement of a forward purchase agreement. The market price of the shares at the time of the repurchase was $25 each. What was the effect of this transaction on the income for the shareholders?

c. Prepare a comprehensive income statement that distinguishes after-tax operating income from financing income and expense. Include gains or losses from the transactions in questions (a) and (b) above.

d. Prepare a reformulated comparative balance sheet that distinguishes assets and liabilities employed in operations from those employed in financing activities. Calculate the firms' financial leverage and operating liability leverage at the end of 2015.

e. Calculate free cash flow for 2015.

Question 2

The following is from the statement of shareholders' equity for Intel Corporation for 2015 (in millions of dollars). Intel faces a 38% tax rate.

Balance, December 25, 2014	32,535
Net income	10,535
Unrealized loss on available-for-sale securities	(3,596)
Issuance of shares through employee stock plans, net of tax benefit of $887 million	1,684
Reclassification of put warrant obligation	130
Amortization of unearned compensation	26
Conversion of subordinated notes to common stock (market value of stock was $350 million)	207
Repurchase of common stock	(4,007)
Cash dividends	(470)
Issuance of shares for acquisitions	278
	37,322

Calculate comprehensive income to Intel's shareholders for 2015, being sure to include any hidden dirty surplus expenses.

Question 3

Below are some summary numbers for a firm for fiscal years 2014 and 2015 (in millions of
dollars).

	2014	2015
Sales	12,257	12,867
Operating income (after tax)	858	772
Net financial expense (after tax)	56	98
Comprehensive income	802	674
Average net operating assets	4,903	4,949
Average common equity	3,503	2,149

(a) Calculate return on common equity (ROCE), return on net operating assets (RNOA), and net borrowing cost (NBC) for the two years.

(b) How much of the change in ROCE over the two years is due to:

(I) Change in profit margin
(II) Change in asset turnover
(III) Change in financial leverage
(IV) Change in borrowing costs?

Question 4

The following are summary income statement and balance sheet numbers for a firm (in millions of dollars). The firm has a required return for operations of 9%.

	2012	2013	2014	2015
Sales	1,906	1,985	2,064	2,147
Core operating expenses	1,773	1,846	1,919	1,997
Core operating income	133	139	145	150
Unusual operating income	------	-----	(45)	60
	133	139	100	210
Net financial expense	7	8	8	9
Comprehensive income	126	131	92	201
Net operating assets	945	983	1,022	1,063
Net financial obligations	150	155	175	120
Common equity	795	828	847	943

(a) Prepare a table giving the following for 2013- 2015. Use beginning-of-period balance sheet numbers in denominators.

- Return on common equity (ROCE)
- Return on net operating assets (RNOA)
- Core return on net operating assets (Core RNOA)
- Free cash flow
- Net payments to common shareholders
- Net payments to net debt holders
- Asset turnover
- Core profit margin
- Growth rate for net operating assets

(b) On the basis of these financial statements, forecast

(i) Residual operating income for 2016 and 2017.

(ii) Abnormal operating income growth for 2017.