Accounting Homework
Question 1 –Decomposing ROE This question does not relate to the Analog Devices Financial Statement Excerpts. Below is information from the balance sheet and income statement of a company. Assume a tax rate of 20%. Year 1 Year 2 Total Assets 1000 1500 Total Liabilities 200 600 Total Shareholders' Equity 800 900 Interest Expense (before tax) 20 60 Net Income (after-tax) 240 290 Since we don’t have information about the beginning balance sheet from Year1, don’t try to use average balance when computing rate of return measures. Use end of period numbers only. A. Calculate Return on Equity (ROE) for Years 1 and 2. B. Based on the information above, what are the causes of the change in the firm’s ROE from year 1 to year 2? Be specific. Use numbers (and other ratios) to help justify your conclusions. C. What dangers (if any) has the firm increased as a result of the changes it has made from year 1 to year 2? Explain. Question 2: Reformulation to Enterprise Perspective This question does NOT relate to the Analog Devices financial statement excerpts. Below are two years of balance sheet and income statement data as conventionally organized in financial statements. The tax rate is 20%. Year 1 Year 2 Operating Assets 1000 1400 Financial Assets 200 300 Total Assets 1200 1700 Operating Liabilities 500 600 Financial Liabilities 400 500 Total Liabilities 900 1100 Other Equity Claims 50 50 Common Shareholders’ Equity 250 550 Total Shareholders’ Equity 300 600 Year 1 Year 2 Operating Income 180 250 Other Financial Income 20 40 Interest Expense 50 100 Pre-tax Income 150 190 Income Tax Expense @20% 30 38 Net Income 120 152 A. Reformulate the balance sheet for each year in a way that is more consistent with an ENTERPRISE FOCUS, as opposed to an EQUITY focus. In particular, what amounts would be included in the following categories for each year: Year 1 Year 2 Net Operating Assets Net Financial Liabilities Other Equity Claims Common Shareholders’ Equity B. Which of the following would typically be a part of a firm’s Net Operating Assets (NOA)? Assume the firm is NOT a financial institution. For each of the following line items, Circle YES if it is part of NOA and circle NO if it is not. • Accounts Receivable YES NO • Goodwill YES NO • Interest Payable YES NO • Preferred Stock YES NO • Property Plant and Equipment YES NO C. Calculate Return on Net Operating Assets (RONOA) for Year 2. Since we do have balance sheet data for the beginning and end of the year for year 2, use the average balance as part of your calculation. D. RONOA is generally higher for high tech companies compared to manufacturing companies. Give a reason for this that is related to ACCOUNTING RULES. E. Calculate Free Cash Flow (unlevered) for Year 2. F. Suppose that at the end of year 2, we estimated that the present value of future free cash flows (unlevered) was equal to $5000. We also assessed that the fair value of financial assets was $100 higher than the book value. The financial liabilities and other equity claims have fair values that approximate their book values. What is the implied fair value of the firm’s common stock at the end of year 2? Question 3 Cash Flow Statement Analysis Refer to the excerpts from the 2021 financial statements from Analog Devices. A. In which year did Analog Devices spend the most cash to buy back shares of common stock? (Circle one) 2021 2020 2019 B. Which of the following is true about the relationship between Analog Device’s sales and their cash collected from customers in 2021? (Circle one) · Sales exceeded collection from customers in 2021 · Sales equaled cash collected from customers in 2021 · Sales were less than cash collected from customers in 2021 C. Why is there an addition (i.e., a positive adjustment) in the operating section of the cash flow statement related to the “Loss on Extinguishment of Debt” in 2021? D. Cash from Investing is positive for Analog Devices in 2021. The primary reason is there is a cash inflow associated with acquiring Maxim in 2021. How can acquiring another firm result in a positive number on the cash flow statement? E. Analog Device’s Net Income is $169,661 higher in 2021 than it was in 2020. However, their Cash From Operations in 2021 is higher by $725,582 compared to 2020! Therefore, the adjustments to reconcile Net Income to Cash From Operations are much more positive in 2021. What are the three biggest reasons that CFO is so much larger than NI in 2021 compared to the gap in 2020? Do not include “Early Extinguishment on Debt” (which you already discussed above) or anything related to “Changes in operating assets and liabilities,” (which are the last 9 adjustments in the operating section of the cash flow statement). For each of the items you pick, state the name of the item and also explain why it is included as an adjustment in the operating section. Question 4 –Cash Flow Statement Reformulation Refer again to the excerpts from Analog Device’s 2021 financial statements. Assume a tax rate of 20% Recast the cash flow statement for 2021 to better reflect the economic activities of the firm. (Your modified statement will violate GAAP rules, but hopefully make more economic sense) Use the table on the next page to make your changes. I have listed the subtotals for the operating, investing, and financing cash flows as they are given on Analog Device’s cash flow statement. You DO NOT NEED TO COPY ALL OF THE INDIVIDUAL LINES (especially those that are fine where they are). There are blank lines in the worksheet for the modified cash flow statement that you can use to make modifications. Just show the modifications. Your answer could involve moving items from one section to another, including items that aren’t there but should be, or deleting items that are there that shouldn’t be. For example, if you think there is a reason to move $1000 from operations to financing, list a modification to the operating section where you remove $1000 (explain what it’s related to) and also list a modification to the financing section where you add $1000 (and explain what it’s related to). Hints: · In addition to Analog Device’s cash flow statement, you should also look at the other information in the excerpts from their financial statements. · THE OVERALL CHANGE IN CASH SHOULD NOT BE AFFECTED! · Check that your total modifications across the three sections net to zero. RE-CAST ANALOG DEVICE’S CASH FLOW STATEMENT FOR 2021 Item Dollar Amount Cash From Operations (as Given) 2,735,069 List Modification (if any) to CFO (list below) TOTAL MODIFICATIONS TO CFO Cash From Investing (As Given) 2,143,525 List Modifications (if any) to CFI (list below) TOTAL MODIFICATIONS TO CFI Cash From Financing (As Given) (3,959,664) Modifications (if any) to CFF (list below) TOTAL MODICATIONS TO CFI 1 1 1 13 (this page is blank in case you want to provide more explanation regarding your modifications) Question 5 Effects of Items on Free Cash Flow This Question is not Related to the Analog Device’s Financial Statements Suppose we define Free Cash Flow (unlevered) using the popular formula: FCF = NI(AT) + (1-t) x Interest Expense + Depreciation – ∆ Working Capital – CAPEX · Where the symbol “∆” stands for “change in” · Assume that Working Capital does NOT include Cash · Ignore taxes in this problem (that is, assume the tax rate is zero)! What do the following transactions/activities do to this measure of FCF? Provide a dollar magnitude