Gain on asset sales



B8110 – Fall 2012EXERCISE SET 3Due Monday, December 3 at 5:00pm (both sections)You may leave your work in Professor Penman’s mail box on the ground floor of Uris or at the assistants’ station in Uris 6W (6th Floor). Section 2 students can hand the exercise set in at the December 3 class. This exercise set must be worked independently—without consultation with fellow students or the TA.There are four exercises. Exercise 1. Analysis of an Income StatementA firm reported the following income statement for 2012 (in millions of dollars):Net Sales 20,367Operating expenses(17,484)Restructuring charge (65)Operating profit 2,818Gain on asset sales 1,083Interest expense (363)Interest income 1183,656Provision for income taxes1,606Net income2,050Operating expenses include $1,230 million from expected returns on pension plan assets.Reformulate this statement to distinguish operating items from financing items. Identify core operating income from sales, after tax. The firm’s statutory tax rate is 37%. Calculate the effective tax rate on core operating income.Exercise 2. Forecasting Cash Flow and Net Indebtedness.At the end of fiscal year 2012, a firm reported the following in its balance sheet (in millions): Net operating assets $500 Net financial obligations 300 You forecast that the firm will earn a 20% return on common equity (ROCE) in 2013 (on beginning-of-year equity), after $15 million in net financial expenses (net of taxes). You also forecast that net operating assets will grow 6%. The board of directors has decided that the firm will pay $20 million in dividends in 2013, but there will be no share issues or repurchases. Forecast for:Return on net operating assets (RNOA) for 2013 (on beginning-of-year net operating assets). Free cash flow for 2013Net financial obligations at the end of 2013.Calculate the financial leverage ratio (FLEV) at the end of 2012 and 2013. Exercise 3. Levered and Unlevered Price-to-Book RatioA firm trades at 3.5 times its book equity of $300 million. It reports a financing leverage ratio of 0.5. What is its unlevered (enterprise) price-to-book ratio? Exercise 4. Challenging the Market Price of Starbucks Corporation (SBUX)Starbucks’ 744.8 million shares traded at $49.74 each when its financial statements for fiscal year 2011 were released. The reformulated version of the income statement and balance sheet are below. You will be familiar with these statements from Exercise Set 2. Unless otherwise indicated, use a required return of 9% in answering the questions below. Calculate core return on net operating assets for 2011 (Core RNOA) using average balance sheet amounts in the calculation. Break this Core RNOA down into core profit margin and asset turnover. How much in net operating assets does Starbucks hold to maintain a dollar of revenue?Forecast residual operating income for fiscal year 2012 based on the forecast that Core RNOA will be the same in 2012 as it was in 2011. Value the common equity based on this forecast with a forecast that residual operating income after 2012 will grow at a rate of 4% per year. Assign a value of $48 million to the noncontrolling interest.Value the common equity with the forecast that Starbucks will maintain the same profit margin and asset turnover in future years as in 2011 but that sales growth will be at a pace of 6% per year.What is the market’s forecast of this residual operating income growth rate given you have a hurdle rate of 9%? What is the market’s forecasted growth rate if you see the required return as 12%?If you forecast that the core RNOA and asset turnover in 2011 will be maintained in the future, what is the market’s forecast of the sales growth rate in the future. Use a 9% hurdle rate. If you forecast that Starbucks will have zero growth in residual operating income after 2012, what is your expected return from buying Starbucks operations? If you expect a growth rate of 5%, what is your expected return from buying the stock?Financial statements follow…….Reformulated Income Statement, 2011(in millions of dollars)Net revenue 11,700.4Cost of sales4,949.3Gross margin6,751.1Core operating expensesStore operating expenses (3,665.1 - 36.2) 3,628.9Advertising Expenses 141.4Other operating expenses 260.6Depreciation and amortization 523.3General and administrative expenses 636.1 5,190.3Core operating income from sales, before tax 1,560.8Tax reported 563.1Tax on interest income (11.0)Tax on non-core income (17.7) 534.4Core operating income from sales, after tax 1,026.4 Other core operating incomeIncome from equity invitees (reported after tax) 173.7Core operating income, after tax 1200.1 Other operating income (non-core, unsustainable)Before-tax items:Gain on sale of properties30.2Gain from acquisition of joint ventures55.2Unrealized loss on trading securities(2.1)Impairment losses(36.2) 47.1Tax @ 37.5%17.7After-tax items:29.4Unrealized loss in OCI(4.8)Translation loss(6.5)Net loss on exercise of stock options(13.0) 5.1Operating income1,205.2 Net Financial IncomeInterest income62.8Interest expense 33.3Net interest29.5Tax @ 37.5%11.0Net interest offer tax18.5Unrealized gain on debt investments 0.4 18.91,224.1Noncontrolling interest (2.3)Comprehensive income to common1,221.8Reformulated Balance Sheet(in millions of dollars)2011 2012 Net Financial assets: Cash and cash equivalents (less $50m) 1,098.1 1,114.0 Short-term investments 855.0 236.5 Long-term investments 107.0 191.8 Financial assets 2,060.1 1,542.3 Long-term debt 549.5 549.4 Net financial assets (NFA) 1,510.6 992.9 Net Operating Assets (NOA) 2,876.7 2,689.4 Total Equity 4,387.3 3,682.3 Noncontrolling interest 2.4 7.6 Common shareholders’ equity (CSE) 4,384.9 3,674.7 ................
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