Financial Statements Calculations
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Financial Statement Analysis – ACCT4445
Assignment 3
Due Date: March 30, 2017
This assignment is due at the start of class on the due date and is to be submitted in hardcopy.
QUESTION 1
The following financial statement data pertains to Halsey, Inc.:
Total Assets
Interest-Bearing Debt
Average borrowing cost
Common Equity:
Book Value
Market Value
Marginal Income Tax Rate
Market Equity Beta
Expected Market Premium
Risk-free interest rate
$195,245
$85,680
11.25%
$42,154
$135,849
37%
0.9
7.5%
4.7%
Required:
a. Calculate the company’s cost of equity capital.
b. Calculate the weight on debt capital that should be used to determine Halsey’s weighted-average cost of
capital.
c. Calculate the weight on equity capital that should be used to determine Halsey’s weighted-average cost
of capital.
d. Calculate Halsey’s weighted-average cost of capital.
QUESTION 2
The following table provides summary information for J Corp. and its competitors K, Inc. and L
Company. Use the information to compute the PB ratio for K and L. In addition, using K and L as
comparables, compute J’s equity intrinsic value and equity intrinsic value per share.
(All amounts in millions)
Company assumed value
Equity assumed value
Net operating assets
Book value of equity
Net nonoperating obligations
Common shares outstanding
J
2,690
1,075
703
92.4
K
57,250
42,865
7,974
4,587
4,387
325.8
L
36,178
35,024
4,085
3,241
344
185.4
QUESTION 3
Following are financial statement numbers and select ratios for Target Corp. for the fiscal year 2013.
($ millions)
Total revenues
Net operating profit after tax (NOPAT)
Net operating assets (NOA)
Current
2013
72,596
2,680
29,318
2014
Forecast Horizon
2015
2016
2017
75,645
2,799
30,502
78,822
2,916
31,783
85,582
3,167
34,509
82,133
3,039
33,118
Terminal
Year
88,150
3,262
35,544
Forecast assumptions and other financial information for Target are as follows:
Revenue growth
Net operating profit margin (NOPM)
Net operating asset turnover (NOAT)
Terminal growth rate
Discount rate
Shares outstanding in millions
Stockholders’ equity
Net nonoperating obligations (NNO)
4.2%
3.7%
2.48
3%
6%
633.2
$16,231
$13,087
Required:
a. Use the discounted free cash flow (DCFF) model to estimate the value of Target’s equity, per share at
fiscal year-end 2013.
b. Target Corp. shares closed at $56.64 per share at fiscal year-end 2013. How does your valuation
compare with this closing price?
QUESTION 4
Zhi Corp. currently pays a dividend of $0.80 per share. In addition, Zhi’s market beta is 1.8 when the risk free
rate is 5% and the expected market premium is 7%. Estimate the intrinsic value of Zhi Corp. using the
dividend discount model under each of the following separate assumptions:
a. The dividend is expected to last into perpetuity.
b. The dividend will be $0.90 next year and then will grow at a rate of 5% per year.
c. The dividend will be $0.80 for the next four years and then will grow at a rate of 5%.
QUESTION 5
Following are financial statement numbers and select ratios for Hewlett-Packard Corp. for the year ended
October 31, 2013.
($ millions)
Total net revenue
Current
2013
2014
Forecast Horizon
2015
2016
2017
Terminal
Year
$112,298
$114,544
$116,835
$119,172
$121,555
$122,771
Net operating profit
after tax (NOPAT)
5,504
5,613
5,725
5,839
5,956
6,016
Net operating assets
(NOA)
38,080
38,828
39,605
40,397
41,205
41,617
Forecast assumptions and other financial information for HP are as follows:
Revenue growth
Terminal growth rate
Net operating profit margin (NOPM)
Net operating asset turnover (NOAT)
Discount rate
Shares outstanding in millions
HP stockholders’ equity
Non-controlling interests
NNO
2.0%
1.0%
4.9%
2.95
5.6%
1,909
$27,269
387
$10,424
a. Use the residual operating income (ROPI) model to estimate the value of Hewlett-Packard’s equity, per
share at October 31, 2013.
b. Hewlett Packard’s shares closed at $24.37 per share on October 31, 2013. How does your valuation
compare with this closing price?
…
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