If a firm’s residual income for a particular year is positive, does that mean the firm was profitable? Explain. If a firm’s residual income for a particular year is negative, does that mean the firm necessarily reported a loss on the income statement? Explain. What does it mean when a firm’s residual income is zero?
> What can a company gain from union-management cooperation? What can workers gain?
> What are the usual steps in a grievance procedure? What are the advantages of resolving a grievance in the first step? What skills would a supervisor need so grievances can be resolved in the first step?
> Why are strikes uncommon? Under what conditions might management choose to accept a strike?
> Imagine that you are the human resource manager of a small architectural firm. You learn that the monthly premiums for the company’s existing health insurance policy will rise by 15 percent next year. What can you suggest to help your company manage this
> What are some advantages of offering a generous package of insurance benefits? What are some drawbacks of generous insurance benefits?
> How do tax laws and accounting regulations affect benefits packages?
> Merging, downsizing, and reengineering all can radically change the structure of an organization. Choose one of these changes and describe HRM’s role in making the change succeed. If possible, apply your discussion to an actual merger, downsizing, or ree
> In principle, health insurance would be the most attractive to employees with large medical expenses, and retirement benefits would be most attractive to older employees. What else might a company include in its benefits package to appeal to young, healt
> Define the types of benefits required by law. How can organizations minimize the cost of these benefits while complying with the relevant laws?
> Why do employers provide employee benefits, rather than providing all compensation in the form of pay and letting employees buy the services they want?
> Why is it important to communicate information about employee benefits? Suppose you work in the HR department of a company that has decided to add new benefits—dental and vision insurance plus an additional two days of paid time off for “personal days.”
> What legal requirements might apply to a family leave policy? Suggest how this type of policy should be set up to meet those requirements.
> What issues should an organization consider in selecting a package of employee benefits? How should an employer manage the trade-offs among these considerations?
> Why do some organizations link the use of incentive pay to the organization’s overall performance? Is it appropriate to use stock performance as an incentive for employees at all levels? Why or why not?
> Suppose you are a human resource professional at a company that is setting up work teams for production and sales. What group incentives would you recommend to support this new work arrangement?
> What are the pros and cons of linking incentive pay to individual performance? How can organizations address the negatives?
> In a typical large corporation, the majority of the chief executive’s pay is tied to the company’s stock price. What are some benefits of this pay strategy? Some risks? How can organizations address the risks?
> At many organizations, goals include improving people’s performance by relying on knowledge workers, empowering employees, and assigning work to teams. How can HRM support these efforts?
> How can human resource management contribute to a company’s success?
> Suppose you are applying the residual income valuation model to value a firm with extremely conservative accounting. Suppose, for example, the firm is following U.S. GAAP or IFRS, but the firm does not recognize a substantial intangible asset on the bala
> Identify conditions that would lead an analyst to expect that management might attempt to manage earnings upward.
> In Problem 10.16, we projected financial statements for Walmart Stores, Inc. (Walmart) for Years +1 through +5. The data in Chapter 12’s Exhibits 12.17, 12.18, and 12.19 include the actual amounts for 2012 and the projected amounts for
> The Coca-Cola Company is a global soft drink beverage company (ticker: KO) that is a primary and direct competitor with PepsiCo. The data in Chapter 12’s Exhibits 12.14, 12.15, and 12.16 (pages 943–946) include the act
> Exhibit 13.7 presents selected hypothetical data from projected financial statements for Steak ‘n Shake for Year +1 to Year +11. The amounts for Year +11 reflect a long-term growth assumption of 3%. The cost of equity capital is 9.34%.
> Priority Contractors provides maintenance and cleaning services to various corporate clients in New York City. The firm has provided the following forecasts of comprehensive income for Year +1 to Year +5: Year +1:........................................
> Starwood Hotels (Starwood) owns and operates many hotel properties under well-known brand names, including Sheraton, W, Westin, and St. Regis. Starwood focuses on the upper end of the lodging industry. Choice Hotels (Choice) is primarily a franchisor of
> A firm has experienced a decrease in its current ratio but an increase in its quick ratio during the last three years. What is the likely explanation for these results?
> Northrop Grumman Corporation is a leading global security company that provides innovative systems products and solutions in aerospace, electronics, information systems, shipbuilding, and technical services to government and commercial customers worldwid
> Assume American Airlines acquires a regional airline in the mid-western United States for $450 million. American Airlines allocates $150 million of the purchase price to landing rights at various airports. The landing rights expire in five years. What ty
> Morrissey Tool Company manufactures machine tools for other manufacturing firms. The firm is wholly owned by Kelsey Morrissey. The firm’s accountant developed the following long-term forecasts of comprehensive income: Year +1:............................
> Select data for Avis and Hertz for 2012 follow. Based only on this information and ratios that you construct, speculate on similarities and differences in the operations and financing decisions of the two companies based on similarities and differences i
> If the firm is in a very competitive, mature industry, what effect will the competitive conditions have on residual income for the firm and others in the industry? Now suppose the firm holds a competitive advantage in its industry, but the advantage is n
> Vulcan Materials Company, a member of the S&P 500 Index, is the nation’s largest producer of construction aggregates, a major producer of asphalt mix and concrete, and a leading producer of cement in Florida. Exhibit 6.19 presents V
> The chapter describes free cash flows for common equity shareholders. Suppose a firm has no debt and uses marketable securities to manage operating liquidity. If the firm uses cash to purchase marketable securities, how does that transaction affect free
> Gap Inc. operates chains of retail clothing stores under the names of Gap, Banana Republic, and Old Navy. Exhibit 3.21 presents the statement of cash flows for Gap for Year 0 to Year 4. REQUIRED Discuss the relations between net income and cash flow fro
> Tesla Motors manufactures high performance electric vehicles that are extremely slick looking. Exhibit 3.20 presents the statement of cash flows for Tesla Motors for 2010–2012. REQUIRED Discuss the relations among net income, cash flow
> Texas Instruments primarily develops and manufactures semiconductors for use in technology-based products for various industries. The manufacturing process is capital-intensive and subject to cyclical swings in the economy. Because of overcapacity in the
> Refer to the websites and the Form 10-K reports of Home Depot (www.homedepot.com) and Lowe’s (www.lowes.com). Compare and contrast their business strategies.
> Assume that the firm’s cost of equity capital is 10% and that the firm’s existing assets and operations generate a 10% return on common equity. If the firm raises additional equity capital and invests in assets that will generate a return less than 10%,
> Microsoft Corporation (Microsoft) and Oracle Corporation (Oracle) engage in the design, manufacture, and sale of computer software. Microsoft sells and licenses a wide range of systems and application software to businesses, computer hardware manufacture
> The Coca-Cola Company (Coca-Cola), like PepsiCo, manufactures and markets a variety of beverages. Exhibit 3.18 presents a statement of cash flows for Coca-Cola for three years. REQUIRED Discuss the relations between net income and cash flow from operat
> BTB Electronics Inc. manufactures parts, components, and processing equipment for electronics and semiconductor applications in the communications, computer, automotive, and appliance industries. Its sales tend to vary with changes in the business cycle
> United Van Lines purchased a truck with a list price of $250,000 subject to a 6% discount if paid within 30 days. United Van Lines paid within the discount period. It paid $4,000 to obtain title to the truck with the state and an $800 license fee for the
> Flight Training Corporation is a privately held firm that provides fighter pilot training under contracts with the U.S. Air Force and the U.S. Navy. The firm owns approximately 100 Lear jets that it equips with radar jammers and other sophisticated elect
> Nojiri Pharmaceutical Industries develops, manufactures, and markets pharmaceutical products in Japan. The Japanese economy experienced recessionary conditions in recent years. In response to these conditions, the Japanese government increased the propor
> Eli Lilly and Company produces pharmaceutical products for humans and animals. Exhibit 7.18 includes a footnote excerpt from the annual report of Lilly for the period ending December 31, 2004. REQUIRED Review Exhibit 7.18 and answer the following questi
> Exhibit 3.27 presents common-size statements of cash flows for eight firms in various industries. All amounts in the common-size statements of cash flows are expressed as a percentage of cash flow from operations. In constructing the common-size percenta
> Aer Lingus is an international airline based in Ireland. Exhibit 3.26 provides the statement of cash flows for Year 1 and Year 2, which includes a footnote from the financial statements. Year 2 was characterized by weakening consumer demand for air trave
> Exhibit 6.22 presents selected financial statement data for Enron Corporation as originally reported for 1997, 1998, 1999, and 2000. In 2001, Enron restated its financial statements for earlier years because it reported several items beyond the limits of
> The text states, ‘‘Over sufficiently long time periods, net income equals cash inflows minus cash outflows, other than cash flows with owners.’’ Demonstrate the accuracy of this statement in the following scenario: Two friends contributed $50,000 each to
> Firms value inventory under a variety of assumptions, including two common methods: last-in first out (LIFO) and first-in first-out (FIFO). Ignore taxes, assume that prices increase over time, and assume that a firm’s inventory balance is stable or grows
> ‘‘Asset valuation and recognition of net income closely relate.’’ Explain, including conditions when they do not.
> Exhibit 4.22 presents selected operating data for three retailers for a recent year. Macy’s operates several department store chains selling consumer products such as brand-name clothing, china, cosmetics, and bedding and has a large pr
> The chapter describes free cash flows for common equity shareholders. If the firm borrows cash by issuing debt, how does that transaction affect free cash flows for common equity shareholders in that period? If the firm uses cash to repay debt, how does
> ‘‘Some asset valuations using historical costs are highly relevant and very representationally faithful, whereas others may be representationally faithful but lack relevance. Some asset valuations based on fair values are highly relevant and very represe
> A recent article in Fortune magazine listed the following firms among the top ten most admired companies in the United States: Dell, Southwest Airlines, Microsoft, and Johnson & Johnson. Access the websites of these four companies or read the Business se
> A firm’s income tax return shows income taxes for 2009 of $35,000. The firm reports deferred tax assets before any valuation allowance of $24,600 at the beginning of 2009 and $27,200 at the end of 2009. It reports deferred tax liabilities of $18,900 at t
> Describe how the statement of cash flows is linked to each of the other financial statements (income statement and balance sheet). Also review how the other financial statements are linked with each other.
> Explain residual ROCE (return on common shareholders’ equity). What does residual ROCE represent? What does residual ROCE measure?
> Suppose the following hypothetical data represent total assets, book value, and market value of common shareholders’ equity (dollar amounts in millions) for Microsoft, Intel, and Dell, three firms involved in different aspects of the co
> What are the fundamental determinants of share value, and how do they affect market-based valuation multiples, such as market-to-book and price earnings ratios?
> A firm’s income tax return shows $50,000 of income taxes owed for 2009. For financial reporting, the firm reports deferred tax assets of $42,900 at the beginning of 2009 and $38,700 at the end of 2009. It reports deferred tax liabilities of $28,600 at th
> Explain the implications of a value to- book ratio that is exactly equal to 1. Compare the implications of a value-to-book ratio that is greater than 1 to those of a value-to-book ratio that is less than 1.
> Sunbeam Corporation manufactures and sells a variety of small household appliances, including toasters, food processors, and waffle grills. Exhibit 6.21 presents a statement of cash flows for Sunbeam for Year 5, Year 6, and Year 7. After experiencing dec
> Effective financial statement analysis requires an understanding of a firm’s economic characteristics. The relations between various financial statement items provide evidence of many of these economic characteristics. Exhibit 1.22 pres
> Dick’s Sporting Goods is a chain of full-line sporting goods retail stores offering a broad assortment of brand name sporting goods equipment, apparel, and footwear. Dick’s Sporting Goods had its initial public offerin
> In conceptual terms, explain the value-to-book valuation approach. Explain how the value-to-book approach described and demonstrated in this chapter relates to the residual income valuation approach described and demonstrated in Chapter 13.
> Analyzing the profitability of restaurants requires consideration of their strategies with respect to ownership of restaurants versus franchising. Firms that own and operate their restaurants report the assets and financing of those restaurants on their
> If the firm borrows capital from a bank and invests it in assets that earn a return greater than the interest rate charged by the bank, what effect will that have on residual income for the firm? How does that effect compare with the effects of capital s
> Why is it appropriate to use the required rate of return on equity capital (rather than the weighted-average cost of capital) as the discount rate when using the residual income valuation approach?
> The Coca-Cola Company is a global soft drink beverage company (ticker symbol ¼ KO) that is a primary and direct competitor with PepsiCo. The data in Exhibits 12.14–12.16 include the actual amounts for 2010, 2011, and 2012
> Identify conditions that would lead an analyst to expect that management might attempt to manage earnings downward.
> Explain the two roles of book value of common shareholders’ equity in the residual income valuation approach.
> Explain the theory behind the residual income valuation approach. Why is residual income value-relevant to common equity shareholders?
> Explain residual income. What does residual income represent? What does residual income measure?
> Explain required income. What does required income represent? How is required income conceptually analogous to interest expense?
> Conceptually, why should an analyst expect a valuation based on dividends, a valuation based on the free cash flows for common equity shareholders, and a valuation based on residual income to yield equivalent value estimates for a given firm?
> The 3M Company is a global diversified technology company active in the following product markets: consumer and office; display and graphics; electronics and communications; health care; industrial; safety, security, and protection services; and transpor
> Suppose you are applying the residual income valuation model to value a firm with extremely aggressive accounting. Suppose, for example, the firm has a substantially overvalued asset on the balance sheet. (Perhaps the firm has a large amount of goodwill
> The text discusses inputs managers might use to determine fair values of assets and liabilities and identifies different classifications of assets identified in SFAS No. 157. Suppose a major university endowment has investments in a wide array of assets,
> Intel Corporation’s consolidated income statement appears in Exhibit 6.20. Note 15, which follows, explains the source of the restructuring charges, the breakdown of the charges into employee-related costs and asset impairments, and the
> Suppose the following hypothetical data represent total assets, book value, and market value of common shareholders’ equity (dollar amounts in millions) for Abbott Labs, IBM, and Target Stores. Abbott Labs manufactures and sells health
> Suppose the following hypothetical data represent total assets, book value, and market value of common shareholders’ equity (dollar amounts in millions) for three firms. Each of these firms, Southwest Airlines, Kroger, and Yum! Brands,
> Conceptually, why should you expect valuation based on dividends and valuation based on the free cash flows for common equity shareholders to yield identical value estimates?
> Explain the theory behind the free cash flows valuation approaches. Why are free cash flows value-relevant to common equity shareholders when they are not cash flows to those shareholders but rather are cash flows into the firm?
> Explain ‘‘free’’ cash flows. Describe which types of cash flows are free and which are not. How do free cash flows available for debt and equity stakeholders differ from free cash flows available for common equity shareholders?
> Describe circumstances and give an example of when free cash flows to equity shareholders and free cash flows to all debt and equity stakeholders will be identical. Under those circumstances, will the required rate of return on equity and the weighted-av
> Describe valuation settings in which the appropriate discount rate to use is the required rate of return on equity capital versus settings in which it is appropriate to use a weighted-average cost of capital.
> The chapter describes valuation using free cash flows for all debt and equity stakeholders as well as free cash flows for equity shareholders. For each approach, give one example of valuation settings in which that approach is appropriate.
> Assume that a corporation needs to enter the private debt market to raise funds for plant expansion. The corporation expects debt covenants to place restrictions on the levels of its current ratio and total-liabilities to assets ratio. Considering the ac
> Kelly Services (Kelly) places employees at clients’ businesses on a temporary basis. It segments its services into (1) Commercial, (2) Professional and technical, and (3) International. Kelly recognizes revenues for the amount bille
> Suppose you are valuing a healthy, growing, profitable firm and you project that the firm will generate negative free cash flows for equity shareholders in each of the next five years. Can you use a free-cash-flows-based valuation approach when cash flow
> Prior to Year 8, Cooper Corporation engaged in a wide variety of industries, including weapons manufacturing under government contracts, information technologies, commercial aircraft manufacturing, missile systems, coal mining, material service, ship man
> Most economists describe three determinants of the interest rates on a borrower’s debt: a real interest rate, which is a charge for using capital; an adjustment for expected inflation to insure that debt is repaid in dollars having the same purchasing po
> A firm had the following values for the four debt ratios discussed in the chapter: Liabilities to Assets Ratio: less than 1.0 Liabilities to Shareholders’ Equity Ratio: equal to 1.0 Long-Term Debt to Long-Term Capital Ratio: less than 1.0 Long-Term Debt
> The use of the term reserve in the title of a financial statement account is not acceptable in the United States, primarily because its purpose is often too vague. However, informal use of the term by chief financial officers, analysts, and the media is
> All leases for financial reporting purposes are treated as either capital (finance) leases or operating leases. The effects of the two reporting techniques on the financial statements differ substantially. From the perspective of the lessee, prepare a ch
> Alfa Romeo incurs direct cash costs of $30,000 in manufacturing a red convertible automobile during 2009. Assume that it incurs all of these costs in cash. Alfa Romeo sells this automobile to you on January 1, 2010, for $45,000. You pay $5,000 immediatel
> Assume that Motorola, Inc., issues bonds with a face value of $10,000,000 for $9,200,000. The bonds have detachable warrants that may be traded in for shares of common stock. Assume that immediately after issue, bonds with warrants detached trade for $9,
> ARTL Company issued 3%, 10-year convertible bonds on January 1, 2013, at their par value of $500 million. Each $1,000 bond is convertible into 40 shares of ARTL’s $1 par value common stock. Use the template below to show the financial s
