Joe Ziegler

Finance 333
Final Exam
Exercise 1. The Treasurer's Rule: Cisco Systems
Cash flow from operations
Cash invested in operations
Free cash flow
Interest servicing
Interest payments
Interest receipts

10166
1459
8707
777
641
136
50

Tax (36.5%)
Cash available to shareholders
Cash dividends
Share repurchases
Share issue
Purchase of net financial assets

658
6896
1831

86
8621

5723
2898

The treasure must purchase $2897.6 of debt. He can do this by buying financial

Exercise 2. Analysis of the Equity Statement

A.
Tax benefit from exercise of options
Divide by tax rate
Loss before tax
Tax benefit
Loss after tax
B.
Common Equity, May 31, 2010

70
0.35
200
70
130

(2,700-120)

Net Payout
Cash dividends
Share repurchases
Share issues (405+200)
Comprehensive Income
Net income
Unrealized loss on debt securities
Loss on stock options

2580

250
132
-605

467
23
130

223

Preferred dividends
Common equity, May 31, 2011 (3227-120)

10

304
3107

C.
ROCE = 304/2580 = 11.78%

Exercise 3. Analysis of the Balance Sheet and Income Statement

A.
Reformulated Balance Sheet
Inventory
PPE
Goodwill
Operating assets
Accounts payable
Accrued expenses
Deferred taxes
Net operating assets
Short-term debt
Long-term debt
Preferred stock
Short-term investments
Common equity
Reformulated Income Statement
Sales
COGS
Gross margin
Selling expenses
Other operating expenses
Core operating income before tax
Tax reported
Tax benefit of net interest
Tax benefit from impairment charge
Core OI after tax
Non-core items
Impairment Charge
Tax (35%)
Loss on stock options
Operating income

870
2880
152
3902
167
30
24

15
1156
120
1291
190

221
3681

1101
2580

5432
3802
1630
478
338
251
23.1
10.5

30
10.5

816
814

284.6
529.4

19.5
130
379.9

Interest expense
Interest income
Tax (35%)
Preferred dividends
Unrealized loss on debt assets
Comprehensive income
B.
RNOA = 379.9/3681 = 10.32%
C.
NBC = 75.9/1101 = 6.89%
D.
ROCE = RNOA + FLEV x (RNOA - NBC)
FLEV = 1101/2580 = 0.427
ROCE = 10.32% + .427 x (10.32% - 6.89%)
= 11.78%
E.
Core operating PM = 529.4/5432 = 9.75%
Core RNOA = 529.4/3681 = 14.38%
ATO = 5432/3681 = 1.476
Core RNOA = Core PM x ATO
= 9.75% x 1.476
= 14.38%
F.
Effective tax rate = 284.6/814 = 34.96%
G.
FCF = OI - NOA
= 379.9 - (4032 - 3681)
H.
NFO = NOA - CSE
= 4032 - 3107
= 925
I.
Cash to net debt holders = FCF - Net cash to shareholders

70
4
66
23.1
42.9
10
23

75.9
304

= 28.9 - (-223)
= 251.9

Exercise 4. Analysis of Apple Inc (AAPL)

Reformulated Balance Sheet
2011
-4685

Net operating assets (NOA)

Net financial assets (NFA)
Cash equivalents
Short-term investments
Long-term marketable securities

9545
16137
55618

Common equity

81300
76615

Reformulated Income Statement

Operating income
Tax reported
Tax on financial income
OI after tax
Interest income
Tax (38%)
Net Income
Core OI = 25664.7
Core PM = 25664.7/108249 = 23.71%
Core ReOI = Core OI - (.09 x NOA)
=25,664.7 - (.09 x 2950)
= 25930.2
Effective tax rate = 8125.3 / 33790 = 24.05%
Value per share = CSE + ReOI/p-g
=76615 + (25930.2 / .09)
=364,728.3 million
=392.49 per share on 929.277 million shares
Value per share = 76615 + (25,930.2 x 1.02) / (.09-.02)
= 454455.1 million
= 489.04 per share on 929.277 million shares

2011
33790
8283
157.7

415
157.7

8125.3
25,664.70

257.3
25922

I would buy shares of apple because they have a high operatin profit margin and strong sales growth.

Exercise 5. Challenging the Market price for Starbucks Corporation (SBUX)

A.
(i) Net debt = 549.5-(1098.1 + 855.0 + 107.0)
=1510.6
(ii) BPS = 4384.9/744.8
5.887
(iii) Trailing P/E = (49.66 + 56) / 1.66
(iv) P/B = 49.66/5.887
8.435
B.
Residual earnings = 1245.7 - (.08 x 3674.7)
=951.724 million
C.
Value = 4384.9 + (951.724/.08)
= 16281.45 million
=21.86 per share on 744.8 million shares
D.
Market price = 49.66 x 744.8 million shares
= 36986.8 million
No growth value
= 16281.5
Market value
= 20705.3 or 27.8 per share
E.
2011
EPS
DPS
BPS
Residual
earnings

5.887

Residual earnings growth

2012
1.78
0.64
7.027
1.309

2013
2.14

1.578

20.54%

F.
Market price = 49.66 = 5.887 + (1.309/1.08) + (1.578/1.08(1.08-g))
Solution for g = 1.0457 (4.57% growth)

If Starbucks R/E can grow at a rate of 4.57% going forward from 2014, it is worth 49.66.
If it can earn that rate in the very long run, but maintain 2013 growth of 20.54%, then I think it is wort

an do this by buying financial assets or financial liabilities

2010
-2950

10991
14359
25391

50741
47791

rgin and strong sales growth.

on (SBUX)

is worth 49.66.
20.54%, then I think it is worth more than 49.66