Chapter 4: Q3CP (page 477)
The information in the following table comes from the 2010 financial statements of QuickBrush Company and SmileWhite Corporation:
Determine which company has the higher quality of earnings by discussing each of the three notes
Smile White
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Consider two firms producing smartphones. One uses a highly automated robotics process, while the other uses human workers on an assembly line and pays overtime when there is heavy production demand.
a. Which firm will have higher profits in a recession? In a boom?
b. Which firm’s stock will have a higher beta?
6. Scott Kelly is reviewing MasterToy’s financial statements in order to estimate its sustain-
able growth rate. Using the information presented in Table 14.19 : (LO 14-3)
a. Identify and calculate the components of the DuPont formula.
b. Calculate the ROE for 2013 using the components of the DuPont formula.
c. Calculate the sustainable growth rate for 2013 from the firm’s ROE and plowback ratios. TABLE 14.19
Mastertoy, Inc.: Actual 2012 and estimated 2013 financial
statements for fiscal year ending December 31 (\( million,
except per-share data)
2012 2013
Income Statement
Revenue \)4,750 \(5,140
Cost of goods sold 2,400 2,540
Selling, general, and administrative 1,400 1,550
Depreciation 180 210
Goodwill amortization 10 10
Operating income \) 760 \( 830
Interest expense 20 25
Income before taxes \) 740 \( 805
Income taxes 265 295
Net income \) 475 \( 510
Earnings per share \) 1.79 \( 1.96
Average shares outstanding (millions) 265 260
Balance SheetCash \) 400 \( 400
Accounts receivable 680 700
Inventories 570 600
Net property, plant, and equipment 800 870
Intangibles 500 530
Total assets \)2,950 \(3,100
Current liabilities \) 550 \( 600
Long-term debt 300 300
Total liabilities \) 850 \( 900
Stockholders’ equity 2,100 2,200
Total liabilities and equity \)2,950 \(3,100
Book value per share \) 7.92 $ 8.46
Annual dividend per share 0.55 0.60
Jand, Inc., currently pays a dividend of \(1.22, which is expected to grow indefinitely at 5%. If the current value of Jand’s shares based on the constant-growth dividend discount model is \)32.03, what is the required rate of return?
Janet Ludlow is preparing a report on U.S.-based manufacturers in the electric toothbrush industry and has gathered the information shown in Tables 12.8 and 12.9. Ludlow’s report concludes that the electric toothbrush industry is in the maturity (i.e., late) phase of its industry life cycle.
a. Select and justify three factors from Table 12.8 that support Ludlow’s conclusion.
b. Select and justify three factors from Table 12.9 that refute Ludlow’s conclusion.
Cash flow from operating activities includes:
a. Inventory increases resulting from acquisitions.
b. Inventory changes due to changing exchange rates.
c. Interest paid to bondholders.
d. Dividends paid to stockholders.
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