Exam 16: Option Valuation

The P/E ratio that is based on a firm's financial statements and reported in the newspaper stock listings is different from the P/E ratio derived from the dividend discount model (DDM)because

Lake Somenos Furniture Co. Income Statement (2001) Sales \ 8,000,000 Cost of goods sold 5,260,000 Gross profit 2,740,000 Selling and administrative expenses 1,500,000 Operating profit 1,240,000 Interest expenses 140,000 Income before tax 1,100,000 Tax expense 440,000 Net ineome \ 660,000 Balance Sheet 2001 2000 Cash \ 200,000 \ 50,000 Accounts receivable 1,200,000 950,000 Inventory 1.840,000 1,500,000 Total current assets 3,240,000 2,500,000 Fixed assets 3,200,000 3,000,000 Total assets \ 6,440,000 \ 5,500,000 Accounts payable 800,000 720,000 Bank loan 600,000 100,000 Total current liabilities 1,400,000 820,000 Bonds payable 900,000 1,000,000 Total liabilities 2,300,000 1,820,000 Common stock(130,000 shares) 300,000 300,000 Retained earnings 3,840,000 3,380,000 Total liabilities \& equity \ 6,440,000 \ 5,500,000 -Refer to the financial statements of Alderwood Vineyards,Inc.The firm's asset turnover ratio for 2001 is _________.

Which of the following are issues when dealing with the financial statements of international firms? I.Many countries allow firms to set aside larger contingency reserves than the amounts allowed for Canadian firms. II.Many firms outside Canada use accelerated depreciation methods for reporting purposes,whereas most Canadian firms use straight-line depreciation for reporting purposes. III.Intangibles such as goodwill may be amortized over different periods or may be expensed rather than capitalized. IV.There is no way to reconcile the financial statements of non-Canadian firms to GAAP.

If you wish to compute economic earnings and are trying to decide how to account for inventory,______.

Publicly traded firms must prepare audited financial statements according to generally accepted accounting principles (GAAP).How do comparability problems arise?

Lake Somenos Furniture Co. Income Statement (2001) Sales \ 8,000,000 Cost of goods sold 5,260,000 Gross profit 2,740,000 Selling and administrative expenses 1,500,000 Operating profit 1,240,000 Interest expenses 140,000 Income before tax 1,100,000 Tax expense 440,000 Net ineome \ 660,000 Balance Sheet 2001 2000 Cash \ 200,000 \ 50,000 Accounts receivable 1,200,000 950,000 Inventory 1.840,000 1,500,000 Total current assets 3,240,000 2,500,000 Fixed assets 3,200,000 3,000,000 Total assets \ 6,440,000 \ 5,500,000 Accounts payable 800,000 720,000 Bank loan 600,000 100,000 Total current liabilities 1,400,000 820,000 Bonds payable 900,000 1,000,000 Total liabilities 2,300,000 1,820,000 Common stock(130,000 shares) 300,000 300,000 Retained earnings 3,840,000 3,380,000 Total liabilities \& equity \ 6,440,000 \ 5,500,000 -Refer to the financial statements of Alderwood Vineyards,Inc.The firm's return on equity ratio for 2001 is _________.

Mt. Prevost Machine Corp. Income Statement (2001) Sales \ 4,000,000 Cost of goods sold 3,040,000 Gross profit 960,000 Selling and administrative expenses 430,000 Operating profit 530,000 Interest expense 160,000 Income before tax 370,000 Tax expense 148,000 Net income \ 222,000 Balance Sheet 2001 2000 Cash \ 60,000 \ 50,000 Aceounts receivable 550,000 500,000 Inventory 690,000 620,000 Total current assets 1,300,000 1,170,000 Fixed assets 1,300,000 1,230,000 Total assets 2,600,000 2,400,000 Aceounts payable Bank loan 270,000 250,000 Total current liabilities 580,000 500,000 Bonds payable 850,000 750,000 Total liabilities 900,000 1,000,000 Common stock (25,000 shares) 1,750,000 1,750,000 Retained earnings 250,000 250,000 Total liabilities \& equity 600,000 400,000 -Refer to the financial statements of Mt.Prevost Machine Corp.The firm's quick ratio for 2001 is ______.

A firm has an ROE of - 2%,a debt/equity ratio of 1.0,a tax rate of 0%,and an interest rate on debt of 10%.The firm's ROA is _______.

Purvis Corp.wants to increase its current ratio from the present level of 1.5 when it closes the books next week.The action of __________ will have the desired effect.

Comparability problems arise because