Expert answer:Answer the attached questions. Show your calculati

Expert answer:Please answer the attached questions. Reformulated statements are provided at the end of the document.
questions_1_4.docx

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QUESTION 1. Analysis of an Income Statement (25 points)
A firm reported the following income statement for 2016 (in millions of dollars):
Net Sales
Operating expenses
Restructuring charge
20,367
(17,484)
(65)
Operating profit
2,818
Gain on asset sales
1,083
Interest expense
(363)
Interest income
118
3,656
Provision for income taxes
1,606
Net income
2,050
Operating expenses include $1,230 million from expected returns on pension plan assets.
a. Reformulate this statement to distinguish operating items from financing items.
Identify core operating income from sales, after tax. The firm’s statutory tax rate is 37%.
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[Answer a. here]
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b. Calculate the effective tax rate on core operating income.
QUESTION 2. Forecasting Cash Flow and Net Indebtedness. (25 points)
At the end of fiscal year 2015, a firm reported the following in its balance sheet (in millions):
Net operating assets
Net financial obligations
$500
300
You forecast that the firm will earn a 20% return on common equity (ROCE) in 2016 (on
beginning-of-year equity), after $15 million in net financial expenses (net of taxes). You also
forecast that net operating assets will grow 6%. The board of directors has decided that the firm
will pay $20 million in dividends in 2016, but there will be no share issues or repurchases.
Forecast for:
a. Return on net operating assets (RNOA) for 2016 (on beginning-of-year net operating
assets).
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b. Free cash flow for 2016
c. Net financial obligations at the end of 2016.
d. Calculate the financial leverage ratio (FLEV) at the end of 2015 and 2016.
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QUESTION 3. Levered and Unlevered Price-to-Book Ratio (10 points)
A firm trades at 3.5 times its book equity of $300 million. It reports a financing leverage ratio of
0.5. What is its unlevered (enterprise) price-to-book ratio?
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QUESTION 4. Challenging the Market Price of Starbucks Corporation (SBUX) (40 points)
Starbucks’ 744.8 million shares traded at $49.74 each when its financial statements for fiscal
year 2011 were released. The reformulated version of the income statement and balance sheet are
below. Unless otherwise indicated, use a required return of 9% in answering the questions below.
a. Calculate core return on net operating assets for 2011 (Core RNOA) using average
balance sheet amounts in the calculation.
b. Break this Core RNOA down into core profit margin and asset turnover. How much in
net operating assets does Starbucks hold to maintain a dollar of revenue?
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c. Forecast residual operating income for fiscal year 2012 based on the forecast that Core
RNOA will be the same in 2012 as it was in 2011.
d. Value the common equity based on this forecast with a forecast that residual operating
income after 2012 will grow at a rate of 4% per year. Assign a value of $48 million to the
noncontrolling interest.
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e. Value the common equity with the forecast that Starbucks will maintain the same profit
margin and asset turnover in future years as in 2011 but that sales growth will be at a
pace of 6% per year.
f. What is the market’s forecast of this residual operating income growth rate given you
have a hurdle rate of 9%? What is the market’s forecasted growth rate if you see the
required return as 12%?
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g. If you forecast that the core RNOA and asset turnover in 2011 will be maintained in the
future, what is the market’s forecast of the sales growth rate in the future. Use a 9%
hurdle rate.
Financial statements follow…….
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Reformulated Income Statement, 2011
(in millions of dollars)
Net revenue
11,700.4
Cost of sales
4,949.3
Gross margin
6,751.1
Core operating expenses
Store operating expenses (3,665.1 – 36.2)
3,628.9
Advertising Expenses
141.4
Other operating expenses
260.6
Depreciation and amortization
523.3
General and administrative expenses
636.1
Core operating income from sales, before tax
5,190.3
1,560.8
Tax reported
563.1
Tax on interest income
(11.0)
Tax on non-core income
(17.7)
Core operating income from sales, after tax
534.4
1,026.4
Other core operating income
Income from equity invitees (reported after tax)
Core operating income, after tax
173.7
1200.1
Other operating income (non-core, unsustainable)
Before-tax items:
Gain on sale of properties
30.2
Gain from acquisition of joint ventures 55.2
Unrealized loss on trading securities
(2.1)
Impairment losses
(36.2)
47.1
Tax @ 37.5%
17.7
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After-tax items:
29.4
Unrealized loss in OCI
(4.8)
Translation loss
(6.5)
Net loss on exercise of stock options
(13.0)
Operating income
5.1
1,205.2
Net Financial Income
Interest income
62.8
Interest expense
33.3
Net interest
29.5
Tax @ 37.5%
11.0
Net interest offer tax
18.5
Unrealized gain on debt investments
0.4
18.9
1,224.1
Noncontrolling interest
Comprehensive income to common
(2.3)
1,221.8
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Reformulated Balance Sheet
(in millions of dollars)
2011
2010
1,098.1
1,114.0
Short-term investments
855.0
236.5
Long-term investments
107.0
191.8
2,060.1
1,542.3
549.5
549.4
Net financial assets (NFA)
1,510.6
992.9
Net Operating Assets (NOA)
2,876.7
2,689.4
Total Equity
4,387.3
3,682.3
2.4
7.6
4,384.9
3,674.7
Net Financial assets:
Cash and cash equivalents (less $50m)
Financial assets
Long-term debt
Noncontrolling interest
Common shareholders’ equity (CSE)
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