Expert answer:Accounting Questions

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1. The following were extracted from a financial report for a 2017 fiscal year (in millions of dollars):
Operating assets
Operating liabilities
Financial assets
Financial liabilities
Interest income
Interest expense
Comprehensive income
2017
165
78
40
60
3.6
5.8
12
The firm has a statutory tax rate of 35%.
(a) What was the operating income (after-tax) for 2017?
(b) What is the common shareholders’ equity at the end of 2017?
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(c) Net payout to shareholders for the year was $6 million. What was common
shareholders’ equity at the beginning of 2017?
2
2. Some accounting numbers for a firm for fiscal year 2017 (in millions of dollars) are as follows:
Beginning common equity
Operating income (after-tax)
Net financial expense (after-tax)
Free cash flow
Ending common equity
Ending net operating assets
473
57
15
67
498
674
Calculate:
(a) Net cash paid to common equity holders.
(b) Cash paid to net debt holders.
3
(c) Net operating assets at the beginning of the year.
(d) Net financial obligations (on beginning-of-year balances).
4
3. The following summarizes the balance sheet and income statement for a property-casualty
insurer. Amounts are in millions of dollars.
BALANCE SHEET
Operating assets associated with the underwriting operations
Unpaid claims and unearned premiums
Net operating assets in underwriting activities
Investments in debt and equity securities, at market
Common equity
2017
2,450
5,300
(2,850)
6,050
3,200
2016
2,300
5,600
(3,300)
5,940
2,640
The firm’s income statement for 2017 reported the following numbers to which taxes have been
allocated:
Income on underwriting activities, after-tax
Investment income and realized gains on investments, after-tax
353
891
In 2017, the expected return (after-tax) on the investment portfolio is 6%. Unrealized losses on
available-for-sale investments of $124 million were reported as part of other comprehensive
income.
(a) Calculate the residual income from underwriting activities for 2017. Use beginning-ofyear balance sheet numbers in the calculation and a required return of 9%.
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(b) Value the equity as of the end of fiscal 2017 under a forecast that the residual income
from underwriting will grow at 2% per year in the future.
6
4. A firm began its fiscal year with a book value of common equity of $823 million and net financial
assets of $125 million. At the end of the year, it reported book value of common equity of $1,782
million and net financial assets of $156 million. Comprehensive income was $123.45 million for the
year, with part of the income being interest from the beginning-of-year net financial assets earning
at an after-tax rate of 1.2%.
(a) Calculate the return on common equity (ROCE) on beginning-of-period balances.
(b) What was the net payout to shareholders during the year?
(c) Cash dividends of $45 million were paid out to common shareholders during the year.
There were no stock repurchases. What explains the remaining net payout shareholders
and in what amount?
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5. In a financial report, Delta Airlines (DAL) reported book value of common equity of —$0.048 (a
negative book value) and $10,457 million in net financial obligations. The annual after-tax
borrowing cost is 2.1%. The 846 million outstanding common shares trade at $9.62 each.
(a) Calculate the enterprise price-to-book ratio at which DAL trades.
(b) Analysts are forecasting forward earnings of $2.46 per share. Calculate the (enterprise)
forward P/E ratio.
(c) Analysts are forecasting earnings-per-share growth over the next five years at an annual
rate of 34.5%. With this forecast as a base, what is the PEG ratio?
8
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