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Current assets $12,594 $ 3,733
Property, plant, and equipment, net 9,946 3,583
Goodwill 18,624 634
Other assets 6,220 1,230
Total assets $47,384 $ 9,180
Current liabilities $11,824 $ 1,936
Long-term debt 14,213 3,499
Deferred taxes 1,803 455
Other liabilities 7,032 56
Stockholders™ equity 12,512 3,234
Total liabilities and stockholders™ equity $47,384 $ 9,180
Other Data
Philip Morris:
Common shares outstanding (millions) 920 1,003
Closing price common stock $80.250 $6.125
S&P Industrials Index:
Closing price 417.09 122.55
Earnings per share 16.29 15.36
Book value per share 161.08 109.43
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10 Web Problems




Table 14.6

Litchfield Chemical (LCC) Aminochem (AOC)

Current stock price $50 $30
Shares outstanding (millions) 10 20

Projected earnings per share (fiscal 1996) $4.00 $3.20
Projected dividend per share (fiscal 1996) $0.90 $1.60
Projected dividend growth rate 8% 7%
Stock beta 1.2 1.4
Investors™ required rate of return 10% 11%
Balance sheet data (millions)
Long-term debt $100 $130
Stockholders™ equity $300 $320




Table 14.7 Jerry™s Department Stores and Miller Stores: Selected Financial Data at
March 31, 1997 (In Millions Except Per-Share Data)


JDS MLS

Sales $21,250 $18,500
PP&E $ 5,700 $ 5,500
Short-term debt $ 0 $ 1,000
Long-term debt $ 2,700 $ 2,500
Common equity $ 6,000 $ 7,500
Issued and outstanding shares as of 3/31/97 250 400
Per-share market price on 5/30/97 $ 51.50 $ 49.50




Table 14.8 Jerry™s Department Stores: Data extracted from March 31, 1997, Financial
Statement Footnotes


1. The Company conducts the majority of its operations from leased premises, which include distri-
bution centers, warehouses, offices, and retail stores. Future minimum lease payments for non-
cancelable real and personal property operating leases are as follows:
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11
Chapter 14




Operating Leases
($ in Millions)

1997 $ 259
1998 213
1999 183
2000 160
2001 144
Thereafter 706

Total minimum lease payments $1,665
Present value of lease payments $1,000
Weighted-average interest rate 10%


2. During the fiscal year ended March 31, 1997, the Company sold $800 million of its accounts re-
ceivable with recourse, all of which were outstanding at year end.
3. Merchandise inventory. Substantially all merchandise inventory is valued at the lower of cost
(first-in, first-out) or market.
4. Substantially all of the Company™s employees are enrolled in Company-sponsored defined-
contribution profit sharing and retirement savings plans.




Table 14.9 Miller Stores: Data extracted from March 31, 1997, Financial
Statement Footnotes


1. The Company™s real estate policy is to own its stores; thus, the Company has no operating leases.
2. The Company does not sell or securitize its accounts receivable.
3. All inventories are valued on the last-in, first-out (LIFO) cost basis. As of March 31, 1997, invento-
ries were $700 million lower than they would have been had the first-in, first-out (FIFO) cost ba-
sis been used.
4. Actuarial present value of accumulated (ABO) and projected (PBO) benefit obligation for its pen-
sion plan at March 31, 1997, was as follows ($ in millions):


ABO PBO

Vested $1,550 $1,590
Nonvested 40 210
Total $1,590 $1,800
Plan assets at fair value = $3,400
Accrued pension per 3/31/97 balance sheet = $0



b. Select, based on Part a, the company that best meets Westfield™s investment criteria. Justify
your choice. [4 minutes]
c. Describe, based on Table 14.8 and Table 14.9, the balance sheet adjustments in each of the
following areas required to enhance the comparability of JDS and MLS. (A total of four ad-
justments is required.) [8 minutes]
(1) Leases
(2) Sale of receivables with recourse
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12 Web Problems



(3) Inventory valuation method
(4) Pensions
d. Calculate each of the following ratios for both JDS and MLS using the adjusted financial data
from Part c. Ignore any income tax effects. Show your work. [12 minutes]
(1) Book value per common share
(2) Total-debt-to-equity ratio
(3) Fixed-asset utilization (turnover)
e. Select, based on Part d, the company that best meets Westfield™s investment criteria. Justify your
choice. [4 minutes]

Note: Questions 7 “ 11 are all related.


7. CFA Examination Level II
CFA
®
Janet Ludlow is preparing a report on U.S.-based manufacturers in the electric toothbrush industry
and has gathered the information shown in Table 14.10 and Exhibit 14.1.
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 14.10 that support Ludlow™s conclusion. [6 minutes]
b. Select and justify three factors from Exhibit 14.1 that refute Ludlow™s conclusion. [6 minutes]

Note: Questions 8 through 11 relate to QuickBrush Company and SmileWhite
Corporation. A total of 73 minutes is allocated to these questions. Use the
first few minutes to review Table 14.11, Table 14.12, and Table 14.13; Exhibit
14.2 and Exhibit 14.3; and the questions themselves.


Table 14.10 Ratios for Electric Toothbrush Industry Index and Broad Stock Market Index


Year 1992 1993 1994 1995 1996 1997

Return on equity
Electric toothbrush 12.5% 12.0% 15.4% 19.6% 21.6% 21.6%
industry index
Market index 10.2 12.4 14.6 19.9 20.4 21.2

Average P/E
Electric toothbrush 28.53 23.23 19.63 18.73 18.53 16.23
industry index
Market index 10.2 12.4 14.6 19.9 18.1 19.1

Dividend payout ratio
Electric toothbrush
industry index 8.8% 8.0% 12.1% 12.1% 14.3% 17.1%
Market index 39.2 40.1 38.6 43.7 41.8 39.1

Average dividend yield
Electric toothbrush
industry index 0.3% 0.3% 0.6% 0.7% 0.8% 1.0%
Market index 3.8 3.2 2.6 2.2 2.3 2.1
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Chapter 14




Exhibit 14.1 Characteristics of the Electric Toothbrush Manufacturing Industry


• Industry Sales Growth”Industry sales have grown at 15“20 percent per year in recent years and
are expected to grow at 10“15 percent per year over the next three years.
• Non-U.S. Markets”Some U.S. manufacturers are attempting to enter fast-growing non-U.S.
markets, which remain largely unexploited.
• Mail Order Sales”Some manufacturers have created a new niche in the industry by selling elec-
tric toothbrushes directly to customers through mail order. Sales for this industry segment are
growing at 40 percent per year.
• U.S. Market Penetration”The current penetration rate in the United States is 60 percent of
households and will be difficult to increase.
• Price Competition”Manufacturers compete fiercely on the basis of price, and price wars within
the industry are common.
• Niche Markets”Some manufacturers are able to develop new, unexploited niche markets in
the United States based on company reputation, quality, and service.
• Industry Consolidation”Several manufacturers have recently merged, and it is expected that
consolidation in the industry will increase.
• New Entrants”“New manufacturers continue to enter the market.



8. CFA Examination Level II
CFA
®
After describing the electric toothbrush industry, Janet Ludlow™s report focuses on two companies,
QuickBrush Company and SmileWhite Corporation. Her report concludes:
QuickBrush is a more profitable company than SmileWhite, as indicated by the 40 percent sales growth and
substantially higher margins it has produced over the last few years. SmileWhite™s sales and earnings are
growing at a 10 percent rate and produce much lower margins. We do not think SmileWhite is capable of
growing faster than its recent growth rate of 10 percent whereas QuickBrush can sustain a 30 percent long-
term growth rate.

a. Criticize Ludlow™s analysis and conclusion that QuickBrush is more profitable (as defined by
return on equity (ROE)) than SmileWhite and that it has a higher sustainable growth rate. Use
only the information provided in Table 14.11 and Table 14.12. Support your criticism by calcu-
lating and analyzing:
• the five components that determine ROE.
• the two ratios that determine sustainable growth. [20 minutes]
b. Explain how QuickBrush has produced an average annual earnings per share (EPS) growth rate
of 40 percent over the last two years with an ROE that has been declining. Use only the informa-
tion provided in Table 14.11. [8 minutes]
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Table 14.11 Quickbrush Company: Financial Statements”Yearly Data ($000 Except
Per-Share Data)


December December December
1995 1996 1997

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