Q1. Analyzing and Interpreting Lease Footnote Disclosures
The Gap, Inc., discloses the following schedule to its 2013 10-K report relating to its leasing activities
|
Fiscal Year ($ millions)
|
|
|
2013
|
$1,093
|
|
2014
|
$1,069
|
|
2015
|
$924
|
|
2016
|
$753
|
|
2017
|
$584
|
|
Thereafter
|
$1,709
|
|
Total Minimum Lease Commitments
|
$6,132
|
a. Compte the present value of GAP's operating leases using a 6% discount rate and round the remaining lease term to the nearest whole year.
b. What types of adjustments might we consider to GAP's balance sheet and income statement for analysis purposes?
Q2. Analyzing and Interpreting Disclosure on Contract Manufacturers
Nike, Inc. reports the following information relating to its manufacturing activities in footnotes to its 10-K report for the year ended May 31, 2013.
Manufacturing: Virtually all of our footwear is manufactured outside of the United States by indepdendent contract manufacturers. In fiscal 2013, contract factories in Vietnam, China, and Indonesia manufactured approximately 42%, 30%, and 26% of total NIKE Brand footwear, respectively
We also have manufacturing agreements with independent factories in Argentina, Brazil, India, and Mexico to manufacture footwear for sale primarily within those countries. The largest single footwear factory with which we have contracted accounted for approximately 6% of total fiscal 2013 NIKE Brand footwear production. Almost all of NIKE Brand apparel is manufactured outside of the United State by independent contract manufacturers located in 28 countries. Most of this apparel production occurred in China, Vietnam, Thailand, Indonesia, Sri Lanka, Pakistan, Malaysia, Turkey, Mexico, and Cambodia. The largest single apparel factory that we have contracted with accounted for approximately 6% of total fiscal 2013 apparel production.
a. What effect does the use of contract manufacturers have on Nike's balance sheet?
b. How does Nike's use of contract manufacturers affect NIKE's return on Net Operating Assets (RNOA) and its components, net operating profit margin (NOPM) and net operating asset turnover (NOAT)? Explain.
c. NIKE executes agreements with its contract manufacturers to purchase their output. How are such "Executory contracts" reported under GAAP? Does your answer suggest a possible motivation for the use of contract manufacturing?
Q3. Identify and describe the four major steps in forecasting financial statements
Q4. Describe the rationale for use of year-end balances in the computation of turnover rates (and other percentages) that are used to forecast selected balance sheet accounts.
Q5. Estimating Share Value Using the DCF Model
Following are forecasts of Abercrombie & Fitch Co.'s sales, net operating profit after tax (NOPAT) and net operating assets (NOA) as of February 2, 2013.
|
(In millions)
|
Reported
2013
|
Horizon Period
|
Terminal
Period
|
|
2014
|
2015
|
2016
|
2017
|
|
Sales
|
$4,511
|
$4,872
|
$5,262
|
$5,683
|
$6,138
|
$6,261
|
|
NOPAT
|
242
|
261
|
282
|
305
|
329
|
336
|
|
NOA
|
1,446
|
1,562
|
1,687
|
1,821
|
1,967
|
2,007
|
Answer the following requirements assuming a discount rate (WACC) of 10%, a terminal period growth rate of 2%, common shares outstanding of 78.4 million, and net nonoperating obligations (NNO) of $(372) million (negative NNO reflects net nonoperating assets such as investments rather than net obligations)
a. Estimate the value of a share of Abercrombie & Fitch common stock using the discounted cash flow (DCF) model as of February 2, 2013.
b. Abercrombie & Fitch (ANF) Stock closed at $45.46 on April 2, 2013 the date the 10-K was filed with the SEC. How does your valuation estimate compare with this closing price? What do you believe are some reasons for the differences?
Q6. Estimating Share Value Using the ROPI Model
Refer to the information in E12-15 to answer the following requirements.
|
(In millions)
|
Reported
2013
|
Horizon Period
|
Terminal
Period
|
|
2014
|
2015
|
2016
|
2017
|
|
Sales
|
$4,511
|
$4,872
|
$5,262
|
$5,683
|
$6,138
|
$6,261
|
|
NOPAT
|
242
|
261
|
282
|
305
|
329
|
336
|
|
NOA
|
1,446
|
1,562
|
1,687
|
1,821
|
1,967
|
2,007
|
a. Estimate the value of a share of Abercrombie & Fitch common stock using the residual operating income (ROPI) model as of February 2, 2013.
b. Abercrombie & Fitch stock closed at $45.46 on April 2, 2013, the date the 10-K was filed with the SEC. How does your valuation compare with this closing price? What do you believe are some reasons for the difference?
Q7. Forecasting and Estimating Share Value Using the DCF Model
Following are the income statement and balance sheet for Kellogg Company
|
KELLOGG COMPANY Consolidated Statement of Income
|
|
For Year Ended December 31 (in millions)
|
2012
|
2011
|
2010
|
|
Net Sales
|
$14,197
|
$13,198
|
$12,397
|
|
Cost of Goods Sold
|
8,763
|
8,046
|
7,055
|
|
Selling, General and Administrative expense
|
3,872
|
3,725
|
3,305
|
|
Operating Profit
|
1,562
|
1,427
|
2,037
|
|
Interest expense
|
261
|
233
|
248
|
|
Other income (expense), net
|
24
|
(10)
|
1
|
|
income before income taxes
|
1,325
|
1,184
|
1,790
|
|
income taxes
|
363
|
320
|
510
|
|
Earnings (loss) from joint ventures
|
(1)
|
-
|
-
|
|
Net income
|
961
|
864
|
1,280
|
|
Net loss attributable to non-controlling interests
|
-
|
(2)
|
(7)
|
|
Net income attributable to Kellogg Company
|
$961
|
$866
|
$1,287
|
|
KELLOGG COMPANY Consolidated Balance Sheet
|
|
(millions, except share data)
|
2012
|
2011
|
|
Current Assets
|
|
|
|
Cash and cash equivalents
|
$281
|
$460
|
|
Accounts receivable, net
|
1,454
|
1,188
|
|
Inventories
|
1,365
|
1,174
|
|
Other current assets
|
280
|
247
|
|
Total current assets
|
3,380
|
3,069
|
|
Property, net
|
3,782
|
3,281
|
|
Goodwill
|
5,053
|
3,623
|
|
Other intangibles, net
|
2,359
|
1,454
|
|
Other assets
|
610
|
516
|
|
Total assets
|
$15,184
|
$11,943
|
|
|
|
|
|
Current Liablities
|
|
|
|
Current maturities of long-term debt
|
$755
|
$761
|
|
Notes payable
|
1,065
|
234
|
|
Accounts payable
|
1,402
|
1,189
|
|
Other current liabilities
|
1,301
|
1,129
|
|
Total current liabilities
|
4,523
|
3,313
|
|
Long-term debt
|
6,082
|
5,037
|
|
Deferred income taxes
|
523
|
643
|
|
Pension liability
|
886
|
560
|
|
Other liabilities
|
690
|
592
|
|
|
|
|
|
Equity
|
|
|
|
Common stock, $.25 par value, 1,000,000 shares authorized
|
|
|
|
Issued: 419,718,217 shares in 2012 and 419,484,087 shares
|
|
|
|
in 2011
|
105
|
105
|
|
Capital in excess of par value
|
573
|
522
|
|
Retained earnings
|
5,615
|
5,305
|
|
Treasury stock at cost:
|
|
|
|
58,452,083 shares in 2012 and 62,182,500 shares in 2011
|
(2,943)
|
(3,130)
|
|
Accumulated other comprehensive income (loss)
|
(931)
|
(1,006)
|
|
Total Kellogg Company equity
|
2,419
|
1,796
|
|
Noncontrolling interests
|
61
|
2
|
|
Total Equity
|
2,480
|
1,798
|
|
Total Liabilities and Equity
|
$15,184
|
$11,943
|
Required:
a. Compute net operating assets (NOA) as of year end 2012.
b. Compute net operating profit after tax (NOPAT) for 2012, assuming a federal and state statutory tax rate of 37%
c. Forecast Kellogg's sales, NOPAT, and NOA for 2013 through 2016 using the following assumptions:
Sales growth - 8.00%
Net operating profit margin (NOPM) - 7.80%
Net Operating asset turnover (NOAT), year end - 1.41%
Forecast the terminal period value using a 1% terminal period growth using the NOPM and NOAT assumptions above.
d. Estimate the value of a share of Kellogg common stock using the discounted cash flow (DCF) model; assume a discount rate (WACC) of 6%, common shares outstanding of 361.3 million, net nonoperating obligations (NNO) of $7,621 million, and noncontrolling interest (NCI) from the balance sheet of $61 million.
e. Kellogg's stock closed at $59.95 on February 26, 2013, the date the Form 10-K was filed with the SEC. How does your valuation estimate compare with this closing price? What do you belive are some reasons for the difference?