AFM291 Lecture Notes - Lecture 7: Credit Risk, Retained Earnings, Book Value

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raspberrygnu289

16 Nov 2016

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM291

Professor

Forbes Burkowski

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Document Summary

Afm 291 chapter 7 financial assets. Financial asset: an assets arising from contractual agreements on future cash flows. Examples of financial assets: investments in stocks and bonds and theses investments entitle the holder to future dividends and interest even if it is uncertain. A financial asset is on the left side of the balance for the investor and a similar item is on the right side of the balance sheet for the counterparty as a liability/equity. Equipment is not a financial asset because there is no counterparty and it will not a appear on the ride side of someone"s balance sheet entity and a financial liability/equity of another entity. Financial instrument (ias 32): it is any contract that gives rise to a financial asset of one. But when a parent company owns a large portion of another company (subsidiary) the market price is not relevant because the parent company does not intend to sell its holdings.

Related Questions

FSU Manufacturing, Inc. has the following financial statements data for 2014:

Income Statement		Balance Sheet
Sales	$102,500	Cash	$40,000
Cost of Goods	$50,000	Fixed Assets	$55,000
SG&E Expenses	$35,000	Total Assets	$95,000
EBIT	$17,500	Accounts Payable	$12,000
Interest Expense	$2,500	Long-term Debt	$25,000
Taxes	$6,000	Retained Earnings	$28,000
Net Income	$9,000	Paid-in Common Equity	$30,000

Trait 1		Use of financial statements
1.
	a.		Compute the firmâs debt ratio and current ratio.
	b.		Is the firm profitable? Does the balance sheet balance? Explain.
	c.		If the firm paid $5,000 in dividends in 2014, what was its retained earnings balance at the end of 2013? (20 points)

Trait 2		Student relates financial ratios to improved business decisions
2.
	a.		Compute the firmâs net profit margin, total asset turnover, and financial leverage multiplier (also known as the equity multiplier).
	b.		Explain what each of the three ratios above tells you about the firmâs performance and how they combine to form the firmâs return on equity.
	c.		The financial data for the firmâs major competitors show on average a net profit margin of 16%, total asset turnover of 1.25, but comparable leverage. Identify some possible business decisions that the firm could make so that it would be as attractive an investment as its competitors.

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Your friend, Liz, loves to shop at Target and is now interestedin investing in the company. Tom, another friend, has told her thatTargetâs debt structure is risky with obligations of nearly 74% oftotal assets. Liz sees that debt on the balance sheet is 65% oftotal assets and is confused by Tomâs comment. Write an explanationto Liz discussing the debt structure of Target and why Tom thinksTarget is risky. Be sure to explain clearly what informationappears on financial statements, as well as what information doesnot appear directly on the financial statements. Use theinformation below in your discussion. At fiscal year-end February2, 2008, Target Corporation had the following assets andliabilities on its balance sheet (in millions): Current liabilities$11,782 Long-term debt 15,126 Other liabilities 2,345 Total assets44,560 Target reported the following information on leases in thenotes to the financial statements: Total rent expense was $165million in 2007, $158 million in 2006, and $154 million in 2005,including percentage rent expense of $5 million in 2007, 2006, and2005. Most long-term leases include one or more options to renew,with renewal terms that can extend the lease term to more than 50years. Certain leases also include options to purchase the leasedproperty. Future minimum lease payments required undernon-cancellable lease agreements existing at February 2, 2008,were: Future Minimum Lease Payments (in Millions) Operating LeasesCapital Leases 2008 $ 239 $ 12 2009 187 16 2010 173 16 2011 129 162010 123 17 After 2010 2, 843 155 Total future minimum leasepayments $3694 (a) $232 Less: Interest (b) (105) Present value ofminimum capital lease payments $127 (c) (a) Total contractual leasepayments include $1,721 million related to options to extend leaseterms that are reasonably assured of being exercised, and alsoinclude $98 million of legally binding minimum lease payments forstores that will open in 2008 or later. (b) Calculated using theinterest rate at inception of each lease. (c) Includes currentportion of $4 million.

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Current liabilities	$11,782
Long-term debt	15,126
Other liabilities	2,345
Total assets	44,560

Target reported the following information on leases in the notes to the financial statements:
Total rent expense was $165 million in 2007, $158 million in 2006, and $154 million in 2005, including percentage rent expense of $5 million in 2007, 2006, and 2005. Most long-term leases include one or more options to renew, with renewal terms that can extend the lease term to more than 50 years. Certain leases also include options to purchase the leased property.

Future minimum lease payments required under non-cancellable lease agreements existing at February 2, 2008, were:

Future Minimum Lease Payments (in Millions)	Operating Leases	Capital Leases
2008	$ 239	$ 12
2009	187	16
2010	173	16
2011	129	16
2010	123	17
After 2010	2, 843	155
Total future minimum lease payments	$3694 (a)	$232
Less: Interest (b)		(105)
Present value of minimum capital lease payments		$127 (c)

a) Total contractual lease payments include $1,721 million related to options to extend lease terms that are reasonably assured of being exercised, and also include $98 million of legally binding minimum lease payments for stores that will open in 2008 or later.
(b) Calculated using the interest rate at inception of each lease.
(c) Includes current portion of $4 million.

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AFM291 Lecture Notes - Lecture 7: Credit Risk, Retained Earnings, Book Value

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