... adjusts the assets to their
market value. This valuation allows valuation of goodwill, real estate, inventories and
other assets at their market value.
BOOKKEEPING is the art, practice, or ... company is likely to enter into
bankruptcy within one or two years:
ã If the Z-Score is 3.0 or above - bankruptcy is not likely.
ã If the Z-Score is 1.8 or less - bankruptcy is likely.
ã A Z-Score ... which prices are
inordinately high.
BLANKET AUTHORIZATION is direct authority to act without having to gain approval for
each action. For example: "Blanket authorization was given to him for...
... Mandel
12. Global Finance 353
Eugene E. Comiskey and Charles W. Mulford
13. Financial Management of Risks 423
Steven P. Feinstein
PART THREE MAKING KEY
STR ATEGIC DECISIONS 457
14. Going Public ... draw out of the business as your compensation?
Pat: My present job pays $76,000 a year. I’d like to keep the same standard of
compensation in my new business this coming year.
Kim: Let’s see how ... the balance
sheet. It is replaced by Accounts Payable of $40,000. Then the balance sheet
looks like this:
Nutrivite
Projected Balance Sheet as of December 31, 200X
Assets Liabilities and Equity
Cash...
... would you like a print-
out of the projected financial statements to take with you?
Pat: Yes, please. I really appreciate your putting them together and explaining
them to me. I picked up some ... statements in order to make her recommendation to the
bank’s loan committee about Nutrivite’s loan application. She paid special at-
tention to the Cash Flow Statement, keeping handy the bank’s ... lenders, to decide whether or not to
invest.
3. Investment analysts, money managers, and stockbrokers, to make
buy/sell/hold recommendations to their clients.
4. Rating agencies (such as Moody’s, Standard...
... Income are measured in relation to their sum, which is
Sales. The expenses, in turn, may be broken down by line item. As an example,
we use the Nutrivite Income Statement for the first three ... Return on Equity when earn-
ings are robust but depresses ROE when earnings are poor. Leverage makes
the good times better but the bad times worse. Therefore, it should be used in
moderation and ... profitable.
This reduced risk and increased predictability of gas and electric utility
companies make short-term liquidity and safety margins less crucial. In turn,
the ratios indicating short-term...
... ITEMS
Defining nonrecurring items is difficult. Writers often begin with phrases like
“unusual” or “infrequent in occurrence.” Donald Keiso and Jerry Weygandt in
their popular intermediate accounting text ... suggesting bankruptcy.
Since the z score uses equity at market value, it is not applicable to pri-
vate firms, which do not issue marketable securities. A variation of the z score
for private ... Statements
31
1. Raising prices perhaps by improving product quality or offering extra
services. Makers of luxury cars have done this successfully by provid-
ing free roadside assistance and loaner...
... repeatedly. However, in line with the key
characteristics of nonrecurring items given earlier, Goodyear’s foreign exchange
losses are both irregular in amount and unlikely to be consistent contributors ... one-fourth of nonrecurring items
are likely to be found separately disclosed in the income statement.
8
Providing
guidance for locating the remaining three-fourths is a key goal of this chapter.
Identif ... expenses and losses in-
cluded in operating income. Many of the listed items appear closely linked to
operations, and their classification seems appropriate. However, some appear
to be at the...
... expenses.
20
The two asset write-downs are likewise
added back to net income or loss because of their noncash character. However,
a separate judgment may also be made that, unlike depreciation, these two
items ... sale of assets
H.J. Heinz Company (1999) Gain on sale of bakery products unit
JLG Industries Inc. (2000) Restructuring charges
Kulicke & Soffa Industries Inc. (1999) Provision for impairment ... a San Francisco earthquake
Avoca Inc. (1995) Insurance proceeds from the destruction of a
building by a fire
BLC Financial Services Inc. (1998) Settlement of a lawsuit
KeyCorp Ohio (1999)
Gain...
... re-
quires a focus on a single key schedule found in the standard income tax note.
The goal is simply to identify nonrecurring tax increases and decreases in this
schedule.
The key source of information ... pretax
earnings. For income tax purposes, however, these amounts are not deductible,
which means that unlike most other expenses these fines and settlements reduce
after-tax earnings by the full amount ... Analyzing Business Earnings
67
The discussion to this point has taken us through the first six steps in the
nonrecurring-items search process outlined in Exhibit...
... supplies.
Other marketplaces have been created to offer products for specific in-
dustries (vertical marketplaces) or across industries (horizontal marketplaces).
These marketplaces provide not ... Others are horizontal marketplaces, like staples.com or wwgrainger
.com. There are also some hybrid models, like Verticalnet.com, that address
multiple industries. Companies like Ariba and Commerce ... facilitates these marketplaces and exchanges.
556
Making Key Strategic Decisions
APPLICATION SERVICE PROVIDERS (ASPS)
ASPs are companies that provide hosted access to software applications like
Microsoft...
... following ex-
amples make clear.
Example 1 There has recently been a wave of takeover activity in the
stuffed animal industry. Griffin’s Giraffes Inc. (GGI) has agreed to merge
Takeover
Acquisition
Proxy ... ranked
No. 1 in a recent survey of corporate M&A practices.
As you read about these dismal transactions, can you speculate on the rea-
sons for failure? On their faces, they seemed like strategically ... by
the transaction, except to have their ownership stake diluted by the newly is-
sued shares.
Example 2 Kristen’s Kangaroos Inc. (KKI) wishes to take over the operations
of Michael’s Manatees Inc....
... super-
markets where Quaker’s strength could be used to expand sales of Snapple’s
drinks.
Aftermath: In April 1997, Quaker announced it would sell Snapple for
$300 million to Triarc Cos. Quaker takes ... interest in Quaker Oats, which Coke CEO
Douglas Daft felt “fit perfectly into Coke’s strategy of boosting growth by in-
creasing its share of non-carbonated drinks.”
7
Even Coke’s directors felt ... Quaker Oats Co. was rumored to be a takeover target. It was
relatively small ($6 billion in revenue) and its diverse product lines could be
easily broken up and sold piecemeal. In November, Quaker...
... (a) the bid-
der’s existing target market, (b) markets that might be of interest to the bid-
der, and (c) markets that are of no interest to the bidder. Keep in mind that
undesirable product ... to reflect its market
value of $12 million and that the difference between the acquisition price ($18
million) and the market value of the assets acquired ($15 million) is booked as
goodwill. ... High Fidelity magazine for its most
recent wireless bookshelf speakers. MC wants to enter the market for personal
computer (PC) speakers, but does not want to develop its own line of new prod-
ucts...
... she is going to determine what a financial buyer would likely pay—the
company’s “fair market value.” Practically, determining the fair market value
will assist Bob in establishing a target minimum ... unrestricted market, when
neither is under compulsion to buy or sell and when both have reasonable
knowledge of the relevant facts.”
1
Fair market value contemplates what the
“market” will pay. ... menu, it will likely have a price
similar to other restaurants selling steak (all things being equal). The first
594
Making Key Strategic Decisions
would be determined. Bob asked his certified...
... do not necessarily take capital
structure into account when making purchase decisions, so a debt-free analysis
may not be necessary for these companies to determine fair market value.
Victoria’s ... co
rporation does
not pay income taxes.
604
Making Key Strategic Decisions
COMPARISON TO INDUSTRY AVERAGES
Victoria also compares ACME’s key financial ratios to peer companies. The
main differences ... investments with higher risks.
APPR AISAL OF FAIR MARKET VALUE
Victoria tells Bob that the shares of ACME are closely held securities and there
is no ready market for their sale. The three general approaches...