M10-10 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
2014
2015
2016
2017
Thereafter
Total Minimum Lease Commitments $
$
$
$
$
$
$ 1,093
1,069
924
753
584
1,709
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 nea b. What types of adjustments might we consider to GAP’s balance sheet and income statement for analysis purposes? es maining lease term to the nearest whole year r analysis purposes? M10-17 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? OA)
Explain ch Q11-6
Identify and describe the four major steps in forecasting financial statements Q11-8
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. er percentages) E12-15 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. Reported
Horizon Period
Terminal
(In millions)
2013
2014
2015
2016
2017
Period
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 $45.46 on April 2, 2013 the date the 10-K was filed
with the SEC. How does your valuation estimate compare with this closing price? What do you
believe are some reasons for the differences? AT) od growth
NO) of$(372)
bligations) cash led
ou E12-16 Estimating Share Value Using the ROPI Model
Refer to the informatin in E12-15 to answer the following requirements.
Reported
Horizon Period
Terminal
(In millions)
2013
2014
2015
2016
2017
Period
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 usin gthe 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? l operating ed with the
e P12-31 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 noncontrolling interests
(2)
(7)
Net income attributable to Kellogg Company
$
961 $
866 $ 1,287 KELLOGG COMPANY
Consolidated Balance Sheet
(millions, except share data)
Current Assets
Cash and cash equivalents
Accounts receivable, net
Inventories
Other current assets
Total current assets
Property, net
Goodwill
Other intangibles, net
Other assets
Total assets
Current Liablities
Current maturities of long-term debt
Notes payable
Accounts payable
Other current liabilities
Total current liabilities
Long-term debt
Deferred income taxes
Pension liability
Other liabilities 2012 2011 $ 281 $
460
1,454
1,188
1,365
1,174
280
247
3,380
3,069
3,782
3,281
5,053
3,623
2,359
1,454
610
516
$ 15,184 $ 11,943 $ 755 $
1,065
1,402
1,301
4,523
6,082
523
886
690 761
234
1,189
1,129
3,313
5,037
643
560
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
Capital in excess of par value
Retained earnings
Treasury stock at cost:
58,452,083 shares in 2012 and 62,182,500 shares in 2011
Accumulated other comprehensive income (loss)
Total Kellogg Company equity
Noncontrolling interests
Total Equity
Total Liabilities and Equity 105
573
5,615 105
522
5,305 (2,943)
(931)
2,419
61
2,480
$ 15,184 $ (3,130)
(1,006)
1,796
2
1,798
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
Net operating profit margin (NOPM)
Net Operating asset turnover (NOAT), year end 8.00%
7.80%
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? NOAT assumptions above.