1 / 15

Homework Exercise

Homework Exercise. Eric Biro. Question 1. Given/calculated information. Question 1. a) Calculate enterprise income, RNEA , residual income for 2014-2019 under GAAP (expense R&D). Question 1. b) Calculate RNEA and residual income if R&D capitalized and amortized over 5 years. Question 1.

diane
Download Presentation

Homework Exercise

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Homework Exercise Eric Biro

  2. Question 1 • Given/calculated information

  3. Question 1 • a) Calculate enterprise income, RNEA, residual income for 2014-2019 under GAAP (expense R&D)

  4. Question 1 • b) Calculate RNEA and residual income if R&D capitalized and amortized over 5 years

  5. Question 1 • c) Compare RNEA and residual income under each accounting treatment. Why are they different? • Accounting differences between expensing and capitalizing R&D • Expensing – larger expense up front, larger revenues later • Capitalizing – smoother income over life of project

  6. Question 1 • d) Forecast RNEA and residual income for 2020. Why are the forecasts different? • Larger NEA with capitalization compared to expensing • Even in steady-state • Higher expected income, smaller residual income from the project.

  7. Question 1 • e) Value the firm at the end of 2013 under both accounting methods. Is there a difference? Why? • No difference – over the life of the project, accounting differences will zero out.

  8. Question 1 • f) If firm was valued to 2016, what difficulties would arise under the two methods? • Expensing: • Value of the firm up to and including 2016 is negative • No steady state achieved • Projection into 2017 with increasing income will continue through infinity, which will see the firm constantly growing • Capitalizing: • Value of the firm hasn't reached steady-state, will continually grow

  9. Question 1 • g) Assume cuts in R&D under expensing method. Calculate RNEA and compare with part a). Why is RNEA higher when sales are growing at a slower rate? • RNEA higher because EPAT outpacing Sales decline, with constant NEA

  10. Question 2 • Given/calculated information

  11. Question 2 • a) Forecast EPAT and NEA under both depreciation models.

  12. Question 2 • b) Which forecast shows more profitability in 2017? Why? • 5-year life model • Takes depreciation over a longer time period • Sales ramp up quickly, depreciation effects are delayed

  13. Question 2 • c) Demonstrate depreciation model doesn’t affect intrinsic value

  14. Question 2 • d) Founders insist market will give a higher value if higher earnings are reported at IPO date. Reply? • Valuation specialists in the market takes this accounting preference into consideration • “Higher value” would only come from an inefficient market • Not supportable

  15. Question 2 • e) Options vest in 2022, and should focus on profits there. What arguments are there for on depreciation method over the other? • Depreciation has no bearing at that point • Both methods have reached steady state • Profits are unaffected by either method compared to the other (EPAT of $350 for both methods)

More Related