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Homework exercise

Homework exercise. Frank Chenxi Huang. 1. Hidden Reserves.

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Homework exercise

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  1. Homework exercise Frank Chenxi Huang

  2. 1. Hidden Reserves

  3. c. RNEA and REI differ under two different methods mostly because NEA are calculated differently. Under GAAP, NEA is not increased by the investment of R&D, while under the new regime, R&D is capitalized, increasing the net enterprise asset, and thus Return on net enterprise asset.

  4. d. RNEA and REI differ for 2020 under the two accounting treatments mostly because NEA grow at different rates. My forecasts show the same results for both treatments, which also makes sense because NEA has stabilized under both treatment by 2020. e. value of the firm at 2013 differ under two different acct treatments. Intuitively they should agree for accounting treatment should not affect the value of a firm. a

  5. f. The valuations will be different if we value the firm by forecasting only to 2016. The REI is higher under GAAP.

  6. 2. Earnings management

  7. b. Expense over 5 years shows to be more profitable in 2017 (income higher by 100 million)

  8. Values should be equal under two methods because accounting treatment does not affect the value of a firm.

  9. D. Not necessarily. Investors will not solely focus on the earnings of the time of the IPO. They will evaluate the firm based on its growth potential and projected value.

  10. E. it should not matter which depreciation method is chosen. By 2022, annual depreciation expense under both methods will have stabilized at 1000.

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