10-400-13 Lecture Notes - Lecture 5: Weighted Arithmetic Mean, Delhaize Group, Financial Statement

Air France, a French company, prepares its financial statements according to IFRS. AF’s annual report for the year ended March 31, 2011, which includes financial statements and disclosure notes, provided with all new textbooks. This material also is provided in AF's "Registration Document 2010-11," dated June 15, 2011 and is available at www.airfranceklm.com

Required:

1 – Where in its March 31, 2011, balance sheet does AF report deferred taxes? How does this approach differ from the way deferred taxes are reported using U.S. GAAP? Using the Internet, determine how deferred taxes would be reported using IFRS at the time of your research. Explain why that approach might differ from the way AF reported deferred taxes at March 31, 2011.

2 – Here’s an excerpt from one AF’s notes to its financial statements:

Deferred taxes (in part)

The Group records deferred taxes using the balance sheet liability method, providing for any temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The tax rates used are those enacted or substantively enacted at the balance sheet date.

*Answer the following question:

Is this policy consistent with U.S GAAP? Explain.

3 - Here’s an excerpt from one AF’s notes to its financial statements:

Deferred taxes (in part)

Deferred tax assets related to temporary differences and carry forwards are recognized only to the extent it is probable that a future taxable profit will be available against which the asset can be utilized at the tax entity level.

*Answer the following question:

Is this policy consistent with U.S GAAP? Explain.

Estimating Cost of Debt Capital
Assume the December 31, 2010, partial financial statements taken from the annual report for AT&T (T) follow.

(a) Explain what AT&T's market beta implies regarding its stock price volatility.

It implies that the stock of AT&T is a very stable stock.

It implies that the stock of AT&T is a very volatile stock.

It implies that the stock of AT&T moves the same as the market index.

(b) Assume the market premium equals: 5.0% and that the risk-free rate equals: 3.1%
Estimate AT&T's cost of equity capital using the CAPM model. (Round to one decimal place.)
Answer%

(c) Footnote 8 of AT&T's 10-K reports that the market value of its debt approximates its book value. Calculate the company's intrinsic value of debt and equity.
Intrinsic value of debt = $Answer million
Intrinsic value of equity = $Answer million (Round to the nearest million.)

Assume that AT&T's after tax cost of debt is 2.81%. Using this information and your rounded answers from above and from part (b), estimate AT&T's weighted average cost of capital. (Do not round until your final answer. Round to one decimal place.)
WACC = Answer%

The Diamond Glitter Company is in the process of preparing itsfinancial statements for 2012. Assume that no entries fordepreciation have been recorded in 2012. The following informationrelated to depreciation of fixed assets is provided to you.

1. The company purchased equipment on January 2, 2009, for$165000. At that time, the equipment had an estimated useful lifeof 7 years with a $25000 salvage value. The equipment isdepreciated on a straight-line basis. On January 2, 2012, as aresult of additional information, the company determined that theequipment has a remaining useful life of 3 years with a $15000salvage value.

3. The company purchased a machine on July 1, 2010, at a cost of$450000. The machine has a salvage value of $25000 and a usefullife of 10 years. The company's bookkeeper recorded straight-linedepreciation in 2010 and 2011 but failed to consider the salvagevalue. Ignore Tax effect.

6. At December 31, 2012, the company decided to change to thestraight-line depreciation method on its retail display equipmentfrom double-declining-balance. The equipment had an original costof $250000 when purchased on January 1, 2011. It has a salvagevalue of 0 and a 8-year useful life. Depreciation expense recordedprior to 2012 under the double-declining-balance method was $62500.The company has already recorded 2012 depreciation expense of$46875 using the double-declining-balance method.