OMM 622 Financial Decision-Making
Please answer each of the questions with a response of at least 75 words. Please provide at least one reference for each question.
Referencing this week’s readings and lecture, what information is provided in the balance sheet? What is a common-sized balance sheet and how do you create one? For your final project company, (My final weeks project company is Kindred Healthcare.) I will provide you with my statement I made earlier in the week.) does anything stand out on the balance sheet?
Your friend, Liz, loves to shop at Target and is now interested in investing in the company. Tom, another friend, has told her that Target’s debt structure is risky with obligations of nearly 74% of total assets. Liz sees that debt on the balance sheet is 65% of total assets and is confused by Tom’s comment.
Write an explanation to Liz discussing the debt structure of Target and why Tom thinks Target is risky. Be sure to explain clearly what information appears on financial statements, as well as what information does not appear directly on the financial statements. Use the information below in your discussion.
At fiscal year-end February 2, 2008, Target Corporation had the following assets and liabilities on its balance sheet (in millions):
Current liabilities $11,782
Long-term debt 15,126
Other liabilities 2,345
Total assets 44,560
Target reported the following information on leases in the notes to the financial statements:
Total rent expense was $165 million in 2007, $158 million in 2006, and $154 million in 2005, including percentage rent expense of $5 million in 2007, 2006, and 2005. Most long-term leases include one or more options to renew, with renewal terms that can extend the lease term to more than 50 years. Certain leases also include options to purchase the leased property.
Future minimum lease payments required under non-cancellable lease agreements existing at February 2, 2008, were:
Future Minimum Lease Payments (in Millions) Operating Leases Capital Leases
2008 $ 239 $ 12
2009 187 16
2010 173 16
2011 129 16
2010 123 17
After 2010 2, 843 155
Total future minimum lease payments $3694 (a) $232
Less: Interest (b) (105)
Present value of minimum capital lease payments $127 (c)
a) Total contractual lease payments include $1,721 million related to options to extend lease terms that are reasonably assured of being exercised, and also include $98 million of legally binding minimum lease payments for stores that will open in 2008 or later.
(b) Calculated using the interest rate at inception of each lease.
(c) Includes current portion of $4 million.
Referencing this week’s readings and lecture, address the following:
• What are the two causes of an increasing or decreasing sales number?
• Discuss all the reasons that might explain an increase or decrease in gross profit.
Income statements are presented in the table below for the Elf Corporation for the years ending December 31, 2010, 2009, and 2008. Write a one-paragraph analysis of Elf Corporation’s profit performance for the period. Create a common-sized income statement for the three years. What conclusions can you draw from the different parts of the statement? What are the causes and effects of Elf’s performance for those three years?
Elf Corporation Income Statements for the Years Ending December 31
(in millions) 2010 2009 2008
Sales $700 $650 $550
Cost of goods sold 350 325 275
Gross profit 350 325 275
Administrative 100 100 100
Advertising and marketing 50 75 75
Operating profit $200 $150 $100
Interest expense 70 50 30
Earnings before tax $130 $100 $ 70
Tax expense (50%) 65 50 35
Net income $ 65 $ 50 $ 35