ACC 411 Business Valuation Homework Assignments 1. Locate the Cree, Inc.

, Form 10-K for the year ended June 24, 2012, on the SEC Edgar website and Read Item 1. Business. Locate Crees Investor Relations website and familiarize yourself with the information it contains. a. What fundamental change in Crees business model was accelerated by the purchase of Ruud, Inc., in 2012, and how do you expect it to impact profit margins, profits, revenue growth, and operating risk? 2. Read the Cree Form 10-K Items 1A., Rick Factors, and 7. Managements Discussion and Analysis.: a. Write a brief description of your analysis of Crees status relative to each of five forces in Porters Competitive Analysis. Give consideration to all three business segments. b. Examine Crees Form 10-Q for the first quarter of fiscal 2013. What new financial statement is included, and what is its relevance to your understanding of Crees financial performance? c. The listing of risk factors is largely legal boiler plate that does not reflect the actual extent of financial risk for each factor. In your judgment, what are the five most significant risk factors that management needs to plan against (think about whether there are important risks that are not included in the 10-K listing)? 3. Profitability Analysis & Interpretation a. Examine the Standard and Poors NetAdvantage database (on-line at Library). Locate the Industry Analysis for Semiconductors, and skim all of the Current Environment and Industry Profile sections. You will see that LEDs are such a small proportion of the semiconductor industry that they are not discussed separately, but much of the production information is relevant to CREE. b. Examine the financial statements and ratio analysis of Cree (see eVal Excel spreadsheet in Moodle). There are minor differences in how these ratios are calculated and the formula calculations presented in the text.ignore these differences. i. It obvious that net income has been declining. Examine the financials and ratios and determine what aspects of performance are contributing to the decline. ii. What information, if any, is provided in the MD&A section of the Form 10-K or the footnotes that helps explain Crees declining performance? c. Examine Crees Earnings Release for the first quarter of fiscal 2013. What new information do the non-GAAP financial metrics provide? Why do you think Cree and most other public companies publish non-GAAP metrics? 4. Given declining income, we are concerned about the financial condition of Cree. Examine Crees credit risk ratios in the eVal spreadsheet and calculate any additional ratios that you need as presented in the textbook. a. Examine the ratios and the financial statements and determine whether they reveal significant risks to the Crees ability to pay its obligations and continue making investments to expand its operations. b. Does Cree have any borrowing arrangements such as lines of credit that it can use to meet short-term needs for cash? Look at disclosures in the MD&A section of the 10-K. c. Why does Cree have such large cash and short-term investment balances?

d. What do you know beyond these financial metrics that is relevant assessing Crees liquidity and long-run solvency? And, this is important! 5. Examine Crees Income statement accounts and the related footnotes. a. Identify the income statement accounts that you consider to be the most subject to distortion, i.e., deviation from the real economic values/amounts that managers and investors need for their evaluations of Crees economic performance and current financial condition. Be sure to look for potential distortions that may occur due to (1) the ease of management manipulation or bias, and (2) the failure of GAAP measurements to completely and accurately measure economic values. b. Examine Footnote 11- Income Taxes. How does Crees effective tax rate compare to the Federal statutory tax rate of 35% that corporations always complain about? How does the amount that Cree is required to pay compare to the amount of expense reported on the income statement and what causes this difference? How much uncertainty is there about Crees tax expense? c. Examine the Standard and Poors NetAdvantage database (on-line at Library). Locate the Industry Analysis for Semiconductors, and examine the Comparative Company Analysis Profit Ratios. How does Cree compare to other semiconductor companies based on Return on Revenues (net profit margin), Return on Assets, and Return on Equity? d. What concerns do you have about the direct comparison of Crees ratios to those of the benchmark companies as presented in the S&P analysis? How could these comparisons be made more meaningful? 6. Examine Crees Item 7., Managements Discussion and Analysis, and the footnotes in the Form 10-K. a. If we asked Crees management why they have such a large cash and investments balances even though these assets are earning much less that Crees cost of capital, what justifications would you expect them to give? What is your opinion about the wisdom of maintaining these large balances? b. Examine Footnote 3 Acquisition of Ruud Lighting, Inc. with attention to the allocation of the purchase price to the fair values of the assets (and liabilities) acquired. Given that the estimates of the FMVs of Ruuds tangible and intangible assets are recorded on the Cree balance sheet, why dont accountants adjust all of Crees assets to their FMVs for financial reporting? c. Evaluate the Goodwill recorded in the Ruud purchase. How confident are you that the Goodwill amount represents a real asset with the value reported for Cree? d. How great are the variations in useful lives of intangible assets, and how confident are you that the cost of intangible assets is being recognized in the appropriate amounts and time periods? (See 10-K, footnote 3 & 7)? e. Examine Footnote 4 Financial Asset Details and the related discussions of significant accounting policies in Footnote 2. i. What questions do the disclosures suggest regarding accounts receivable? ii. What questions do the disclosures suggest regarding inventories? iii. What questions do the disclosures suggest regarding property and equipment? f. Examine Footnote 7 Intangible Assets and Goodwill. How much opportunity does management have to manage the amount of amortization and/or write-offs?

7. Examine Crees Item 7., Managements Discussion and Analysis, and the footnotes in the Form 10-K. a. Examine Footnote 12 Commitments and Contingencies. Which items are reported on the balance sheet and which items are only disclosed? b. What is your evaluation of the possible need to recognize any of the unrecognized contingencies on the balance sheet? c. Examine Footnote 11- Income Taxes. Cree nets deferred income tax assets and liabilities in the balance sheet, but the details are shown in note 11. Look at the timing differences that have created the deferred tax assets and liabilities. Which ones are likely to be long-term in nature and therefore overstated because the amounts are not discounted? d. Why does Cree have so little long-term debt? What arguments favor adding long-term debt to Crees capital structure? 8. Examined Crees Footnote 8 Shareholders Equity and Footnote 10 Stock Based Compensation. a. What are the possible reasons that Cree purchases shares of stock rather than issuing dividends of an equivalent dollar amount? i. Offset shares issued upon exercise of stock options to avoid dilution of EPS ii. Due to high operating risk, Cree doesnt want to commit to regular dividend payment. Once dividend are paid out, shareholders punish companies for reduction of the dividend amount b. How many of the options exercisable and/or outstanding are likely to be exercised during the next 12 months? Why? c. Do you consider Crees total stock-based compensation expense to be a material item in fiscal 2012? Why? i. Expense is very material since they are big number d. Examine the estimates that Cree used to calculate the value of its new stock option grants. In your judgment, which ones are most subject to error or management manipulation? Why? e. Examine Footnote 9 Earnings Per Share. What are the implications of the large difference between potentially dilutive effect of the options (532,000 shares in 2012) and the total number of options disclosed in Note 10? 10. Examine Crees Footnote 12- Commitments and Contingencies. a. Examine Crees Footnote 12- Commitments and Contingencies. Estimate the dollar value of operating lease obligations that are not recorded on the Balance Sheet. Assume that the appropriate discount rate is 6%. b. Examine Crees Footnote 15 Retirement Savings Plan. What is the amount of pension obligation recognized by Cree? Evaluate the plan to determine how generous it is for employees.