PMBA 8020 Module 4 Solutions

M4-21
($ millions)
a. ANF RNOA
TJX RNOA

=
=

$242 / [($1,446 + $1,545) / 2] = 16.18%

$1,925 / [($2,393 + $2,395) / 2] = 80.41%

b. ANF NOPM
TJX NOPM

=
=

$242 / $4,511 = 5.36%

$1,925 / $25,878 = 7.44%

ANF NOAT
TJX NOAT

=
=

$ 4,511 / [($1,446 + $1,545) / 2] = 3.02

$25,878 / [($2,393 + $2,395) / 2] = 10.81

ANF RNOA
TJX RNOA

=
=

5.36% 3.02 = 16.19% (0.01% rounding difference)

7.44% 10.81 = 80.43% (0.02% rounding difference)

c. TJXs RNOA is five times that of ANF. TJX, despite operating in the value-priced segment of
its industry, reports a higher NOPM than does ANF. As is typical of value-priced retailers,
TJXs asset turnover is very high: NOAT is 3.6 times that of ANFs. On balance, TJXs
business model appears to be more successful in 2013 in that the company is able to
maintain both a high NOPM and a high NOAT relative to ANF, resulting in a RNOA that is
considerably greater than ANFs in this year.

E4-26
a.
($ millions)

RNOA

Abercrombie & Fitch ................................

$242 / [($1,446 + $1,545) / 2] = 16.18%

The Gap, Inc............................................

$1,186 / [($2,630 + $2,535) / 2] = 45.92%

b.
($ millions)

NOPM = NOPAT / Sales

NOAT= Sales / Average NOA

Abercrombie & Fitch .............

$242 / $ 4,511 = 5.36%

$4,511 / [($1,446 + $1,545) / 2] = 3.02

The Gap, Inc.........................

$1,186 / $15,651 = 7.58%

$15,651 / [($2,630 + $2,535) / 2] = 6.06

c. The GAPs RNOA is nearly three times (2.84) more than that of A&F. This higher RNOA is
the result of a much higher net operating profit margin and a higher net operating asset
turnover rate in comparison with Abercrombie & Fitch in this year.

E4-31
a.
($ millions)

Current Ratio

2012 ..............................................................................
$19,991 / $16,714 = 1.20
2011 ..............................................................................
$8,573 / $13,241 = 0.65
In 2012, Comcast has a current ratio of 1.2. The companys liquidity has improved drastically
from 2011 to 2012. Since the ratio is now higher than 1.0, it implies positive working capital.
While the current ratio provides a useful point estimate of liquidity, it would be helpful to
know when the cash flows from current assets will be realized and when the current
liabilities will need to be paid. An excess of current maturities over near-term cash
realization will cause a liquidity problem regardless of the level of the overall ratio. As well,
we would like to know the current ratio for firms in this industry.
b.
($ millions)

Times interest earned

Liabilities-to-equity

2012 .................

$(11,609 + 2,521) / $2,521 = 5.60

$115,175 / $49,796 = 2.31

2011 .................

$(8,207 + 2,505) / $2,505 = 4.28

$110,163 / $47,655 = 2.31

The times interest earned ratio has increased since 2011. It appears that Comcast is able
to cover its interest expense with a comfortable margin. Comcasts total liabilities-tostockholders equity ratio of 2.31 is lower than median for cable and satellite companies (see
Exhibit 4.6), and has remained fairly constant over the two-year period.
c. Comcast has an acceptable level of debt, and its liquidity appears adequate.

P4-40
a. 2013 current ratio = $15,840 / $13,257 = 1.19
2012 current ratio = $13,526 / $12,260 = 1.10
2013 quick ratio = ($4,644 + $1,480 + $1,201) / $13,257 = 0.55
2012 quick ratio = ($3,528 + $1,326 + $1,026) / $12,260 = 0.48
Both Costcos current and quick ratios experience a slight improvement during 2013.
b. 2013 times interest earned = $3,053 / $2 = 1,526.5
2012 times interest earned = n/a since net interest is interest income
2013 liabilities-to-equity = $19,271 / $11,012 = 1.75
2012 liabilities-to-equity = $14,622 / $12,518 = 1.17
Costcos times interest earned ratio is exceptional. The company has essentially negative
debt (borrowed money is less than nonoperating assets) and thus, no net interest expense.
Its liabilities-to-equity ratio increased and is slightly greater than the median for publiclytraded companies. However, given the profitability of Costco, we have no concerns about
Costcos ability to meet its debt obligations.

c. Costco is not particularly liquid (current ratio near 1.2 and quick ratio near 0.55), but is not
financially leveraged and its times interest earned ratio is extremely high. The company
generates sizeable operating profits and cash flow. In sum, no solvency concerns are
evident for Costco.

MA4-56
a. The parties affected by schemes to manage earnings is often much broader than first
thought. It includes the following affected parties:
1. employees above and below the level at which the scheme is implemented
2. stockholders and elected members of the board of directors
3. creditors of the company (suppliers and lenders) and their employees, stockholders, and
board of directors
4. competitors of the company
5. the companys independent auditors
6. regulators and taxing authorities
b. Managers often believe that earnings management activities will be short-lived, and will be
curtailed once its operations turn around. Often, this does not prove to be the case.
Interviews with managers and employees who have engaged in this activity often reveal that
they started rather innocuously (just managing earnings to make the numbers in one
quarter), but, quickly, earnings management became a slippery slope. Ultimately, the parties
the company was trying to protect (shareholders, for example) are hurt more than they
would have been had the company reported its results correctly, exposing problems early so
that corrective action could be taken (possibly by removing managers) to protect the broader
stakeholders in the company.
c. Company managers are just ordinary people. They desire to improve their compensation,
which is often linked to financial performance. Managers may act to maximize their current
compensation at the expense of long-term growth in shareholder value. The reduction in the
average employment period at all levels of the company has exacerbated the problem.
d. Unfortunately, the separation of ownership and control often leads to less informed
shareholders who are unable to effectively monitor the actions of the managers they have
hired. To the extent that compensation programs are linked to financial measures,
managers can use the flexibility given to them under GAAP to their benefit, even without
violating GAAP per se. These actions can only be uncovered by effective auditing and
enforced by an effective audit committee of the board. Corporate governance has grown
considerably in importance following the accounting scandals of the early 2000s. The
Sarbanes-Oxley Act mandates new levels of corporate governance. The stock market and
the courts are helping to enforce this mandate.