Presentation on theme: "Accounting. You weren’t supposed to learn this –Pooling was supposed to be banned by Q3 2000 –Thanks to Cisco and Investment Bankers, you still get to."— Presentation transcript:
You weren’t supposed to learn this –Pooling was supposed to be banned by Q3 2000 –Thanks to Cisco and Investment Bankers, you still get to learn it (see also Option Accounting) Latest Proposal from Financial Accounting Standards Board (FASB): –Write down goodwill “if and when they determined that the value of that goodwill has become impaired” (Dec 7 WSJ) –Pooling will probably go away eventually, but only after purchase looks eerily similar Pooling vs Purchase
Suppose Buyer (B) acquires Target (T) for $100 in stock. T’s book value of net assets is $5. Fair Market value of net assets is $10. Pooling: –Add T’s assets and liabilities to B’s balance sheet. Add T’s SE ($5) to B’s. Move on to the next deal. –Restrictions Purchase: –Mark net assets to market ($10) (A) –Add $100 to common stock (SE) –Add $100 - $10 = $90 to Goodwill (A) –Amortize Goodwill over ?? Years Pooling vs Purchase
Let’s say Cisco bought Cisco. Market value of equity = $368B, book value of equity $26B, net income $2.6B, FMV of net assets $60B(??). Pooling: –Essentially add balance sheets together for a book value of $52B. Net Income = $5.2B. Get r e from CAPM: r e = r f + (r m -r f )
Pooling vs Purchase Let’s say Cisco bought Cisco. Market value of equity = $368B, book value of equity $26B, net income $2.6B, FMV of net assets $60B(??). Purchase: –Add $60B in net assets for total of $86B and add $308B Goodwill –Amortize Goodwill over 40 yrs or $7.7B/yr. Net Income = ($5.1B) Get r e from CAPM: r e = r f + (r m -r f )
Three Financial Statements With an Income Statement and two years of Balance Sheets, you can create a Cash Flow Statement, and some banker will probably ask you to do so How does NI flow to the BS and CFS? What does an increase in A/R do to IS and CFS? Where DTL’s and DTA’s come from? Where do you record unearned revenue? If a company issues $100 in equity, how do they record it? Why did my sister receive $75,000 for answering this question?
Managing Earnings Managing Earnings = Fraud –See also Waste Management, Tyco (unfounded), Sunbeam and Lernout and Hauspie How? –Waste Management forgot to depreciate assets –Tyco supposedly abused restructuring charges (one time charges, allowances for bad debt, etc.) –Sunbeam jammed the pipeline (revenue recognition) More subtle methods
Miscellaneous Ratios –Current Ratio, Coverage Ratios Turnover –Inventory, A/R Return on Equity, Return on Sales, definition of Working Capital What if you have extra cash on the BS??? Accountants Beware!!!