1. Forecasting an Income Statement
Abercrombie & Fitch† reports the following income statements.
Income Statement, For Fiscal Years Ended ($ thousands)
2008
Net sales
$3,657,847
Cost of goods sold
1,238,480
Gross profit
2,419,367
Stores and distribution expense
1,386,846
Marketing, general and administrative expense
395,758
Other operating (income), net
(11,734)
Operating income
648,497
Interest income, net
(18,808)
Income before income taxes
667,305
Provision for income taxes
283,628
Net Income
$ 383,677
2007
$3,318,158
1,109,152
2,209,006
1,187,071
373,828
(9,983)
658,090
(13,896)
671,986
249,800
$ 422,186
Forecast Abercrombie & Fitch's 2009 income statement assuming the following income
statement relations. Assume no change for all other accounts not listed below. All percentages,
other than sales growth and provision for income taxes, are based on percent of net sales.
(Round your answers to the nearest whole number.)
Net sales growth
Gross profit margin
Stores and distribution expense/Net sales
Marketing, general and administrative expense/Net sales
Other operating (income), net/Net sales
Provision for income taxes/Income before income taxes
10.2%
66.1%
37.9%
10.8%
−0.3%
42.5%
Forecasted Income Statement, For Fiscal Years Ended ($
thousands)
Net sales
2008
$3,657,847
Cost of goods sold
1,238,480
Gross profit
2,419,367
Stores and distribution expense
1,386,846
Marketing, general and administrative expense
395,758
Other operating (income), net
(11,734)
2009
$
Operating income
648,497
Interest income, net
(18,808)
Income before income taxes
667,305
Provision for income taxes
283,628
Net Income
$ 383,677
2. Analyzing, Forecasting, and Interpreting Both Income Statement and Balance Sheet
Following are the income statements and balance sheets of Best Buy Co., Inc.†
March 1,
March 3,
Balance Sheet ($ millions, except share amounts)
2008
2007
Assets
Cash and cash equivalents
$ 1,438
$ 1,205
Short-term investments
64
2,588
Receivables
549
548
Merchandise inventories
4,608
4,028
Other current assets
583
712
Total current assets
7,242
9,081
Property and equipment*
5,608
4,904
Less accumulated depreciation
2,302
1,966
Net property and equipment
3,306
2,938
Other assets**
2,110
1,551
Total assets
$12,658
$13,570
Liabilities and shareholders' equity
Accounts payable
$ 4,297
$ 3,934
Unredeemed gift card liabilities
531
496
Accrued liabilities, accrued compensation and related
1,348
1,322
expenses†
Accrued income taxes
404
489
Short-term debt
156
41
Current portion of long-term debt
33
19
Total current liabilities
6,769
6,301
Long-term liabilities
838
443
Long-term debt
627
590
Minority interests
40
35
Shareholders' equity
Preferred stock, $1.00 par value: Authorized—400,000
__
__
shares; Issued and outstanding—none
Common stock, $0.10 par value: Authorized—1.0 billion
41
48
shares; Issued and outstanding—410,578,000
and 480,655,000 shares, respectively
Additional paid-in capital
8
430
Retained earnings
3,833
5,507
Accumulated other comprehensive income
502
216
Total shareholders' equity
4,384
6,201
Total liabilities and shareholders' equity
$12,658
$13,570
* Land, buildings, fixtures, equipment, leasehold improvements, and property under capital
leases are combined.
** Goodwill, tradenames, equity and other investments, and other noncurrent assets are
combined.
† Accrued liabilities and accrued compensation and related expenses are combined.
Income Statement, Fiscal Years Ended ($ millions)
Revenue
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Operating income
Other income*
Earnings before income tax expense
Income tax expense
Net earnings
2008
$39,023
29,477
9,546
7,285
2,261
60
2,321
805
$ 1,516
2007
$35,934
27,165
8,769
6,770
1,999
130
2,129
752
$ 1,377
* Other income combines investment income, interest expense, minority interest in earnings, and
equity in loss of affiliates.
(a) Forecast Best Buy's 2009 income statement and balance sheet using the following
relations; assume no change for all other accounts not listed below. Assume that all
capital expenditures are purchases of property and equipment, and that depreciation is
included as part of selling, general and administrative expenses ($ millions). (Round
your answers to the nearest whole number.)
Revenue growth
Gross profit margin
Selling, general and administrative expenses/Revenue
Income tax expense/Earnings before income tax expense
8.6%
24.5%
18.7%
34.7%
Receivables/Revenue
Merchandise inventories/Revenue
Accounts payable/Revenue
Capital expenditures/Revenue
Accrued liabilities, accrued compensation and related expenses/Revenue
Accrued income taxes/Income tax expense
Dividends/Net earnings
Depreciation expense/Prior year property and equipment, gross
Portion of long-term debt due in 2010
Best Buy Forecasted Income Statement ($ millions)
Revenue
Cost of goods sold
2008
$39,023
9,546
Selling, general and administrative expenses
7,285
Operating income
2,261
Earnings before income tax expense
Income tax expense
Net earnings
Best Buy Forecasted Balance Sheet ($ millions)
Assets
Cash and cash equivalents
Short-term investments
Receivables
Merchandise inventories
2009
$
29,477
Gross profit
Other income*
1.4%
11.8%
11.0%
2.1%
3.5%
50.2%
13.5%
11.8%
$16
60
2,321
805
$ 1,516
$
2008
$ 1,438
64
549
4,608
Other current assets
583
Total current assets
7,242
Property and equipment*
5,608
Less accumulated depreciation
2,302
Net property and equipment
3,306
Other assets**
2,110
2009
$
Total assets
$12,658
$
Liabilities and shareholders' equity
Accounts payable
Unredeemed gift card liabilities
Accrued liabilities, accrued compensation and related expenses
$ 4,297
531
1,348
Accrued income taxes
404
Short-term debt
156
Current portion of long-term debt
Total current liabilities
33
6,769
Long-term liabilities
838
Long-term debt
627
Minority interests
40
Shareholders' equity
Common stock
41
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
$
8
3,833
502
4,384
$12,658
$
3. Forecasting the Statement of Cash Flows
Refer to the Best Buy Co., Inc.†, financial information shown below. Prepare a forecast of its
fiscal year 2009 statement of cash flows.
March 1,
March 3,
Balance Sheet ($ millions, except share amounts)
2008
2007
Assets
Cash and cash equivalents
$ 1,478
$ 1,205
Short-term investments
64
2,588
Receivables
549
548
Merchandise inventories
4,708
4,028
Other current assets
583
712
Total current assets
7,382
9,081
Property and equipment*
5,644
4,904
Less accumulated depreciation
Net property and equipment
Other assets**
Total assets
Liabilities and shareholders' equity
Accounts payable
Unredeemed gift card liabilities
Accrued liabilities, accrued compensation and related
expenses†
Accrued income taxes
Short-term debt
Current portion of long-term debt
Total current liabilities
Long-term liabilities
Long-term debt
Minority interests
Shareholders' equity
Preferred stock, $1.00 par value: Authorized—400,000
shares; Issued and outstanding—none
Common stock, $0.10 par value: Authorized—1.0 billion
shares; Issued and outstanding—410,578,000
and 480,655,000 shares, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
2,302
3,342
2,110
$12,834
1,966
2,938
1,551
$13,570
$ 4,297
531
$ 3,934
496
1,348
1,322
404
156
34
6,770
838
627
40
489
41
19
6,301
443
590
35
__
__
41
48
8
4,008
502
4,559
$12,834
430
5,507
216
6,201
$13,570
* Land, buildings, fixtures, equipment, leasehold improvements, and property under capital
leases are combined.
** Goodwill, tradenames, equity and other investments, and other noncurrent assets are
combined.
† Accrued liabilities and accrued compensation and related expenses are combined.
Income Statement, Fiscal Years Ended ($ millions)
Revenue
Cost of goods sold
Gross profit
Selling, general and administrative expenses
2008
$40,163
30,477
9,686
7,385
2007
$35,934
27,165
8,769
6,770
Operating income
2,301
1,999
Other income*
61
130
Earnings before income tax expense
2,362
2,129
Income tax expense
815
752
Net earnings
$ 1,547
$ 1,377
* Other income combines investment income, interest expense, minority interest in earnings, and
equity in loss of affiliates.
Revenue growth
11.8%
Gross profit margin
24.1%
Selling, general and administrative expenses/Revenue
18.4%
Income tax expense/Earnings before income tax expense
34.5%
Receivables/Revenue
Merchandise inventories/Revenue
Accounts payable/Revenue
Capital expenditures/Revenue
Accrued liabilities, accrued compensation and related expenses/Revenue
Accrued income taxes/Income tax expense
Dividends/Net earnings
Depreciation expense/Prior year property and equipment, gross
Portion of long-term debt due in 2010
Best Buy Forecasted Income Statement ($ millions)
Revenue
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Operating income
Other income*
Earnings before income tax expense
Income tax expense
Net earnings
Best Buy Forecasted Balance Sheet ($ millions)
Assets
Cash and cash equivalents
Short-term investments
Receivables
2008
$40,163
30,477
9,686
7,385
2,301
61
2,362
815
$ 1,547
1.4%
11.7%
10.7%
2.0%
3.4%
49.6%
13.5%
11.8%
$16
2009
$44,902
34,081
10,821
8,262
2,559
61
2,620
904
$ 1,716
2008
2009
$ 1,478
64
549
$ 2,802
64
629
Merchandise inventories
Other current assets
Total current assets
Property and equipment*
Less accumulated depreciation
Net property and equipment
Other assets**
Total assets
Liabilities and shareholders' equity
Accounts payable
Unredeemed gift card liabilities
Accrued liabilities, accrued compensation and related expenses
Accrued income taxes
Short-term debt
Current portion of long-term debt
Total current liabilities
Long-term liabilities
Long-term debt
Minority interests
Shareholders' equity
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
(Round your answers to the nearest whole number.)
Best Buy Forecasted Statement of Cash Flows ($ millions)
Net earnings
Depreciation
Receivables
Merchandise inventories
Accounts payable
Accrued liabilities, accrued compensation and related expenses
4,708
583
7,382
5,644
2,302
3,342
2,110
$12,834
5,254
583
9,331
6,542
2,962
3,580
2,110
$15,020
$ 4,297
531
1,348
404
156
34
6,770
838
627
40
$ 4,805
531
1,527
448
156
16
7,483
838
611
40
41
8
4,008
502
4,559
$12,834
41
8
5,498
502
6,089
$15,020
2009
$
Accrued income taxes
Net cash flow from operating activities
Capital expenditures
Net cash flow from investing activities
Long-term debt
Dividends
Net cash flow from financing activities
Net change in cash
Beginning cash
Ending cash
$
4. Analyzing, Forecasting, and Interpreting Income Statement and Balance Sheet
Following are the income statement and balance sheet of Whole Foods Market, Inc.†
Income Statement, For Years Ended (in $ 000s)
2008
2007
2006
Sales
$7,953,912
$6,591,773
$5,607,376
Cost of goods sold and occupancy costs
5,247,207
4,295,170
3,647,734
Gross profit
2,706,705
2,296,603
1,959,642
Direct store expenses
2,107,940
1,711,229
1,421,968
General and administrative expenses
270,428
217,743
181,244
Pre-opening expenses
55,554
59,319
32,058
Relocation, store closures and lease termination
36,545
10,861
5,363
costs
Operating income
236,238
297,451
319,009
Interest expense
(40,616)
(4,208)
(32)
Investment and other income
6,237
11,324
20,736
Income before income taxes
201,859
304,567
339,713
Provision for income taxes
91,995
121,827
135,885
Net income
$ 109,864
$ 182,740
$ 203,828
Balance Sheet (in $000s)*
Assets
Cash and cash equivalents
Restricted cash
2008
$ 30,534
647
2007
$
__
2,310
Accounts receivable
Proceeds receivable for divestiture
Merchandise inventories
Prepaid expenses and other current assets
Deferred income taxes
Total current assets
Property and equipment
Accumulated depreciation
Property and equipment, net
Goodwill and intangible assets, net
Deferred income taxes
Other assets
Total assets
115,424
__
327,452
69,750
76,229
620,036
2,894,329
(997,612)
1,896,717
738,258
111,002
10,853
$3,376,866
105,209
165,054
288,112
40,402
66,899
667,986
2,483,350
(816,791)
1,666,559
766,533
104,877
7,173
$3,213,128
(in $000s)*
Liabilities and shareholders' equity
Current installments of long-term debt and capital lease obligations
Accounts payable
Accrued payroll, bonus and other benefits due team members
Dividends payable
Other current liabilities
Total current liabilities
Long-term debt and capital lease obligations, less current
installments
Deferred lease liabilities and other long-term liabilities
Total liabilities
Shareholders' equity
Common stock, no par value, 300,000 shares authorized,
140,286 and 143,787 shares issued, 140,286 and 139,240 shares
outstanding in 2008 and 2007, respectively
Common stock in treasury, at cost
Accumulated other comprehensive income
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
2008
$
380
183,134
196,233
__
284,630
664,377
2007
$
24,781
225,728
181,290
25,060
315,491
772,350
928,990
736,087
282,945
1,876,312
245,887
1,754,324
1,066,980
__
448
433,126
1,500,554
$3,376,866
1,232,845
(199,961)
15,722
410,198
1,458,804
$3,213,128
* Gross property and equipment and its accumulated depreciation are inserted in the balance
sheet; both are taken from footnotes to financial statements. Goodwill and other intangible assets
are combined, as are deferred lease liabilities and other long-term liabilities.
(a) Forecast Whole Foods Market's 2009 income statement and balance sheet using the following
relations; assume no change for all other accounts not listed below ($ 000s). (Round your
answers to the nearest whole number.)
Sales growth
Gross profit margin
Direct store expenses/Sales
General and administrative expenses/Sales
Pre-opening expenses/Sales
Relocation, store closures and lease termination costs/Sales
Depreciation/Prior year property and equipment, gross
Amortization/Prior year goodwill and intangible assets
Provision for income taxes/Income before income taxes
20.7%
34.0%
26.5%
3.4%
0.7%
0.5%
9.8%
0.8%
45.6%
Accounts receivable/Sales
Merchandise inventories/Sales
Capital expenditures/Sales
Accounts payable/Sales
Accrued payroll, bonus and other benefits due team members/Sales
Dividends
Installments of long-term debt and capital lease obligations, due in 2009 and 2010
Whole Foods Forecasted Income Statement (in $ 000s)
Sales
2008
$7,953,912
Cost of goods sold and occupancy costs
5,247,207
Gross profit
2,706,705
Direct store expenses
2,107,940
General and administrative expenses
270,428
Pre-opening expenses
55,554
Relocation, store closures and lease termination costs
36,545
Operating income
236,238
Interest expense
(40,616)
Investment and other income
6,237
Income before income taxes
201,859
Provision for income taxes
91,995
2009
$
1.5%
4.1%
6.6%
2.3%
2.47%
$109,072
$0
Net income
$ 109,864
Whole Foods Forecasted Balance Sheet (in $000s)
Assets
Cash and cash equivalents
$
2008
647
Accounts receivable
115,424
Merchandise inventories
327,452
Prepaid expenses and other current assets
69,750
Deferred income taxes
76,229
Total current assets
620,036
2,894,329
Accumulated depreciation
(997,612)
Property and equipment, net
1,896,717
Goodwill and intangible assets, net
738,258
Deferred income taxes
111,002
Other assets
10,853
Total assets
$3,376,866
Liabilities and shareholders' equity
Current installments of long-term debt and capital lease
obligations
$
380
Accounts payable
183,134
Accrued payroll, bonus and other benefits due team members
196,233
Other current liabilities
284,630
Total current liabilities
664,377
Long-term debt and capital lease obligations, less current
installments
928,990
Deferred lease liabilities and other long-term liabilities
282,945
Total liabilities
1,876,312
Shareholders' equity
Common stock
Accumulated other comprehensive income
$
$ 30,534
Restricted cash
Property and equipment
2009
1,066,980
448
$
$
Retained earnings
433,126
Total shareholders' equity
1,500,554
Total liabilities and shareholders' equity
$3,376,866
$
5. Estimating Share Value Using the DCF Model
Following are forecasts of Abercrombie & Fitch's† sales, net operating profit after tax (NOPAT),
and net operating assets (NOA) as of January 31, 2008.
(In millions)
Sales
NOPAT
NOA
Reported
2008
$3,750
464
1,345
2009
$4,500
568
1,616
Horizon Period
2010
2011
$5,400
$6,480
653
782
1,923
2,321
2012
$7,776
941
2,779
Terminal
Period
$7,853
973
2,817
Answer the following requirements assuming a discount rate (WACC) of 13.3%, a terminal
period growth rate of 1%, common shares outstanding of 86.2 million, and net nonoperating
obligations (NNO) of $(294) million (negative NNO reflects net nonoperating assets such as
investments rather than net obligations).
(a) Estimate the value of a share of Abercrombie & Fitch common stock using the discounted
cash flow (DCF) model as of January 31, 2008. (Round your answer to the nearest whole
number except for the discount factors, shares outstanding, and the stock price per share.
Round the discount factors to five decimal places, the shares outstanding to one decimal
place, and and the stock price to two decimal places.)
Horizon Period
Termin
Reported
al
(In millions)
2008
2009
2010
2011
2012
Period
Increase in NOA
FCFF (NOPAT - Increase in
NOA)
Discount factor [1 / (1 + rw)t ]
Present value of horizon FCFF
Cum present value of horizon
FCFF
$
Present value of terminal FCFF
Total firm value
Less NNO (Plus negative NNO)
$
Firm equity value
Shares outstanding (millions)
$
Stock price per share
6. Estimating Share Value Using the ROPI Model
Following are forecasts of Abercrombie & Fitch's† sales, net operating profit after tax (NOPAT),
and net operating assets (NOA) as of January 31, 2008. Refer to the information in the table to
answer the following requirements.
Horizon Period
Reported
Terminal
(In millions)
2008
2009
2010
2011
2012
Period
Sales
$3,750
$4,500
$5,400
$6,480
$7,776
$7,853
NOPAT
464
555
672
795
941
986
NOA
1,315
1,614
1,930
2,336
2,773
2,798
Answer the following requirements assuming a discount rate (WACC) of 13.3%, a terminal
period growth rate of 1%, common shares outstanding of 86.2 million, and net nonoperating
obligations (NNO) of $(270) million (negative NNO reflects net nonoperating assets such as
investments rather than net obligations).
(a) Estimate the value of a share of Abercrombie & Fitch common stock using the residual
operating income (ROPI) model as of January 31, 2008. (Round your answer to the
nearest whole number except for the discount factors, shares outstanding, and the
stock price per share. Round the discount factors to five decimal places, the shares
outstanding to one decimal place, and and the stock price to two decimal places.)
Horizon Period
(In millions)
ROPI (NOPAT - [NOABeg ×
rw])
Reported
2008
Discount factor [1 / (1 + rw)t ]
Present value of horizon ROPI
Cum present value of horizon
ROPI
$
Present value of terminal ROPI
NOA
Total firm value
Less NNO (Plus negative NNO)
Firm equity value
$
2009
2010
2011
2012
Termin
al
Period
Shares outstanding (millions)
$
Stock price per share