Fsa Backup

551 views

Published on

Published in: Business, Technology
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
551
On SlideShare
0
From Embeds
0
Number of Embeds
5
Actions
Shares
0
Downloads
6
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Fsa Backup

  1. 3. Analysis of income tax <ul><li>recording a net deferred tax liability every year </li></ul><ul><li>much larger since 2003 and averaged about $800 million afterwards </li></ul>
  2. 4. Analysis of income tax
  3. 5. <ul><li>Deferred tax liabilities </li></ul><ul><li>Property and equipment accounted for the largest shares </li></ul><ul><ul><li>Due to difference in method of depreciation </li></ul></ul><ul><ul><ul><li>Tax purpose: accelerated </li></ul></ul></ul><ul><ul><ul><li>Financial reporting: straight-line </li></ul></ul></ul>Analysis of income tax
  4. 6. <ul><li>Unlikely reversal of deferred tax liability </li></ul><ul><li>Walmart continued to purchase property and equipment and investment in international operations </li></ul><ul><li>Growing firm </li></ul>Analysis of income tax
  5. 7. <ul><li>Unlikely reversal of deferred tax liability </li></ul><ul><li>No expectation of cash outflow in future </li></ul><ul><li>The liability should be treated as equity </li></ul>Analysis of income tax Total liabilities – total deferred tax liability Total equity + total deferred tax liability Adjustment:
  6. 8. Analysis of income tax
  7. 9. Analysis of income tax <ul><li>Most significant deferred tax asset relates to “amounts accrued for financial reporting purposes not yet deductible for tax purposes” </li></ul><ul><li>No information provided </li></ul><ul><li>Valuation allowance: </li></ul><ul><ul><li>Walmart: Present since 2004 </li></ul></ul><ul><ul><li>Target: None </li></ul></ul>
  8. 10. Analysis of income tax <ul><li>Significant increase in valuation allowance </li></ul><ul><li>REASONS: </li></ul><ul><ul><li>Change of tax legislation in Germany in 2004 </li></ul></ul><ul><ul><li>Pre-acquisition loss in 2006-2008 </li></ul></ul><ul><li>Tax benefit not realized will be adjusted to goodwill </li></ul><ul><ul><li>Not possible to know if it is done </li></ul></ul>
  9. 11. <ul><li>Change in valuation allowance did not follow a regular pattern </li></ul><ul><li>Exclude it to give a better picture of recurring performance </li></ul><ul><li>Net income was underestimated </li></ul><ul><li>Net income was less smooth after restatement </li></ul>Analysis of income tax Total asset + valuation allowance Adjustment:
  10. 12. <ul><li>Footnote: Permanently reinvested foreign earnings </li></ul><ul><li>No adjustments are required </li></ul><ul><ul><li>Walmart earned large profit every year </li></ul></ul><ul><ul><li>Quite unlikely it will repatriate the earnings </li></ul></ul>Analysis of income tax
  11. 13. <ul><li>Walmart: no reserve for bad debt </li></ul><ul><li>Target: Average 8% of gross receivables established as bad debt allowance </li></ul><ul><li>Adjustment: </li></ul><ul><ul><li>Remove bad debt allowance of Target </li></ul></ul><ul><ul><li>Add bad debt expense to net income </li></ul></ul>Analysis of bad debt Write-off = Opening Balance – ending balance – Bad debt expense Adjusted total asset = reported total asset + ending balance of bad debt allowance Adjusted net income = reported net income - bad debt expense
  12. 14. Analysis of employee related benefits <ul><li>Retirement-related plans: </li></ul><ul><ul><li>Walmart: no calculation is shown for the pension expense </li></ul></ul><ul><ul><li>Target: Detailed calculation is shown </li></ul></ul><ul><li>Stock-based compensation plans </li></ul><ul><ul><li>Walmart: Assumed a higher dividend yield and lower volatility for the share </li></ul></ul>
  13. 15. <ul><li>Non cancelable leases </li></ul><ul><li>Obligation for the firm </li></ul><ul><li>Operating lease  Capital lease </li></ul><ul><li>Assumptions: </li></ul><ul><ul><li>fifth year lease payment will be constant thereafter </li></ul></ul><ul><ul><li>Estimated useful life </li></ul></ul><ul><ul><li>=(Total payment thereafter/fifth year lease payment)+5 </li></ul></ul><ul><ul><li>Implicit interest rate = capital lease expense/average present value of capital lease </li></ul></ul>Lease
  14. 16. <ul><li>Present value of operating lease </li></ul><ul><li>Interest expense = PV of operating lease * implicit interest rate </li></ul><ul><li>Amortization expense = PV of operating lease/estimated useful life </li></ul><ul><li>Adjusted Net income </li></ul><ul><li>= Net income + operating lease expense-interest expense-amortization expense </li></ul><ul><li>Adjusted total liability </li></ul><ul><li>= Total Debt + PV of operating lease </li></ul>Restatment methods
  15. 17. 4238 5123 5803 6266 7669 8721 10006 10885 10909 12138 Adjusted Net income -249 -291 -371 -432 -401 -380 -413 -643 -690 -840 Less: Amortization -347 -357 -507 -537 -508 -542 -512 -433 -482 -595 Less: Interest expense 404 394 387 564 623 589 665 730 797 842 Operating lease expense 4430 5377 6295 6671 7955 9054 10267 11231 11284 12731 Net income 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Adjustments:
  16. 18. 30570 47211 51483 53502 60205 66761 76577 90363 94730 106525 Adjusted Total Debt 3485 3975 5836 6360 6219 6463 7073 6812 7270 9558 Add: PV of Operating Lease 27085 43236 45647 47142 53986 60298 69504 83551 87460 96967 Total Debt 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
  17. 19. 1132 1250 1353 1635 1836 3180 2367 2724 2758 2188 Adjusted Net income -57 -57 -56 -66 -67 -67 -64 -60 -77 -94 Less: Amortization -70 -70 -70 -80 -86 -114 -123 -140 -156 -170 Less: Interest expense 115 113 111 127 147 163 146 137 142 239 Operating lease expense 1,144 1,264 1,368 1,654 1,841 3,198 2,408 2,787 2,849 2214 Net income 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Adjustments:
  18. 20. 12077 13771 17082 20084 21281 20840 22270 23140 31025 32338 Adjusted Total Debt 796 800 788 924 998 1576 1480 1424 1772 1944 Add: PV of Operating Lease 11281 12971 16294 19160 20283 19264 20790 21716 29253 30394 Total Debt 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
  19. 21. Effects after restatement
  20. 23. Analysis of Depreciation <ul><li>Adjustment of changes in depreciation </li></ul><ul><li>No change in accounting method (Straight-Line Method only) </li></ul><ul><li>Change in asset lives </li></ul>
  21. 24. Analysis of Depreciation <ul><li>Estimated useful live </li></ul><ul><li>Annual reports have not mentioned </li></ul><ul><li>- estimated useful live of each specific item </li></ul><ul><li>- changes in asset lives </li></ul><ul><li>Apply Average useful live </li></ul><ul><li>Average useful live </li></ul><ul><li>= Depreciable asset base / Depreciation expense </li></ul>Analysis of Depreciation
  22. 25. Analysis of Depreciation <ul><li>Depreciable asset base </li></ul><ul><li>= Buildings and improvements </li></ul><ul><li>+ Fixtures and equipment </li></ul><ul><li>+ Computer hardware and software </li></ul><ul><li>= Net property and equipment </li></ul><ul><li> - Land - Construction in progress </li></ul>
  23. 26. Analysis of Depreciation
  24. 27. Analysis of Depreciation <ul><li>Adjusted deprecation expense </li></ul><ul><li>= Depreciable asset base / Average useful live </li></ul><ul><li>Adjusted net income </li></ul><ul><li>= Net income + Depreciation expense </li></ul><ul><li>– Adjusted depreciation expense </li></ul>
  25. 28. Analysis of Inventory <ul><li>Both used LIFO in 1999-2003 </li></ul><ul><li>Both stated “Our inventory valued at LIFO approx equal to that valued at FIFO&quot; </li></ul>
  26. 29. Analysis of Inventory
  27. 30. Analysis of Inventory
  28. 31. Analysis of Inventory
  29. 32. Analysis of Inventory
  30. 33. Quality of earnings
  31. 34. Quality of earnings
  32. 35. <ul><li>Walmart: </li></ul><ul><ul><li>Income Smoothing </li></ul></ul><ul><li>Target: </li></ul><ul><ul><li>Adjusted Net Iincome ≈ Reported Net Income </li></ul></ul><ul><ul><li>Except 2008, but justified </li></ul></ul>
  33. 36. <ul><li>Walmart </li></ul><ul><ul><li>Beneficial earnings management </li></ul></ul><ul><ul><li>Major shareholders=management </li></ul></ul><ul><li>Target </li></ul><ul><ul><li>Difficult to manipulate earnings </li></ul></ul><ul><ul><li>Major shareholders=public investors </li></ul></ul><ul><ul><li>Quality of earnings affecting investment decisions </li></ul></ul>Possible Reasons
  34. 37. Target has higher profit margin than Walmart WAL  MART Buy Sell Decision
  35. 38. <ul><li>Walmart has higher growth in net sales than Target </li></ul>WAL  MART Buy Sell Decision
  36. 39. <ul><li>Walmart has higher ROA than Target </li></ul><ul><li>Walmart is more efficient in using their resources </li></ul>WAL  MART Buy Sell Decision
  37. 40. Return on Equity <ul><li>Quite similar, except for different timing in fluctuations, may be due to different selling strategies in different years </li></ul>WAL  MART Buy Sell Decision
  38. 41. Debt to Equity Ratio <ul><li>Target has higher and less stable debt to equity ratio, may have difficulty in poor times </li></ul><ul><li>On the other hand, Walmart is much more stable and healthy </li></ul>WAL  MART Buy Sell Decision
  39. 42. Free Cash Flow <ul><li>Walmart has much higher free cash flow, except for 2000, which it invested in international operations </li></ul>Buy Sell Decision WAL  MART Buy Sell Decision
  40. 43. <ul><li>Based on the ratio analysis above, Walmart performs better than Target </li></ul><ul><li>Current News </li></ul><ul><ul><li>Walmart announced sales for March, its overall sales increased by 3.1%, it seems that its low-price strategy is appropriate for customers in such a tough time </li></ul></ul><ul><ul><li>However, its share price continues to decline, from $51 in late March to $49 currently, which is a 4% down </li></ul></ul><ul><ul><li>Possible reason is the selling-off of shares in retail industry as the global economy is not doing well </li></ul></ul>WAL  MART Buy Sell Decision
  41. 44. Conclusion <ul><li>buy Walmart for long term holding </li></ul><ul><li>but not short term sell </li></ul><ul><li>∵ it may encounter a sell-off at any point of time in such a volatile trading environment especially when expectations are not met. </li></ul>WAL  MART Buy Sell Decision

×