Problem 4: H&M and Burberry’s non-current assets
Question 1
(a) Ratio of land, buildings and equipment to sales
H&M: (420+222+7134) / 78346 = 9.9%
Burberry: (58.2+99.2) / 995.4 = 15.8%
(b) Ratio of depreciation to sales
H&M: (14+1750) / 78346 = 2.25%
Burberry: (1.9+27)/ 995.4 = 2.9%
The above ratios can be used to measure the efficiency of a firm’s investment policy. Burberry has a higher land, buildings and equipment to sales ratio as well as a higher depreciation to sales ratio. The higher the ratio of land, buildings and equipment to sales, the smaller the investment required to generate sales revenue and therefore the higher the profitability of the firm. Moreover, the ratio of depreciation to sales provides a measure of
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Therefore, Cost of Sales would increase by 2422 million.
Question 4
a.
In order to specify the adjustments to the beginning book value of H&M’s and Burberry’s land, buildings and equipment required after the capitalization of the retailers’ operating leases, we need to calculate the present value of the rent payments.
H&M
With a discount rate of 4.4%, the present values of the rental payments for the years 2006 and 2007 are as follows: 2007 2006
Within one year 6514.4 5909
Over one year 30852.5 28047.9
Total 37366.9 33956.9
The beginning book value of H&M’s land, buildings and equipment for the year 2007 will increase by 33956.9.
Burberry
Assume that the annual payments in the sixth year is equal to the rental payment in the fifth year ( 112.9 and 86.0) and the remainder of the lump sum values (54.6 and 17.8) is due in the seventh year. With a discount rate of 5.4%, the present values of the rental payments for the years 2006 and 2007 are as follows: 2007 2006
Within one year 37.1 29.9
Over one year 266.03 180.1
Total 303.13 210
The beginning book value of Burberry’s land, buildings and equipment for the year 2007 will increase by 210.
b.
If
Market value per share = Book value per share = $12,000 / 750 shares = $16 per share
To calculate straight-line depreciation when you buy a building or equipment for your business, you calculate the useful life of the asset. Find the useful life of your asset, and then determine the salvage value at the end of the asset’s useful life. Subtract the salvage value from the original cost. Divide that figure by the number of years it will last. You can write off that figure each year on your taxes. The IRS publishes a
The adjusted book value of the operation is based on the idea that we are paying for the firm's book value, in particular with the book value of the assets or the book value of the equity. This is a decent option, since we can expect to utilize our own brand, therefore the important part of the purchase is the assets that we are acquiring, everything from cars to drivers to customer contacts. However,
• Inventory was $84,000 on April 30 and an increase of $12,000 is planned for May 31.
Calculate the Nominal Payback, the Discounted Payback, the Net Present Value and the IRR assuming:
Cost – HD’s cost of goods sold has increased from 1991 to 1995 due to expansion of production. Similarly, the cost of selling, admin and engineering has also increased.
Equity accounts for 89% of Wrigley’s book value of capital before the recapitalization. But the book value per share is $5.49,[1] less than one-tenth of Wrigley’s current share price of $56.37. This huge disparity is the possibility that book values are backward-looking and ignore important economic considerations, such as the value of brands, intellectual property, and customer franchise as well as the debt tax shields.
This annual report includes all the accounts subsidiaries and affiliates that Berkshire Hathaway INC holds, the information presented in this report reflects all the adjustments necessary in order to present a fair statement for the interim period. During the year 2016, the company’s gain was $27.5 billion “which increased the per-share book value of both our Class A and Class B stock by 10.7%. Over the last 52 years (that is, since present management took over), per-share book value has grown from $19 to $172,108, a rate of 19% compounded annually”. (Berkshirehathaway.com,
* This increase is mainly because of the 26.74% increment in PBIT but the assets went up only by 21.66%.
In the balance sheet, all current assets and current liabilities vary with revenues. We are supplied with the payment period for vendors, supplies and taxes; this has not been used since all current liabilities have been taken to vary with revenues. There is an increase of $10 million for operating property in year 2007 and beyond that there is no increase in operating property.
The book value regards past costs of assets. The market value is the price of the share multiplied with the numbers of outstanding shares. The current book value of the company is 792,170 in 2004 and 692,000 in 2003 (Equity of ever year). The current market value of the company is 1,100,000 (price per share x amount of outstanding shares).
i. The present value of the future minimum lease payments is equal to $8,546. This amount was calculated by discounting each of the payments at the given rate of 12%.
Price/Book Value Ratio (P/B Ratio) ............................................................................................. 36 Sensitivity ............................................................................................................................ 38 Discussion and Valuation .................................................................................................... 39
The total current liabilities of the company get an increase from 16750167 in 2016 to 21929057 in 2017.