Question

Some balance sheet information is shown here (all values n millions of dollars). see at the end

questions:

a. What change in the book value of the company's equity took place at the end of 2015 ?

b. Is the company's market-to-book ratio meaningful? Is its book debt-equity ratio meaningful? Explain.

c. Find the company's other financial statements from that time online. What was the cause of the change to its book value of equity at the end of 2015 ?

d. Does the company's book value of equity in 2016 imply that it is unprofitable? Explain.

Solution .... EXPLAIN HOW TO CALCULATE A .. how did they come up with $2.104

a. What change in the book value of the company's equity took place at the end of 2015 ?

The book value of equity decreased by $2.104 billion from the end of the previous year, and was negative

b. Is the company's market-to-book ratio meaningful? Is its book debt-equity ratio meaningful? Explain. (Select all the choices that apply.)

A. Because the book value of equity is negative in this case, the company's market-to-book ratio and its book debt-equity ratio are not meaningful.

C. Because the book value of equity is negative in this case, the company's market debt-equity ratio may be used in comparison.

c. Find the company's other financial statements from that time online. What was the cause of the change to its book value of equity at the end of 2015 ?

Information from the statement of cash flows helped explain that the decrease of book value of equity resulted from an increase in debt that was used to repurchase$2.104 billion worth of the firm's shares.Your answer is correct.d. Does the company's book value of equity in 2016 imply that it is unprofitable? Explain. (Select all the choices that apply.)

C.Negative book value of equity does not necessarily mean the firm is unprofitable.

Your answer is correct.

D.If a firm borrows to repurchase shares or invest in intangible assets (such as R&D), it can have a negative book value of equity.

Balance Sheet: 3/31/2016 12/31/2015 9/30/2015 6/30/2015 Assets Current Assets Cash and cash equivalents 293 300 255 232 Net receivables 401 362 385 460 Inventory 374 342 437 306 Other current assets 60 43 53 45 Total Current Assets 1,128 1,047 1,130 1,043 Long-term investments 128 97 — 200 Property, plant, and equipment 979 991 995 1,052 Goodwill 744 748 736 742 Other assets 777 832832 919919 797 Total Assets 3,756 3,715 3,780 3,834 Liabilities Current Liabilities Accounts payable 876 1,467 922 980 Short/current long-term debt 410 2 173 288 Other current liabilities — — — — Total Current Liabilities 1,286 1,469 1,095 1,268 Long-term debt 2,381 2,124 474 475 Other liabilities 435 574 559 551 Total Liabilities 4,102 4,167 2,128 2,294 Total Shareholder's Equity −346 −452 1,652 1,540 Total Liabilities and Shareholder's Equity 3,756 3,715 3,780 3,834

Answer 1

a) The book value of equity decreased by $2.104 billion from the end of the previous year, and was negative

b) A) Because the book value of equity is negative in this case, the company's market-to-book ratio and its book debt-equity ratio are not meaningful.Because the book value of equity is negative in this case, the company's market debt-equity ratio may be used in comparison.

c) Information from the statement of cash flows helped explain that the decrease of book value of equity resulted from an increase in debt that was used to repurchase$2.104 billion worth of the firm's shares

d) Book value of equity changes does not meant that, the company is unprofitable. Due to shortage of fund company may takes more debt to over come the existing crisis. Fund raised may be for the expansion of business. Negative book value of equity does not necessarily mean the firm is unprofitable.

The value of 2104 is the difference of equity value at the end of 30-09-2015 & 31-12-2015 (1652-(-452))=2104

If a firm borrows to repurchase shares or invest in intangible assets (such as R&D), it can have a negative book value of equity.