Financial Accounting (MScF) Fall 2022

Questions and Solutions

Residual Income
You are an intern at JP Morgan and they ask you to do a “Residual Income” analysis of Pfizer.
You need to forecast the next 5 fiscal years (FY) and compute a terminal value. You should use
the information given in the 10K filling. Furthermore, you are given the following assumptions.
• Earnings for Pfizer Common Shareholders decline by 15% for 2022.
• Earnings have a growth rate of 7% for FY 2023 to FY 2026.
• Cash Dividends paid out, as per the Statement of Cash Flow, grow at a constant rate
of 2%.
• For FY 2022 and FY 2023, the number of shares stays the same at 5,601 (million).
For FY 2024 to FY 2026, the number of shares is equal to 6,000 (million).
• The required return is 11%.
• The terminal time period continuation growth rate is 3%.

1. What is the Return on Shareholder's Equity for FY 2022?

A. 24.12%
B. 21.96%
C. 27.88%
D. None of these answers are correct

ANSWER: A

2. What is the EPS for FY 2022 and FY 2026?

A) 3.34 and 4.08
B) 2.63 and 3.56
C) 1.08 and 3.91
D) None of these answers are correct

ANSWER: A

3. What is the per-share present value of Residual Earnings (without Terminal

Value/Continuing Value) as of FY 2021?
A) 6.43
B) 4.56
C) 7.11
D) None of these answers are correct

ANSWER: A

4. What is the per-share terminal (i.e., continuation) value?

A) 21.70
B) 25.01
C) 23.12
D) None of these answers are correct

ANSWER: A
 5. What is the per-share total value of Pfizer?
A) 33.14
B) 30.09
C) 32.93
D) None of these answers are correct

ANSWER: A
Solution

- 𝑋𝑋𝑁𝑁 = 𝑋𝑋𝑁𝑁−1 ∗ (1 + 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟) with X being Earnings and Dividends

o 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑠𝑠1 = 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸0 ∗ �1 + 𝑔𝑔𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 � = 21,979 ∗ (1 − 15%) =
18,682.15
o 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷1 = 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷0 ∗ (1 + 𝑔𝑔𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 ) = 8,729 ∗ (1 + 2%) = 8,903.58
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑠𝑠𝑁𝑁
- 𝐸𝐸𝐸𝐸𝑆𝑆𝑁𝑁 = , and same logic for DPS.
𝑆𝑆ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑠𝑠𝑁𝑁
18,682.15
o 𝐸𝐸𝐸𝐸𝑆𝑆2022 = = 3.34
5,601
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸
- 𝐵𝐵𝐵𝐵𝑆𝑆0 =
𝑆𝑆ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑠𝑠1
77,462
o 𝐵𝐵𝐵𝐵𝑆𝑆2021 = = 13.83 with 77,462 being the Total Equity
5,601
- 𝐵𝐵𝐵𝐵𝑆𝑆𝑁𝑁 = 𝐵𝐵𝐵𝐵𝑆𝑆𝑁𝑁−1 + 𝐸𝐸𝐸𝐸𝑆𝑆𝑁𝑁 − 𝐷𝐷𝐷𝐷𝑆𝑆𝑁𝑁 for N > 0
o 𝐵𝐵𝐵𝐵𝑆𝑆2022 = 13.83 + 3.34 − 1.59 = 15.58
𝐸𝐸𝐸𝐸𝑆𝑆𝑁𝑁
- 𝑅𝑅𝑅𝑅𝐸𝐸𝑁𝑁 = 𝐵𝐵𝐵𝐵𝑆𝑆
𝑁𝑁−1
3.34
o 𝑅𝑅𝑅𝑅𝐸𝐸2022 = = 24.12%
13.83
- 𝑅𝑅𝐸𝐸𝑁𝑁 = (𝑅𝑅𝑅𝑅𝐸𝐸𝑁𝑁 − 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅) ∗ 𝐵𝐵𝐵𝐵𝑆𝑆𝑁𝑁−1
o 𝑅𝑅𝐸𝐸2022 = (24.12% − 11%) ∗ 13.83 = 1.81
- 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑟𝑟𝑟𝑟𝑟𝑟𝑒𝑒𝑁𝑁 = (1 + 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅)𝑁𝑁
o 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑟𝑟𝑟𝑟𝑟𝑟𝑒𝑒2022 = (1 + 11%)1 = 1.11
𝑅𝑅𝐸𝐸
- 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉(𝑅𝑅𝑅𝑅)𝑁𝑁 = 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑁𝑁𝑟𝑟𝑟𝑟𝑟𝑟𝑒𝑒
𝑁𝑁
1.81
o 𝑃𝑃𝑃𝑃(𝑅𝑅𝑅𝑅)𝑁𝑁 = = 1.63
1.11
1+𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
- 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 = 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑅𝑅𝑅𝑅 ∗
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅− 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑛𝑛𝑎𝑎𝑎𝑎 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
1+3%
o 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 = 1.685 ∗ = 21.70
11%−3%
- 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 = 𝑃𝑃𝑃𝑃(𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉) + ∑ 𝑃𝑃𝑃𝑃 (𝑅𝑅𝑅𝑅) + 𝐵𝐵𝐵𝐵𝑆𝑆1
o 12.88 + 6.434 + 13.83 = 33.14
Taxes
You are now an intern at Pfizer and they ask you to help the accounting department of HospEquip
Inc. with their tax filings. They want you to construct the Income Statement (I/S) and the Tax
Filing. You are given the following information:

HospEquip Inc. decomposition of revenue:

• $9,000 for selling equipment to developing countries. This revenue is 25% tax deductible.
• $16,500 for selling equipment to universities. This revenue is 33% tax deductible.
• $50,000 for selling equipment to a US clinic. This revenue is 0% tax deductible.
• $16,000 down payment received for an equipment sale in next period. This revenue is 0%
tax deductible.
• $10,000 credit sale for university equipment, cash will be received in the next period.
This, again, is 33% tax deductible.

HospEquip Inc. has fixed COGS which correspond to 25% of its revenue.

The tax rate is 40%.

HospEquip Inc. decomposition of expense:

• $10,000 of R&D. This expense is 120% tax deductible.

• $8,500 of private jet maintenance. This expense is 10% tax deductible.
• $11,000 in wages. This expense is 100% tax deductible.

Moreover, HospEquip Inc. polluted a lake. The lawyers are certain that the company will have to
pay a $3,000 fine. This expense is not tax deductible.

HospEquip Inc. has two types of PPE:

• The laboratory equipment has an historic value of $100,000 and is depreciated over 20
years. On the other hand, the tax authorities depreciate it over 5 years.
• The private jet has an historic value of $50,000 and is depreciated over 10 years. On the
other hand, the tax authorities depreciate it over 50 years.
• Both of these depreciation items are part of SG&A.

6. What is the revenue under the I/S?

A) $85,500
B) $89,325
C) $101,500
D) None of these answers are correct

ANSWER: A

7. What is the revenue under the Tax Filing?

A) $83,805
B) $92,805
C) $93,805
D) None of these answers are correct

ANSWER: A
 8. What is the tax expense under the I/S?
A) $8,650
B) $10,180
C) $12,110
D) None of these answers are correct

ANSWER: A

9. What is the tax expense under the Tax Filing?

A) $7,032
B) $10,632
C) $6,810
D) None of these answers are correct

ANSWER: A

10. What is the SG&A expense under the Tax Filing?

A) $23,850
B) $29,500
C) $44,850
D) None of these answers are correct

ANSWER: C

11. What is the depreciation expense under the Tax Filing?

A. $21,000
B. $10,000
C. $14,000
D. None of these answers are correct

ANSWER: A
Solution
Revenue
- Income Statement:
Total Revenue = Sale of equipment to developing countries + Sale of equipment to universities +
Sale of equipment to US clinic + Credit sale of university equipment.
o 9,000 + 16,500 + 50,000 + 10,000 = $85,500.
o We are not taking into account the down payment because we cannot recognize
as the sale hasn’t happened yet.
- Tax Filing:
Total Revenue = Sale of equipment to developing countries * (1 – Tax deduction) + Sale of
equipment to universities * (1 – Tax Deduction) + Sale of equipment to US clinic + Down
payment.
o 9,000 ∗ (1 − 25%) + 16,500 ∗ (1 − 33%) + 50,000 + 16,000 = $83,805
o We are not taking into account the credit sale because no cash has been received.
o We are taking into account the deferred payment since cash has been received.
COGS
Both for the Income Statement and the Tax Filing it is equal to $21,375 (= $85,500 * 25%).

SG&A
- Income Statement:
o Expenses = R&D + Jet Maintenance + Wages = 10,000 + 8,500 + 11,000 =
$29,500
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐽𝐽𝐽𝐽𝐽𝐽 100,000 50,000
o Depreciation + = + = $10,000
𝐼𝐼/𝑆𝑆 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐼𝐼/𝑆𝑆 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 20 10
o Total SG&A Expense = Expenses + Depreciation = $39,500
- Tax Filing:
o Expenses = 𝑅𝑅&𝐷𝐷 ∗ 𝑇𝑇𝑇𝑇𝑇𝑇 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 + 𝐽𝐽𝐽𝐽𝐽𝐽 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 ∗ 𝑇𝑇𝑇𝑇𝑇𝑇 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 +
𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊 ∗ 𝑇𝑇𝑇𝑇𝑇𝑇 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 = 10,000 ∗ 120% + 8,500 ∗ 10% + 11,000 ∗
100% = $23,850
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐽𝐽𝐽𝐽𝐽𝐽 100,000 50,000
o Depreciation: + = + = $21,000
𝑇𝑇𝑇𝑇𝑇𝑇 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑇𝑇𝑇𝑇𝑇𝑇 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 5 50
o Total SG&A Expense = Expenses + Depreciation = $44,850

Special Items
Taken into account in the Income Statement ($3,000) but not in the Tax Filing.

Tax Expense
- Income Statement:
o 𝑇𝑇𝑇𝑇𝑇𝑇 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 = 𝐸𝐸𝐸𝐸𝐸𝐸 ∗ 40% = (𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 − 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 − 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 −
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼) ∗ 𝑇𝑇𝑇𝑇𝑇𝑇 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 = (85,500 − 21,375 − 39,500 − 3,000) ∗ 40% =
$8,650
- Tax Filing:
o 𝑇𝑇𝑇𝑇𝑇𝑇 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 = 𝐸𝐸𝐸𝐸𝐸𝐸 ∗ 40% = (𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 − 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 − 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸) ∗ 𝑇𝑇𝑇𝑇𝑇𝑇 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 =
(83,805 − 21,375 − 44,850) ∗ 40% = $7,032

You need to pay attention to the difference between “permanent differences” (they reduce or
increase the tax rate on the Income Statement) and “temporary differences” (they do not change
the statutory tax rate on the Income statement but taxes are paid either later or earlier.
IRR
Pfizer fully acquired Arena for $6,700m in December 2021. In 2022, Arena had revenue of
$2,400m and a Return on Sales (ROS) of 43%. The ROS is expected to grow by 1% every year
until it reaches 46%. Pfizer’s internal investment policy requires each project to reach an internal
rate of return (IRR) above 11.5% within 5 years.

12. What is the IRR if the revenue growth rate is equal to 20%?
A) 5.66%
B) 5.55%
C) 5.83%
D) None of these answers are correct

ANSWER: A

13. What is the minimal revenue growth rate to satisfy the policy? (Round to 0 decimal)
A) 30%
B) 27%
C) 45%
D) None of these answers

ANSWER: A

A top executive at Arena believes that if 25% of Arena’s earnings was reinvested in the company,
they would have a revenue growth rate of 50% and the ROS would jump in FY 2023 to 50% and
would grow at a rate of 1% per year.

14. What is the IRR of the Arena project?

A) 17.62%
B) 15.42%
C) 18.32%
D) None of these answers are correct

ANSWER: A

15. What are the projected earnings in FY 2025?

A) $4,212m
B) $3,159m
C) $4,613m
D) None of these answers are correct

ANSWER: A
Solution

- 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑒𝑒𝑁𝑁 = 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑒𝑒𝑁𝑁−1 ∗ (1 + 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅)

o 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑒𝑒2023 = $2,400 ∗ (1 + 20%) = $2,880
- 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑠𝑠𝑁𝑁 = 𝑅𝑅𝑅𝑅𝑆𝑆𝑁𝑁 ∗ 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑒𝑒𝑁𝑁
o 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑠𝑠2022 = 43% ∗ $2,400 = $1,032
- To find the IRR, use the IRR formula taking all the “Cash Flows” values.
- To find the minimum growth rate to have a certain IRR, use the goal seek function in
excel.
o Set cell = IRR; To value = 11.5%; By changing value = Growth rate
- 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝑡𝑡𝑁𝑁 = 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑠𝑠𝑁𝑁 ∗ 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 for N > 1
o 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝑡𝑡2022 = $1,032 ∗ 25% = $258
Forecasting
You are now interviewing for a position as junior financial analyst at Morgan Stanley. They ask
you to forecast the Financial Statements of Arena. You are given the Income Statement and the
Balance sheet of Arena for FY 2022.

Arena Financial Statements Assets 2022

Income Statement 2022 Cash 14,250.00
Revenues 60,000.00 Accounts Receivable 1,900.00
COGS 33,000.00 Other Assets 1,900.00
Gross Margin 27,000.00 Inventories 4,750.00
SGA 11,100.00 PPE, net 72,200.00
Depreciation 7,220.00 Total Assets 95,000.00
EBIT 8,680.00
Interest Expense 3,562.50 Liabilities & Equity
EBT 5,117.50 Payables 4,750.00
Tax Expense 1,791.13 Other Liabilities 6,650.00
Net Income 3,326.38 Long Term Debt 47,500.00
Common Stock 7,600.00
Retained Earnings 28,500.00
Furthermore, you are given the following information. Total L. & E. 95,000.00

• In FY 2023, sales will increase by 8%.

• All margins remain the same.
• All operating accruals maintain the same relationship to sales.
• The company has a dividend payout ratio of 25%
• Debt amortizes over 15 years.
• Average net PPE lasts 10 years before becoming fully depreciated.
• Company maintains a leverage rate of 1.5 with respect to equity.
• The interest rate on the old debt and the new debt is equal to 7.5%.
• In FY 2023, the company will issue $5,000 of equity.
• The tax rate is 35%.

16. What is the Net Income of Arena in FY 2023?

A) $4,153.18
B) $4,181.35
C) $3,784.67
D) $4,019.48

ANSWER: A

17. What is the value of the Change of operating assets in FY 2023?

A) -$684.00
B) -$544.00
C) +$626.00
D) +$684.00

ANSWER: A
 18. What is the “Capital Expenditure” of Arena in FY 2023?
A) -$12,996.00
B) -$12,978.58
C) -$12,493.92
D) -$11,910.56

ANSWER: A (MISTAKE IN THE EXAM, EVERYBODY GOT A POINT FOR THIS

QUESTION)

19. What is the “Long Term Debt” in FY 2023?

A) $66,322.32
B) $74,137.59
C) $70,025.18
D) $61,367.65

ANSWER: A

20. What is the value of dividends paid by Arena in FY 2023?

A) $1,038.29
B) $1,911.53
C) $1,632.20
D) $1,936.45

ANSWER: A

21. What is the “Common Stock” in FY 2023?

A) $12,600.00
B) $14,120.00
C) $10,306.00
D) $8.398.00

ANSWER: A

22. How much cash does Arena have in FY 2023?

A) $35,639.20
B) $30,310.91
C) $33,394.73
D) $41,204.88

ANSWER: A

23. What are the “Retained Earnings” in FY 2023?

A) $31,614.88
B) $30,769.82
C) $30,652.47
D) $30,583.03

ANSWER: A
Solution

- 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑠𝑠𝑁𝑁 = 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑠𝑠𝑁𝑁−1 ∗ (1 + 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅)

o Revenues2023 = $60,000 ∗ (1 + 8%) = $64,800
𝑁𝑁−1 𝑋𝑋
- 𝑋𝑋𝑁𝑁 = 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑠𝑠𝑁𝑁 ∗ 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑠𝑠 where X is COGS, SGA, Accounts Receivable, Other
𝑁𝑁−1

Assets, Inventories, PPE, Payables and Other Liabilities.

33,000
o 𝐶𝐶𝐶𝐶𝐶𝐶𝑆𝑆2023 = 64,800 ∗ = $35,640
60,000
11,100
o 𝑆𝑆𝑆𝑆𝐴𝐴2023 = 64,800 ∗ = $11,988
60,000
1,900
o 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑒𝑒2023 = 64,800 ∗ = $2,052
60,000
1,900
o 𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑠𝑠2023 = 64,800 ∗ = $2,052
60,000
4,750
o 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝑠𝑠2023 = 64,800 ∗ = $5,130
60,000
72,200
o 𝑃𝑃𝑃𝑃𝐸𝐸2023 = 64,800 ∗ = $77,976
60,000
4,750
o 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑠𝑠2023 = 64,800 ∗ = $5,130
60,000
6,650
o 𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑠𝑠2023 = 64,800 ∗ = $7,182
60,000
𝑃𝑃𝑃𝑃𝐸𝐸
𝑁𝑁−1
- 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑛𝑛𝑁𝑁 = 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 𝑜𝑜𝑜𝑜 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷
72,200
o D𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑛𝑛2023 = = $7,220
10
- 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑒𝑒𝑁𝑁 = 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐷𝐷𝐷𝐷𝐷𝐷𝑡𝑡𝑁𝑁−1 ∗ 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅
o 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑒𝑒2023 = 47,500 ∗ 7.5% = $3,562.5
- 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑠𝑠𝑁𝑁 = 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 ∗ 𝑁𝑁𝑁𝑁𝑁𝑁 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝑒𝑒𝑁𝑁
o 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑠𝑠2023 = 25% ∗ 4,153.18 = 1,038.29
- 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑠𝑠𝑁𝑁 = 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑒𝑒𝑒𝑒 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑠𝑠𝑁𝑁−1 + 𝑁𝑁𝑁𝑁𝑁𝑁 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝑒𝑒𝑁𝑁 − 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑠𝑠𝑁𝑁
o 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑠𝑠2023 = 28,500 + 4,153.18 − 1,038.29 = $31,614.88
- 𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑠𝑠𝑁𝑁 = 𝐴𝐴𝑅𝑅𝑁𝑁−1 − 𝐴𝐴𝑅𝑅𝑁𝑁 + 𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑠𝑠𝑁𝑁−1 − 𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑠𝑠𝑁𝑁 +
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝑠𝑠𝑁𝑁−1 − 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝑠𝑠𝑁𝑁
o 𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑠𝑠2023 = 1,900 − 2,052 + 1,900 − 2,052 + 4,750 −
5,130 = −$684
- 𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑠𝑠𝑁𝑁 = 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑠𝑠𝑁𝑁 − 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑠𝑠𝑁𝑁−1 + 𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑠𝑠𝑁𝑁 −
𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑠𝑠𝑁𝑁−1
o 𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑠𝑠2023 = 5,130 − 4,750 + 7,182 − 6,650 = $912
- 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐷𝐷𝐷𝐷𝐷𝐷𝑡𝑡𝑁𝑁 = (𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 + 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸) ∗
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑡𝑡𝑡𝑡 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑎𝑎𝑡𝑡𝑡𝑡𝑡𝑡
o 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐷𝐷𝐷𝐷𝐷𝐷𝑡𝑡2023 = (12,600 + 31,614.88) ∗ 1.5 = $66,322.32
- 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑠𝑠𝑁𝑁 = 𝑃𝑃𝑃𝑃𝐸𝐸𝑁𝑁 − 𝑃𝑃𝑃𝑃𝐸𝐸𝑁𝑁−1 + 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑛𝑛𝑁𝑁
o 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑠𝑠2023 = 77,976 − 72,200 + 7,220 = $12,996
−𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐷𝐷𝐷𝐷𝐷𝐷𝑡𝑡
- 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 (𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅) = 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑜𝑜𝑜𝑜
𝑁𝑁−1
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷
47,500
o 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 (𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅) = = −3,166.67
15
- 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 (𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼) = (𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐷𝐷𝐷𝐷𝐷𝐷𝑡𝑡𝑁𝑁 − 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐷𝐷𝐷𝐷𝐷𝐷𝑡𝑡𝑁𝑁−1 ) + |𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 (𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅)|
o 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 (𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼) = 66,622.32 − 47,500 + 3,166.67 = 21,988.99
Leases
You are given the following information about a lease agreement:

Leasing terms
PMT Starting date 31 December of Year 1
Annual payments 120,700.00 $US
Asset life (years) 20
Lease duration (years) 7
Depreciation Linear
Fair Value equipment 698,500.00 $US
Direct costs Lessor 1,525.00 $US
Direct costs Lessee 950.00 $US
First scenario option 500,000.00 $US
Second scenario option 174,625.00 $US

This lease agreement has two different scenarios. In the first one, the option to buy the asset at the
end of the lease is priced at $500,000. In the second one, the option to buy the asset at the end of
the lease is priced at $174,625.

24. Under the second scenario, what is the implicit interest rate of the lease?
A) 9.11%
B) 9.82%
C) 9.94%
D) 9.06%

ANSWER: A

25. Under the second scenario, what is the liability in the first year?
A) $700,025.00
B) $700,975.00
C) $695,420.77
D) $718,995.68

ANSWER: A

26. Under the second scenario, what would be the interest payment due in year 2?
A) $58,605.06
B) $55,474.75
C) $55,890.37
D) $58,274.93

ANSWER: A

27. Under the first scenario, what is the implicit interest rate of the lease?
A) 13.96%
B) 14.38%
C) 12.87%
D) 14.12%
ANSWER: A

28. Under the first scenario, what is the liability in the first year?
A) $518,174.00
B) $512,895.00
C) $537,590.00
D) $503,611.00

ANSWER: A

29. Under the first scenario, what would be the interest payment due in year 5?
A) $39,152.93
B) $42,655.41
C) $36,329.87
D) $36,582.59

ANSWER: A

30. Under the first scenario, what would be the interest payment due in year 8?
A) $0.00
B) $10,510.85
C) $10,911.12
D) $14,729.73

ANSWER: A

31. Under the first scenario, will Pfizer exercise the option to buy the asset at the end of the
contract?
A) No, because the option price is bigger than the residual value.
B) Yes, because the option is cheaper than the residual value.
C) No, because the option is cheaper than the residual value.
D) None of these answers is correct.

ANSWER: A
Solution

Implicit interest rate

Use the excel function “rate”.

“Rate (Lease Duration, Annual Payments, -Total Cost, Value Asset at the end of contract, 0)”.

Liability
1st scenario: Use the excel function “PV”
• PV (Residual value, Lease duration, - Payments, 0, 0)
• With 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 = (𝐹𝐹𝐹𝐹 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 − 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 ∗ 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷)

2nd scenario:
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 = 𝐹𝐹𝐹𝐹 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 + 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿

Interest rate
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑅𝑅𝑅𝑅𝑅𝑅𝑒𝑒𝑁𝑁 = 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑦𝑦𝑁𝑁 ∗ (𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅)
Goodwill
Pfizer wants to acquire ShadyDubai, a small vaccine producing company very well liked on social
media, with the following balance sheet (numbers below are in fair values). The acquisition price
is set at $250,000. Pfizer has yet to decide whether they will repay the “Long Term Debt” of
ShadyDubai upon acquisition (by using the cash on the Pfizer balance sheet), or assume these
liabilities themselves.

Hint: If the debt is repaid, the total cash outflow will be $350,000.

32. Upon acquisition, and assuming that the debt is repaid using the cash on the Pfizer
Balance Sheet, by how much will the Pfizer Goodwill increase and what are the total
assets of Pfizer? ($ in thousands)
A) $174,000 and $181,500,000
B) $174,000 and $181,476,000
C) $164,000 and $181,590,000
D) None of these answers is correct

ANSWER: A

𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 = 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 – = 250,000 − 76,000 = $174,000

This is from the definition of goodwill.

Total assets = Pfizer Total Assets + Plus New Total Assets Acquired + Goodwill – Cash Paid for
Acquisition – Cash Paid to Retire the Debt.

𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 = 181,476,000 + 200,000 − 174,000 − 250,000 − 100,000 = $181,500,000

Please note that the debt repaid using cash on the balance sheet of Pfizer, does not affect the
goodwill calculation. Goodwill is the price paid to acquire the business. The cash paid is an extra
transaction to retire the debt, and does not translate to the “goodwill” asset. In other words, if you
retire debt, the incremental cash paid to acquire the business does not change
 33. Upon acquisition, and assuming that the debt is not repaid (it is simply transferred to
Pfizer), by how much will the goodwill increase and what are the total Assets of Pfizer? ($
in thousands)
A) $174,000 and $181,600,000
B) $50,000 and $181,476,000
C) $64,000 and $181,476,000
D) None of these answers is correct.
ANSWER: A

𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 = 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 – = 250,000 − 76,000 = $174,000

This is from the definition of goodwill.

Total assets = Pfizer Total Assets + Plus New Total Assets Acquired + Goodwill – Cash Paid for
Acquisition.

𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 = 181,476,000 + 200,000 − 174,000 − 250,000 = $181,600,000

34. Now assume Pfizer purchased 80% of ShadyDubai, for $250,000 and repaid the debt
using the cash on the Pfizer Balance Sheet. By how much will the goodwill increase
(calculated using the fair value method)? ($ in thousands)
A) $236,500
B) $181,200
C) $105,350
D) None of these answers is correct.

ANSWER: A

Fair value method:

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑎𝑎𝑎𝑎 80%
𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 = 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑎𝑎𝑎𝑎 100% − 𝐵𝐵𝐵𝐵 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 with 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑎𝑎𝑎𝑎 100% =
80%

250,000
𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 = − 76,000 = $236,500
80%

35. Now assume Pfizer purchases 80% of ShadyDubai, for $250,000 and repaid the debt
using the cash on the Pfizer Balance Sheet. By how much will the minority interest
increase (calculated using the fair value method)? ($ in thousands)
A) $62,500
B) $17,200
C) $32,250
D) None of these answers is correct.

ANSWER: A

Fair value method:

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 = %𝑁𝑁𝑁𝑁𝑁𝑁 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 ∗ (𝐵𝐵𝐵𝐵 + 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺)

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 = 20% ∗ (76,000 + 236,500) = $62,500

 36. Now assume Pfizer purchases 80% of ShadyDubai, for $250,000 but the debt isn’t repaid.
By how much will the goodwill increase (calculated using the book value method)? ($ in
thousands)
A) $189,200
B) $90,000
C) $105,350
D) None of these answers is correct.

ANSWER: A

Book value method / “Net Assets” method / Partial method

𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 = 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 − % 𝑜𝑜𝑜𝑜 𝐵𝐵𝐵𝐵 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴
𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 = 250,000 − 80% ∗ 76,000 = $189,200

37. Now assume Pfizer purchases 80% of ShadyDubai, for $250,000 but the debt isn’t repaid.
By how much will the minority interest increase (calculated using the book value
method)? ($ in thousands)
A) $13,400
B) $40,000
C) $32,250
D) None of these answers is correct.

ANSWER: D

Book value method / “Net Assets” method / Partial method

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 = %𝑁𝑁𝑁𝑁𝑁𝑁 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 ∗ 𝐵𝐵𝐵𝐵

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 = 20% ∗ 76,000 = $15,200

Other Questions
During the year, Pfizer Inc. had a number of transactions with its European subsidiary, that need
to be reversed at the end of the year.

38. Pfizer Europe has sold services for a total amount of $450 million to Pfizer Inc.; at the
end of the accounting period such transaction has not been paid yet. The adjustments that
need to be done by Pfizer Inc. are:
A) Reduce expenses and revenues by $450m, decrease payables and receivables by
$450m.
B) Reduce revenues by $450m, decrease payables by $450m and increase receivables by
$450m.
C) Reduce expenses and receivables by $450m.
D) None of these answers is correct.

ANSWER: A

Pfizer needs to cancel all intercompany transactions. Therefore, decrease revenues and expenses
as well as payables and receivables.
 39. Pfizer Europe sold $230m worth of products to Pfizer Inc. The profit included in those
products was $90m; at the end of the accounting period such transaction has been paid
and the products are in Pfizer’s Inc. inventory. The adjustments that need to be done by
Pfizer Inc. are:
A) Reduce revenues by $230m, reduce COGS by $140m, reduce Net Income by $90m,
reduce equity by $90m and reduce inventories by $90m.
B) Reduce revenues by $230m, reduce COGS by $140m, increase Net Income by $90m,
increase equity by $90m and reduce inventories by $90m.
C) Reduce inventories by $230m and increase cash by $140m.
D) None of these answers is correct.

ANSWER: A

Again, Pfizer needs to cancel the transaction. Reducing Revenues, COGS and Net Income by their
respective amount and also reducing the value of the inventory. Pfizer moved the products from
one warehouse to the other, therefore, the profit made on this has to be canceled.

40. What is the proportion of revenue credited to the COVID-19 vaccine?

A) 45.25%
B) 42.87%
C) 53.28%
D) 36.16%

ANSWER: A

Page 103: Active immunization to prevent COVID-19/Total Revenue = 36,781/81,288

41. The effective tax rate is lower than the statutory rate. Which item contributes the most to
this reduction? (Please do not take into account the Consumer Healthcare joint venture)
A) Lower taxes on foreign income.
B) Export tax subsidies.
C) R&D investments in the USA.
D) None of the answers.

ANSWER: A

See pages 73 & 74. This is given by the company.

42. How many shares did Pfizer repurchase in FY 2021 and what was the cost?
A) 15m at a cost of $780m.
B) 130m at a cost of $6.8bn.
C) 11m at a cost of $373m.
D) None of these answers is correct.

ANSWER: D
Page 89: No shares were repurchased in FY 2021. If you check the “consolidated statements of
equity” in page 54, you will see that there is no treasury stock transactions when it comes to
common stock (or preferred stock) – there are some treasury stock transactions in terms of paying
employees in shares under “share based payment transactions”, and some of these shares are taken
out of the treasury stock account.

43. How come the Consolidated Statement of Cash Flows indicates that Pfizer paid $8,729m
dividends when the Consolidated Statement of Equity shows $8,816m?
A) Pfizer paid out $8,729m of dividends and added $87m of dividends payable.
B) When Pfizer announced an $8,816m dividend payment but $87m was attributed to
the firm because of treasury stock.
C) A small mistake of $87m was made.
D) None of these answers is correct

ANSWER: A

Page 53 & 54: Dividends paid = Dividends announced – Dividends payable = 8,816 – 87 = 8,729

44. What was the conversion rate on May 4, 2020 for preferred shares to common shares? (1
preferred share = x common shares)
A) 2,483.45
B) 1,357.33
C) 875.64
D) None of these answers is correct.

ANSWER: A

This question is on the harder side (but not extremely hard). Page 54&89: Common shares /
Preferred shares = 1,070,369/431 = 2,483.45
 45. Pfizer had a last-minute tax-expense adjustment, related to sales of inventory, which
increased its tax expenses by $25 million. These tax expenses are not paid yet. Which
accounts need to be correspondingly adjusted on the financial statements?
A) Total Assets and Net Income.
B) Retained Earnings and Net Income.
C) Inventory and Net Income.
D) CFO and Inventory.

ANSWER: B

So, we should have an increase in tax expense, this affects net income and retained earnings
(moustache!). Of course, it also affects the cash flow statement because of the “moustache” and
the corresponding adjustment in the liability accrual “income tax payable” which would be a
+25m under the CFO. The minor “trick” in this question is that I do not give you the CFO
adjustment in the answers.

46. Pfizer Europe, a subsidiary of Pfizer Inc., had an upward PPE revaluation. Which account
at Pfizer Inc. is affected?
A) Retained earnings.
B) CFO.
C) Net Income.
D) None of these answers is correct

ANSWER: D

An upward revaluation doesn’t positively affect the Income Statement (we had this dealt with in
the class, in the excel example at the beginning of the class). The accounts impacted are PPE and
“fair value adjustment” (or a similar account) under equity.

Therefore no impact on the net income, and no impact on the CFO. There is no cash inflow.
Additionally keep in mind that I give you numbers on Pfizer Europe which does an upward
revaluation – since in Europe it is allowed – however, Pfizer Inc. uses U.S. numbers – where an
upward revaluation is not allowed.

47. If Pfizer decided to retire its repurchased shares, how would this affect the diluted EPS?
A) It would remain the same since the diluted EPS is calculated using the outstanding
shares and all the potential dilutions.
B) It would be smaller since the number of outstanding shares is smaller.
C) It would be bigger since the number of outstanding shares is smaller.
D) None of these answers is correct.

ANSWER: A

Treasury shares (essentially, shares that are not held by investors) – do not affect EPS
calculations. If there are potential dilutions these affect outstanding shares, but having (or not
having) treasury shares does not make a difference.
 48. Why is the share-based compensation expense added back in the consolidated cash flow
statement?
A) Share-based compensation is a non-cash item therefore we add it back.
B) As of the end of FY 2021, some share-based compensation didn’t take place, hence,
some are added back.
C) Pfizer share-based compensation is primarily done using S&P 500 ETF stocks.
Therefore, due to stock volatility, the CFO needs to be adjusted at the end of the year.
D) None of these answers is correct.

ANSWER: A

The concept here is similar to that of deprecation. It reduces income but does not reduce cash –
hence, needs to be added back. This was discussed in the class.

In the last week of the year, the chief comptroller realized that she has missed one outstanding
item in her EPS calculation. Particularly, there is $800 million convertible debt that carries an
interest rate of 10%, that is convertible to 1,000m shares. The comptroller decides against making
the adjustment upon the urging of the CFO, and postpones it to the next fiscal year.

49. Had the conversion been applied, basic EPS would have been (Assume an effective tax
rate of 25%, and that conversion conditions have been met):
A) 3.92 would change to 3.41.
B) 3.92 would change to 3.33.
C) 3.92 would change to 3.94.
D) None of these answers is correct.

ANSWER: D

The basic EPS is not affected by the dilution effects.

50. Had the conversion been applied, diluted EPS would have been (Assume an effective tax
rate of 25%, and that conversion conditions have been met):
A) 3.85 would change to 3.285.
B) 3.85 would change to 3.332.
C) 3.85 would change to 3.943.
D) None of these answers is correct.

ANSWER: A
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐸𝐸𝐸𝐸𝐸𝐸∗𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑆𝑆ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎+𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷∗𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟∗(1−𝑇𝑇𝑇𝑇𝑇𝑇 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟)
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐸𝐸𝐸𝐸𝐸𝐸 =
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑆𝑆ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎+𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎

3.85∗5,708+800∗10%∗(1−25%)
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐸𝐸𝐸𝐸𝐸𝐸 = = 3.285
5,708+1,000
 51. Pfizer had an outstanding year of profitability, partly fueled by increases of COVID-19
related sales. However, not all years have been stellar as this one. Pfizer takes pride that it
has had only a few episodes of negative earnings over its recent history. Critics contend
that this is partly due to creative use of accounting and aggressive earnings management
tactics. It is well known that if we graph the ROA of companies such a graph would not
look like the well-known “normal” distribution – but would be much more like an
“abnormal” graph that has a steep decline in the hump on the $0 earnings marking. What
causes this abnormality?
A) Upward earnings management where firms with small losses manage earnings to
exceed the $0, and downward earnings management by CEOs/CFOs who want to fill
the “cookie jar”.
B) Upward earnings management where firms with small losses manage earnings to
exceed the $0.
C) The abnormality is caused by the hard work of employees and managers who work
extremely hard when they realize they are about to make a small loss.
D) None of these answers is correct.

ANSWER: A

This has been discussed in the class. Earnings and ROA do not follow a normal distribution: just
to the left of the $0 mark there is a big “absence” of firms: firms with small negative earnings
simple manage earnings to be either positive, or have a large negative (so that they clear the books
and that future income is higher). This has been discussed in the class.

52. During the year Pfizer took a $200m impairment on one of its patents. This impairment
affected the following accounts:
A) Income, Intangible Assets, negative adjustment on the CFO, CFI.
B) Income, Intangible Assets, positive adjustment on the CFO, CFI.
C) Income, Intangible Assets, positive adjustment on the CFO, Retained Earnings.
D) Income, Intangible Assets, negative adjustment on the CFO, Retained Earnings.

ANSWER: C

We do a positive adjustment on the CFO to indicate that CFO is not affected by the impairment.
So, -200 on N.I., +200 adjustment => CFO = 0.

CFI is affected when there is a cash transaction involved. There is no cash involved here, so CFI
stays blank.
 53. During the year Pfizer took a $200m impairment on one of its patents, although the true
value of the write-down should have been $500m. For simplicity, use the Net Income
before allocation to non-controlling interests. Assume an effective tax rate of 25%:
A) Current ROA is now inflated, where correct ROA should have been 12.01%.
B) Current ROA is now artificially reduced, where correct ROA should have been
12.28%.
C) ROA is now inflated, where correct ROA should have been 12.03%.
D) ROA is now artificially reduced, where correct ROA should have been 11.97%.

ANSWER: C
𝑁𝑁𝑁𝑁𝑁𝑁 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼−𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖∗(1−𝑇𝑇𝑇𝑇𝑇𝑇 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟%)
𝑁𝑁𝑁𝑁𝑁𝑁 𝑅𝑅𝑅𝑅𝑅𝑅 =
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴−𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖

Subtract (300*0.75) 225 from income (22025), and 300 from Assets (181,476), you get 12.032 ~
12.03.

Remember that in the “New ROA” – you have to remember that total assets are now less.

54. What is Pfizer’s Return on Sales (ROS)?

A) 27.04%
B) 31.13%
C) 30.09%
D) None of these answers is correct.

ANSWER: A
𝑁𝑁𝑁𝑁𝑁𝑁 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 21,979
𝑅𝑅𝑅𝑅𝑅𝑅 = =
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 81,288

This was a present from me as I have a soft heart and I love my students.
 55. How much Pfizer spent on producing inventories during the year? (assume “trade
accounts payable” fully relates to the purchase of raw materials used in inventory
production, also assume that “Cost of sales” on the income statement only relates to
inventory items)
A) $28,454m
B) $27,132m
C) $30,704m
D) None of these answers are correct

ANSWER: C

𝐶𝐶𝐶𝐶𝐶𝐶ℎ 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 = −𝐶𝐶𝐶𝐶𝐶𝐶𝑆𝑆 − 𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥 + 𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥

-30,704 = - 30,821 – 1,125 + 1,242

Using the numbers from the cash flow statement is best, and it is better than that of the balance
sheet by far. The reason for that is – that the cash flow statement gives you the exact cash
inflow/outflow during the year.

On the other hand, if you are calculating the changes from the balance sheet, this could lead to
errors. The BS is affected by two non-operating cash activities: if you buy a company, or if you
sell a division. In both cases, operating accruals are added (or subtracted) to the balance sheet,
without a commensurate change in cash. Let me make a simple example:

Assume Inventories in 2035 are 100, and in 2036 are 150. Moreover, the cash flow statement
would indicate “Changes in Inventories of -35.”

Simple balance sheet logic would say that we have incrementally spent $50 to buy new inventory.
However, now if we dig further, we see that on December 31 we purchased another company
XYZ, that already has inventories of $15, which are now consolidated. Then actually, incremental
cash spent on inventories during the year is only $35, and not $50.

56. How much cash is received from customers?

A) $85,099m
B) $87,055m
C) None of these answers are correct
D) $77,477m

ANSWER: D

𝐶𝐶𝐶𝐶𝐶𝐶ℎ 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 − 𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥

= 81,288 – 3,811 = 77,477

For further explanations on the logic, please read the solutions to the question above. In sum, part
of the sales was on credit – and the receivables increased year on year by $3,811. This 3,811 was
counted as part of revenues/income but was not received in cash – hence, actual cash received is
less.