CASE: Quality of Earnings #2 – Bear Stearns & Co
1. What is Blockbuster's amortization timetable? Do you think it is appropriate?
The amortization timetable of Blockbuster is 40 years. In my opinion as an investor's perspective, it is not appropriate because of this is not as per the SEC standard of 5-7 years. 2. What would be the impact on Blockbuster's 1988 earnings per share if 5 amortization were applied to this goodwill?
If the 5-year amortization were applied in its place of the 40-year timetable, then it is necessary for Blockbuster to identify the goodwill in larger amounts. This would increase tax liability of Blockbuster, which would have represented a loss of $0.09 (0.58 - 0.49) per share | 1988 | 40 Yrs.
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Over what period does BV depreciate its "base stock" videotapes?
Blockbuster depreciates its "base stock” videotapes over 36-month, using a straight-line amortization period. 5. What was the effect on earnings per share of the change in depreciation method for 'hit" tapes (assume that hit tapes made up 25% of new tape purchases, and that the average hit tape was owned for half the year)?
If the depreciation method changes from straight-line method to accelerated method then, depreciation expense would be increase and net income would decrease. The EPS ratio would represent a loss of $0.19 per share.
EPS = (Net Income - Dividend on preferred stock)/Average Outstanding Share | 1988 | 1987 | Videocassette rental inventory | 76,390,000.00 | 19,600.00 | Less: Accumulated amortization | (16,096,000.00) | (3,211.00) | Videocassette rental inventory Book Value | 60,294,000.00 | 16,389.00 | New Tape Purchase | 76,373,611.00 | | New "hit" Tape Purchase | 19,093,402.75 | | Depreciation Under Previous Method for "hit" | 12,728,935.17 | | Depreciation Under New Method "hit" | 3,182,233.79 | | Net Income Before Taxes (before Adjustment) |
Even though Mr. Fordham mentions that he in his “Statement of Cost of Goods Manufactured for Year Ended Dec. 31 1956” that he depreciated $24,000 of Plant and Equipment, I decided to change the depreciation schedule so that PP&E would be fully depreciated by the end of the 5 year period. Thus, I used a straight-line depreciation schedule that accumulated $40,000 worth of depreciation per year, which was spread evenly across the 12 months of this Balance Sheet (or $3,333.33 per month).
For the depreciation part, we adopted the straight-line method. Here since the depreciation of year 1984 was $1270, we just assumed all the depreciation amount to be equal to $1270 till the year 1989. With all of these previous assumptions, we obtain the complete pro forma financial statement and the cash flow table for the Collinsville Plant.
6. Note 8 states Harnischfeger’s allowance for doubtful accounts. Compute the ratio of the allowance to gross receivables (receivables before the allowance) in 1983 and 1984. What would the allowance have been if the company maintained the ratio at the 1983 level? How much did the pre-tax
Numerous failures in planning and monitoring market changes negatively affected profits and decreased customer loyalty. Blockbuster sought utilization of section 11 bankruptcy to significantly decrease the businesses debt. The bankruptcy and acquisition by Dish network provided the opportunity to invigorate a better business solution for moving forward. Blockbuster’s
2. What is the effect of the depreciation accounting method change on the reported income in 1984? How will this change affect profits in future years?
| In Year 1, depreciation is $5,000 plus 15% of the asset’s outlayFrom Year 2, depreciation is either * 30% of the asset’s book value; or * if the asset’s book value is less than $6,500, depreciation is the asset’s book value (i.e. asset is depreciated to zero once book value < $6,500)
ii. What percentage of the total (gross) assets acquired in the NDS acquisition (excluding liabilities assumed) are comprised of goodwill and other intangibles?
Based on the Form 10-K (2010), Blockbuster stated that: “Our level of indebtedness may make it more difficult for us to pay our debts as they become due and more necessary for us to divert our cash flow from operations to debt service payments” (p. 22). At the end of 2009, their long-term debt went up to 855.9 million of dollars (Form 10-K, p.40). One of the factors that negatively affected Blockbuster’s income and cash flow due to their debt obligation was the payment due date. It made even more difficult for Blockbuster to pay off the debts when the company faced economic downturns. The decrease in revenue made Blockbuster’s obligation and interest higher. Due to this fact, the company had a limited fund to contribute their strategy and operation. While their revenue decreased and debt increased, Blockbuster gradually lost their ability to remain the war price as low as others. The company ended up going bankrupt.
-In 1984, there was a switch from accelerated to straight line depreciation retroactively. Because of this, the depreciation expense decreased.
3. Assuming the average value of flight equipment that Delta had in 1993, how much of a difference do the depreciation assumptions it adopted on April 1, 1993 make? How much more or less will its annual depreciation expense be compared to what it would be were it using Singapore’s depreciation assumptions?
ii. Using double- declining method, the first year ending balance of $6,404 is subtracted form the proceeds of the sale netting in a gain of $1,096 on the disposal. Once this is subtracted form the previous years depreciation $4,269, you get a total income statement impact of $3,173.
Blockbuster’s restructuring of the company under its new owners shows how they were open to organizational change. The text describes organizational change as the movement of an organization from one state of affairs to another. Blockbuster completely changed their strategy and technology in order to compete with the new technology based companies that put them in this position in the first place. Simply put, no one visited the stores to rent movies when they could just turn on their television to order on-demand showings for the exact same price without leaving their home or grab a couple movies for a dollar apiece while grocery shopping. If they did not change they were sure to fail as a business and the company would disappear into the long list of companies that failed in the economic recession. The change was forced by other companies’ utilization of technology that caused a drastic change in the market conditions. This shift enabled the cheaper, more convenient home entertainment to steal a huge chunk of market share from Blockbuster’s traditionally structured company. Blockbuster enjoyed a long period on top of the movie rental/ home entertainment industry and this could possibly be what caused the success of these newer
The actual production would begin in the third quarter of this year, therefore only half year’s depreciation should be counted on Equipment and IT communication in 2004 (According to Appendix A). The following years (2005-2008) incremental cash flows are computed by the same method. However as the IT equipment and furnishings would be depreciated on a straight line basis over 3 years, thus in year four (2007), there would be only half a year’s deprecation left and after that it will be used up. The last year’s net cash flow in 2009 should be included the extra terminal Value on that year, which includes 24 years’ residual value on building and one year and a half residual value on equipment totaled $2,990,412 with two assumptions of by using residual book values for the building and operating equipment and there will be no further NWS advantage after year 2009. Finally, by obtaining 6 years’ incremental cash-flows and discounting them back to time zero (with the estimate rate of return by 15%) lessing initial cost to get an appealing NPV of $1190528 (Luehrman, p. 3).
Assume that on January 1, 2005, each of the three airlines purchases a new Boeing 757 for $75 million. Each airline estimates that the residual value will be 5% of cost. Each airline uses the average depreciation period that is consistent with its policies as stated in the Appendix, found on page 3. On January 1, 2009, each firm sells the plane. First, assume that Northwest sells its plane for $55 million, Delta sells its plane for $60 million, and United sells its plane for $65 million (Sale Price I). Second, assume each firm sells its plane for $60 million (Sale Price II).