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Intercorporate Entities, i.e., consolidations, equity investments, partnerships

Intercorporate Entities, i.e., consolidations, equity investments, partnerships. Chapter 7. Acquisitions. Purchase (old and new) Goodwill mark-to-market analogy Pooling Simply added BVs of assets and liabilities No reflection of MVs at purchase 12 criteria (p. 467)

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Intercorporate Entities, i.e., consolidations, equity investments, partnerships

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  1. Intercorporate Entities, i.e., consolidations, equity investments, partnerships Chapter 7

  2. Acquisitions • Purchase (old and new) • Goodwill • mark-to-market analogy • Pooling • Simply added BVs of assets and liabilities • No reflection of MVs at purchase • 12 criteria (p. 467) • practice no longer allowed under GAAP

  3. Equity Investments • Majority => > 50% • control • consolidated (Vs. acquired) • Minority Active => 20% to 50% • create an asset and adjust for share in NI and dividends • Equity method • Minority Passive => < 20% • mark to market • Market value method

  4. Comprehensive Income • Stockholder Equity impact (SFAS 130) • as compared with I/S impact • Arises from • hedging (foreign currency and other derivatives) (SFAS 133) • pension reporting • certain mark to market adjustments

  5. Segment Reporting (SFAS 131) • Reportable operating segments • Geographic coverage • Major customers • Be able to identify unique risk in each

  6. Segments, continued • What is reported? • Operating segments: • Sales • Profit / Loss • Assets • Customers: (if  10%) • Have to report sales • Often named • Geographic Segments: • Sales and fixed assets

  7. Chapter 8 Profitability ROA and ROE expanded

  8. ROA, as a function of: • Operating Leverage • i.e., fixed costs (committed and discretionary) • Business Cycle • Product Life Cycle

  9. Leverage • Earn a higher return than the cost of the investment • Operating Leverage • Reflects investment in fixed costs • Measure as fixed costs (expense) as a percent of total expenses

  10. Strategic Management • Life cycle of a firm • Introduction • Growth • Maturity • Decline

  11. Industry-Specific ROA Problems • High Tech • Airlines / Travel and Transport • Service firms • Retailers

  12. Expand to ROCE • ROCE = ROA x CEL x CSL • Reversion to the Mean

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