inde

Accelerate (definition), 347 Accounting, 193-200

in mergers and acquisitions,

193-             200

pooling-of-interests, 193,

194-             197, 200

profits, 117-118 purchase, 194-195, 197, 200 Accounting Principle Board (APB)

extraordinary item rules, 60 Accounting Principle Board (APB) (definition), 347 Accounting profits, 117-118 Accounting rules gimmicks aggressive revenue recognition, 56

diseretionary accounting decisions, 56

Accrual accounting (definition), 347

Acquisition dates, 198

Acquisitions, 238-244

goodwill, 239-244

reporting employee stock options, 244

Advance PCS, 261-265

debt service projection, 264 forecast assumptions, 263 historical and projected financial data, 261-262

services provided, 265

Advertising

new rules for direct mailers, 153-156

Air Products & Chemicals, 46

Alberto-Culver A, 324

All Star Cafe, 183-185

Altima, 239-244

Altman, Edward I., 175

Altman’s Z-Score, 175

Amazon.com, 65

Amerada Hess, 305

America Online (AOL), 153-156 investor skepticism of, 154 new accounting method of, 153-154

and reduced information flow, 155

lang=EN-US style='font-size:10.0pt; line-height:105%'>settlement of SEC charges by,

155

American Can, 186

American Greetings, 102

American Institute of Certified

Public Accountants, 7, 153

SOP 91-1, 128

SOP 97-2, 128

SOP 98-4, 128

Amortization, 57

of goodwill, 194, 197, 200 of net deferred gains and losses on pension portfolios, 204

Amortization (Continued)

of prior employee service costs, 204

of the transition amount in pension funds, 204 Anderson, Anne, 162 Anderson & Strudwick, 7 Anheuser-Busch, 52, 53, 54 Annual earnings formula, 289 ANS Communications, 156 Armstrong World Industries, 19 Arthur Andersen, 29, 188 Asset protection, 270 Atlantic City casino, 182

bonds, 185

Atlantis Investment Company, 1 62

AT&T, 156

Auditor-certified compliance with GAAP, 127

Average days of receivables, 291 Avon Products, 324

Bait-and-switch technique, 277 Balance sheet, 29-48

drawing conclusions, 48 effects of stock price on net worth, 34

intangible assets, 34

projected, 223-224 shortcomings, 29

Balance sheet ratios, 268-271 asset protection, 270 capital adequacy, 271 current ratio, 268 debt-equity ratio, 271 quick ratio, 270 total-debt to total-capital ratio, 271

working capital, 270 Balderston, William III, 145

Bally Total Fitness, 137-138 accounting, 138 fee reserves, 138

Bankruptcy Reform Act of 1978,

348

Barron’s, 187-188, 199

Baruch Lev, 30

Basis Information Technologies,

152

Baush & Lomb (B&L), 142-145 channel-loading by, 142-143 revenue revisions, 144 SEC staff inquiry, 144

Bear, Stearns & Co., 183, 203

Beaver, William H., 174

Behavioral finance, 44

Bell Atlantic, 61

BellSouth, 61

Beneish, Messod Daniel, 89

size=2 color=black face="Times New Roman">Bernstein, Richard, 179, 180 “Big bath” technique, 11-12

Big Time Corp.

84-86

price-earnings multiple, 84-86

Bill-and-hold transactions, 188

Birmingham Steel Corporation, 233

BJ’s Wholesale Club, 139 recognition of annual fees, 139

Bliley, Thomas, 193

Bloomberg, 136, 137

Boeing, 205

Bolduc, J.

Bona FIDE profits, 117-118

Bond ratings

Moody’s, 296-297

Standard & Poor’s, 298-301

Book value (definition), 347

Bosak, Barry, 135

Boston Beer, 49-55

Boston Brewery, 53

Breakeven rate (definition), 347

Breakeven level, 77

Bridge loan (definition), 348

Brincat, John, 6

Broadcast cash flow, 122

Broadcom, 239-244

Brooke Group, 63

Brooke’s, 63

Brown, Donaldson, 333

Brussels Translation Group (BTG), 8

Business cycle (definition), 348

Business life cycle, 99-107 cash flow and, 99-107 declining industry companies,

104

emerging growth companies, 100-102

established growth companies,

102

start-up companies, 100

venture capitalists, 100

Business Week, 142, 145

Burry, Roy, 63

Cabot Corporation, 234-238

Cabot LNG Business Trust, 236

Cabot Microelectronics

Corporation, 236

California Micro Devices, 190-191

Canin, Jeffry, 135

Capital adequacy, 271

Capital expenditures, 222

Capital-intensive (definition),

348

Capitalization (of an expenditure) (definition), 348

Capitalization of selected expenditures

cautions, 69

use, 69

Capitalized interest

fixed-charge coverage adjusted for, 283

Caradon PLC, 157

Cash balance plans, 206

definition, 348

Cash flow

analysis, 161, 174-179

definition, 174 measuring with EBITDA, 174-179

and working capital, 177-179 Cash flow ratio, 285-287 Cash flow statements

advantages of, 91

mandatory under SFAS 95, 91 projected, 221-223

Cash-on-cash profit principle,

122

Caterpillar, 205

CCA Industries Inc., 324

Center for Financial Research &

Analysis, 162

Central Widget (fictitious), 74-76, 77

Chainsaw Al, 186-189 Chalhoub, George, 230, 232 Chambers, John, 193

Chanos, James, 198

Chapter 11, (definition), 348

Chattem Inc., 324

Chicago Board Options Exchange

Gaming Index, 185

Chevron, 305

Cincinnati Milacron, 151

Cisco Systems, 65, 193, 196

Citicorp, 151

Class-action suit, (definition), 348 Coca-Cola, 63-64

Cohen, Marc, 63

Colgate-Palmolive, 324

Colossal Chemical Corporation (fictitious), 308-323

Columbia Business School, 197 Combination ratios, 287-302 and credit risk, 294-302

Common form balance sheet, 46, 48

Comparability (definition), 348 Comparative ratio analysis, 302-307

and line of business, 302-307 and business volume, 302

Compound Annual Growth Rate (CAGR), 203 definition, 348-349

size=2 color=black face="Times New Roman">CompuServe, 154, 155, 156

Computer Associates International, 182

Conagra, 334

Consolidation (of an industry) (definition), 349

Contribution (definition), 349

Contribution per unit, 80

Convertible (definition), 349

Corporate governance, 337

Corporate growth

limits to, 14-15 rationalizing decline in, 15-18

Cost assessment, 120-122 alternative earnings measures, 120-121 depreciation, 120-121 pitfalls, 120-121 real estate and, 121-122

Cost of capital

definition, 349 determination of, 43

Cost of goods sold (COGS), 80-81 fixed, 77 projected capacity utilization percentage, 216 projected gross margin, 216 variable, 77

Credit analysis, 267-313 bait-and-switch technique, 277 criteria, 267-268 financial derivatives, 272 floating-rate debt, 272 long-term debt, 271-272 potential liquidity, 272 preferred stock, 273 short-term debt, 271-272

Credit approval process, 22

Credit Facility, 233

Credit quality, 34

economic reality and, 36 stock-for-stock acquisition, 36 value of goodwill in balance sheet-based analysis of, 36-37

Crown Zellerbach, 186

Cumulative dividend (definition),

349

Currency exchange rates, 86

Current ratio, 268

Current stock price

equation, 316

equation for a growing company,

318

Cyclical company, 320-321

Davies, Ronald, 150

Davis, Michael, 197

Davis, Tom, 193

Debt

affecting return on equity, 290 covenants, 110 embedded cost of, 219 fixed-rate, 353 floating-rate, 272, 353 long-term, 271-272 short-term, 271-272

Default, 309-313

definition, 349

Deferred taxes and calculating risk, 276

Defined benefit plans, 206, see also cash balance plans, Defined contribution plan definition, 349-350

Defined contribution plan (definition), 350, see also Defined benefit plan

Del Laboratories, 205, 324

Dell Computers, 46

Denari, Stephen, 199

Department of Health and Human Services, 152

Depreciation

accessing, 122-123

accounting methods for, 58-59 changing assumptions, 58 definition, 350

industry peer comparisons, 57-58

schedules, 91-93 straight-line basis, 217 and true economic value, 32 units-of-production method, 362-363

write-off period, 217 Depreciation schedules

for publicly owned companies, 91-93

Desaigoudar, Chan, 191

Dilution (definition), 350

Direct mail, 153

Disclosure

derivatives, 45-46

equity values, 45

FASB, 46

pension plans, 203

SFAS 133, 46 time and, 46

Discount rate, 43

definition, 350

Discount value, see Cost of capital

Discounted cash flow

definition, 350 equation, 350

Disney Internet Group, 65

Discretionary cash flow definition, 351 and financial flexibility, 109

Diversification conglomerate discount and, 17 “cross-selling” and, 17 definition, 351-352

Dividend-discount model, 316-322 and cash flow, 320-322 and cyclical companies, 320-322 future appreciation, 317 example, 316-317 example of a growing company, 318-320

valuing a growing company, 317-320

Dividend-payoff ratio, 318 Dividend rate, 319

Dividend safety margin, 109

Dole Food Co.

Dow Jones Industrial Average, 43-44

definition, 352

Downplaying contingencies ploys, 18-20

bankruptcy scenario, 19 contingent liability assessment,

18

lawsuits and public disclosures,

19

size=2 color=black face="Times New Roman">Doyle, James A., 6

DSG International, 324

Du Pont, 333

Du Pont Formula, 333-342

Dunlap, Albert, 186-189

Earnings

before interest and taxes, see EBIT

before interest, taxes, depreciation, amortization, see EBITDA

core net earnings, 64 forecast of, 213 maximizing following acquisition, 197-198

per share, 332

pro forma, 64-68

smoothed versus actual, 8-9 Easdaq (European) stock market, 8 Eastman Kodak, 107

Eatmore & Co. (fictitious), 325-326

EBIT

definition, 352

and total enterprise value, 164-179

EBIT-based coverage ratio, 169 EBITDA

abuse of, 172-174

calculation of multiple, 167-168 coverage of interest, 171 definition, 352

vs.

fixed charge coverage, 169 for measuring cash flow, 174-179

total-debt-to-total-capital ratio, 170

and total enterprise value,

164-179

EBITDA multiple, 167

Econometric forecasting models,

214

Economies of scale, 102 acquisitions and, 74 definition, 352 opportunities, 76

Economies of scope, 73-74

cultural barriers, 74

definition, 352

Edward I. Altman’s Z-Score model, 310

Edwards, Albert J., 189

Efficient market hypothesis, 315 Embedded cost of debt (definition), 219

EPI Printers, 188

Equity

economic versus accounting definition, 39

leveraged recapitalization, 39 negative, 39

return on, 288-290

Equity investing, see Leveraged buyouts

Ernst & Young, see Informix

Estee Lauder, 324

E.W. Scripps, 205

size=2 color=black face="Times New Roman">Examples

acquisitions, 239-244 acquisitions and revenues, 70-72 adjusting shareholders’ equity, 38

Air Products & Chemicals, 46

Altima, 239-244

American Greetings Corporation, 105

Anheuser-Busch, 52, 54 average Ratios for Standard & Poor’s Single-A Industrials 1988-2000

backing out fixed and variable costs, 79

Big Time Corporation (fictitious), 70-72, 84-86

Boston Beer, 50, 51, 52 breakeven analysis, 77-81 Breathing Room, Inc.

Broadcom, 239-244 Cabot Corporation, 234-238 capital spending projection, 259 Central Widget (fictitious), 74, 77-81

Colossal Chemical Corporation (fictitious), 212-229 common form balance sheet, 47 companies within an industry ranked by price-earnings ratio: cosmetics and personal care industry, 350 comparative ratio analysis of integrated oil and gas companies annualaverage 1998-2000, 304 consolidated balance sheet, Johnson & Johnson, 268 corporate pension plans, 201 cost of sales as a percentage of sales, 82, 83 cycle-to-cycle stability, 309 debt service projection pro forma, 258 dividend-discount model, 316-317, 318-320 diverting earnings from non­operating to operating, 203

debt service projection, 264 Deep Hock Corporation (fictitious), 164

Dell Computers, 46

Du Pont analysis of food processing industry’s 2000 results, 334

earnings forecast, 213

EBITDA calculation, 96 economies of scale, 74-76 economies of scope, 73-74 embedded cost of debt, 219 Excelsior Widget (fictitious), 74-76

exploiting a difference in price­earnings multiples, 85 financial derivatives disclosure, 45-46

Focal Communications

Corporation, 101 forecast assumptions, 263

General Electric, 201

generic LBO, 94-95

generic LBO income statement, 97

goodwill, 31

historical and projected financial data, 261-262

Holowman, Inc.

Intel, 43-44

International Business Machines

(IBM), 201-203

JDS Uniphase, 33

Johnson & Johnson, 282

Jostens, 230-232

Knowledge Ware Inc., 132 leveraged recapitalization,

40-42

link between goodwill and stock prices, 34-36

Lowe’s Companies Inc., 47 median ratios by bond rating category (Industrials, 1997-1999), 307

Examples (Continued) mergers-and acquisitions accounting, 195 multiyear balance sheet, 249 multiyear cash flow statement, 250

multiyear income statement, 252-254

multiyear operating margins, 251, 255

Newport, 239-244

Nortel Networks, 31 operating income by segment, 217

operating leverage, 78

Oxford Health Plans, 161

Polaroid Corporation, 106 potential and limitations of financial forecasting, 230-232

PPE manufacturing corporation earnings history graph, 329

PPE manufacturing corporation earnings history table, 329

PPE manufacturing corporation earnings trend—least squares method, 330 problems with exploiting a difference in price-earnings multiples, 86

Procter & Gamble, 46 pro forma combined balance sheet, 240-241

pro forma combined statement of operations, 242-243 projected balance sheet, 224 projected statement of cash flows, 222

quarterly income statement, 248 rate-of-return measures, 288 rating history: Viacom International, 278

Rayovac Corporation, 92 revenue projections, 256-257 Rock Solid Corporation (fictitious), 169

Rock Solid and Hollowman statements of income, 170 sales forecast, 214 sales forecast by geographic area, 215

Salsa Meister (fictitious), 119 selected financial data Grubb &

Chao (fictitious), 323

selected financial data Wolfe Food Company (fictitious), 319

Selected medical, 247 sensitivity analysis of projected financial statements,

226-        227

settlement of pension liabilities, 206

Sherwin-Williams, 33

Silicon Spice, 239-244

Sitting Duck Corporation (fictitious), 338-339

Six Flags, 82

Small Change (fictitious), 70-72, 84-86

Solectron Corporation, 103-104 trend of credit quality, 225,

227-        228

Trump Taj Mahal, 184 unaudited pro forma consolidation income statement, 235

Wal-Mart Stores Inc., 108

Washington Group International, 82-84

West Coast Whatsit (fictitious),

77-81

Westinghouse Electric, 206

working capital projection, 260 Excelsior Widget (fictitious), 74-76 Exchangeable (definition), 352 Expense recognition, 153-162 Expenses

reduction of, 156-157

size=2 color=black face="Times New Roman">External growth

definition, 352

economies of scope, 73-74

gross margin, 73

synergy, 73

volume discounts, 73

Externally generated funds

(definition), 352

Extraordinary items

aliases for, 61

“below-the line” treatment of, 59-61

non-recurring nature of, 60 prevalence of, 61 prohibited expenses, 60 qualifying for, 59-60 as special charges, 61

Exxon Mobil, 304

Factor (definition), 352

Fannie Mae, 61

FAS 101, 136

Federal Reserve, 43

Federal Rule of Civil Procedure 23, see Class-action suit

Financial Accounting Standards Board (FASB), 9-10, 11, 46, 60, 66, 67, 193, 196

and elimination of the pooling method, 196

Congress and, 9

theoretical versus negotiated rule­making by, 9 Financial derivatives, 45, 272 definition, 352 Financial flexibility, 107-110 adjusted working capital, 110 compliance with loan covenants, 232-233

curing the default, 234 and debt covenants, 110 definition, 352 disadvantages of, 111 and discretionary cash flow, 109

and dividends, 109 dividend safety margin, 109 and hostile takeovers, 111 loss of, 234 maintenance-level capital spending, 110

and overinvestment, 111-112 reducing discretionary expenditures, 111

self-finance, 108-109

slack, 111 Financial leverage (definition), 354-355

Financial position statements

required under APB 19, 91 Financial reporting analysis error tradeoff versus sound financial analysis, 23 gamesmanship of, 21 mitigating circumstances in, 23-24

routine versus proactive, 3 skepticism important, 20-24 stories versus sound financial analysis, 21-22 types of investors, 21

Financial flexibility (Continued) vendor bias versus sound financial analysis, 22-24 Financial reporting for large losses “big bath” technique, 11-12 and corporate self-interest, 5-6 and cost of capital, 5 corporations and, 4-5 credit ratings and, 5 hidden assumptions, 8-10 inaccuracies, 5 as means to an end, 5 price-earnings multiples and, 5 purpose of (defined), 5 small profits misinformation, 11 Financial Statement Alert, 134 Financial statement, 56-58 accounting rules manipulation, 56

analysis of, 56-58 detecting artificial revenue inflation in, 57 executive bonuses linked to earnings per share, 56 forecasting, 211-266 revenue inflation in, 57 unrealistic depreciations in, 57-58

Finocchio, Robert, 127 First American Financial, 140 First Call, 66, 67

First Call/Thompson Financial, 136

First Financial Management, 152 Fixed-charge coverage ratio formula for, 283 and interest income, 284-285 lease expense calculations, 284 Fixed costs, 74, 80 definition, 353

Fixed-rate debt (definition), 353 Fixed versus variable costs, 76-84 cautions, 81 contribution per unit, 80 costs of goods sold (COGS), 80 difficulties in quantifying, 80 financial performance and, 81-82

fixed costs, 80 operating margin, 81 selling, general and administrative expenses (SG&A), 80

Six Flags, 82 unit price, 80

Floating-rate debt, 272 definition, 353

Focal communications, 100, 102 Forbes, 199

Forbes ASAP, 7

Ford’s Lincoln, 145, 146 Forecasting, 211-266 additions to property, plant, and equipment, 222 cost of goods sold, 216 dividends, 222-223 deferred income taxes, 221 drawing conclusions from, 265-266

earnings, 213 economic growth, 215 interest income, 221 interest expense, 219-38 operating income, 218 provision for income taxes, 221 repayment of current maturities of long-term debt, 223 research and development (R&D), 217-218 selling, general, and administrative expenses, 216-217

starting point, 213

working capital changes, 221-222 Form 10-Q, 133 Fort Howard, 58

Fortune, 152

Fraud, 88-90

audits, 89

earnings manipulation, 89 outright misrepresentation, 89 Fundamental analysis (definition), 315, 353

Funding (definition), 353

Future value (definition), 353 formula, 353

Gabelli Asset Management, 66 Gabelli, Mario, 66

Gaughan, Eugene, 148

General Electric, 201

General Motors, 333

General Motors’ Cadillac, 145-147 Generally Accepted Accounting

Principles (GAAP), 4, 5, 66, 157, 199, 205

as best predictor of cash flow, 67 definition, 353

dynamic industries and, 34 fraud and, 8 fee recognition requirements of, 139

inaccurate reporting not illegal, 8 intangible assets and, 34 percentage-of-completion method, 140

and traditional accounting systems, 30

Gerstner, Louis, 156

Gibson Greetings, 102

Gill, Daniel, 144

Gillette Company, 324

Goldberg, Arthur, 185

Goldman Sachs, 63

Goodwill, 30-31

amortization of, 194, 197, 200 assets-to-liabilities ratio versus tangible assets-to-liability ratio, 33

definition, 354

and stock prices, 34-36

as a write-off, 33

Graham, Benjamin, 336

lang=EN-US style='font-size:10.0pt'>Grant, James, 333

Grant, W. T., 175-177 Gray, Susannah, 247, 265 Gross Domestic Product (GDP) (definition), 354

Gross margin, 52, 73 Grubb & Chao (fictitious), 323-324

GTE, 61

Harris, Trevor J., 197

Harvard Business School, 149 Heinz (HJ) Co., 334 Henderson, Barry, 199

Henke, Steven J., 190-191 Henricks, Alan, 126

Hershey Foods, 334, 335 Hidden assumptions of financial reporting

bonuses based on stock price, 10 CEO self-interest, 9-10 depreciation schedules and, 10 price-earnings multiples and, 8 reporting gimmicks, 8-11 smoothed versus actual earnings, 8-9

volatility, 9 Historical cost accounting, 29-32

as basis, 30

definition, 354 disadvantages of, 30

Historical cost accounting (Continued)

and goodwill, 30-31 liability distortion with, 31 true economic value, 32

Hopkins, Patrick E., 65, 197

Hormel Foods Co., 334

Hostile takeovers, 111, 337 definition, 354

Hybrid Networks, 150

I.D.T., 68-69

Ikon Office Solutions, 150

IMC Global, 205

Income

deferred taxes on, 221 from interest, 284-285 net, 196

reduction through goodwill amortization, 194

Income statement analysis corporate commentary, 51-52 cost of goods sold, 77 drawing conclusions, 90 extraordinary items, 59 fixed versus variable costs, 76-84 fraud, 88-90

as future performance indicators, 59

interest rates, 50

intimidation, 55 percent income, 50-51 price-earnings multiples, 84-88 projected, 213-221 revenues, 69-72

Income statement ratios, 280

Infinity Broadcasting Corporation, 191

Informix, 125

class action suit against, 129 dispute with Ernst & Young, 129 independent audit of, 129 revenue costs, 127 revenue recognition problems, 126

revenue reduction, 127

Intel, 43-44

Intellectual capital, 29

Inter Parfums, 324

Interest income, 284-285

New Roman">Internal growth

compared to industry average, 73 definition, 73, 354 versus external growth, 72-74 intrinsic value of, 73

Internal Revenue Service, 93, 203

Internally generated funds (definition), 354

International Accounting Standards Board, 244

International Business Machines (IBM), 56-57, 154, 156-157, 201, 202, 206, 333 pension plan investment portfolio, 203 pension-related income, 206 Inventory turnover, 292, 293 Investment returns

on corporate pension plans, 201 Investor-relations officer, 354 Involuntary inventory accumulation, 354

JDS Uniphase, 33, 34, 37 Jenkins, Edmund L., 67, 193 Jensen, Michael C., 149, 150 Jepson, Franklin T., 143-144 John Hancock Financial Industries Fund, 66

Johnson & Johnson, 268, 270, 281 Johnson, Harold O., 142

Jostens, 230-232

Kelley School of Business (Indiana University), 65, 89, 197

Kellogg Co., 334

Kellogg, Loren, 134

Kendall Square Research, 134-135 revenue loss on, 135 revenue recognition controversies, 135

revenue recognition reform, 135 KnowledgeWare, 130-134

amended financial reporting practices of, 132

diverging trends of revenues and receivables, 133-134 financial reporting problems of, 131

MD&A analysis, 133-134 merger with Sterling Software, 130-131

Kraft Foods, 334

Laclede Steel, 205

Laing, Jonathan, 187-188

Lease expense fixed-charge coverage calculation, 284

Least-squares method

for corporate earnings projection, 330-331

Lernout & Hauspie Speech

Products (L & H), 7-8

Levenson, Carol, 66

Leveraged buyouts (LBO), 340-342 asset sales in, 341-342 average annual return on equity from, 96

cash flow and, 93-98 definition, 356-357 dividends not taken, 95 funds generated by, 93 and income statements, 98

profit margin improvement in, 340-341

risks of, 97-98

Leverage, operating, 54, 77 definition, 356

Leveraged recapitalization, 39-42 definition, 39, 357 double-entry bookkeeping in, 42 financial analysts’ perceptions of,

42

uses of, 40

Lieberman, Joseph, 193, 196

Lilly Tulip, 186

Liquidity (definition), 357

Llewellyn, Trefor, 157, 158, 159

Lockheed Martin Corporation, 233

Loews Corporation, 66

Long-term debt, 223, 271-272 Long-term issue credit ratings, 298 Low-cost debt

asset versus liability, 31 balance sheet, 31

Lowe’s Companies Inc., 47, 48

Lucas, Timothy S., 60

Lynch, Gary, 145

Macroeconomic (definition), 357

Maher, Robert P., 199

Manville Corporation, 18-19

Market capitalization, 29, 43-44 advantages of, 43 and book value, 43 definition, 357 drawbacks of, 43 of Intel, 43-44

Mature (definition), 357

Maximizing growth expectations actual versus management- projected growth, 14 competition, 14

Maximizing growth expectations (Continued)

confronting falling growth expectations, 13 corporate credibility gap, 14 corporate ploys for, 12-18 distorted comparisons, 15-16 diversifying away from mature markets, 17-18 increasing base, 15 limits to continued growth, 14-15

management optimism, 13 market saturation, 14 market share constraints, 15 new product expectations, 16-17

rationalizations for declining growth, 15-18

shipment delays, 16

Y2K problem, 16

Maytag, 61 McCormick, 334, 335 MemberWorks, 139

Mercury Finance, 6-7 Mergers, 238-239 Mergers and acquisitions accounting, 193-200 disclosure in, 88 in same industry, 238-239 price-earnings multiple in, 76 problems with, 88

Mergers and acquisitions accounting, 193-200

Merrill Lynch, 198, 230, 247 Metzler Group, 198

Meyercord, Wade, 191 Microeconomics (definition), 357 Microstrategy, 7

Mills, Charles, 7 Minkin, Gustave, 186

Modified Du Pont Formula,

335-342

valuation through restructuring potential, 336-342 Moody’s Investor Service, 33, 34, 37, 311

bond ratings (definitions), 296-297

debt ratings, 297

Moog, 205

Morgan Stanley, 197

Morgenson, Gretchen, 68 Morison Knudsen, see Washington

Group International

Morrison, Helane L., 150

Multiple (definition), 357 Multivariate (definition), 357 Multiyear projections, 244-265

for capital-intensive companies, 245-246

electronic spreadsheets for, 246 present value of future dividends,

245

in radical financial restructuring,

246

for Select Medical, 247-260

and volatility of economic conditions, 245

Murphy, Michael, 65 Mutual fund (definition), 357

National Auto Credit, 190

National Data Corporation, 140

National Gypsum, 19

National Medical Care (NMC),

147

Navigant Consulting, 196, 198-200

Navigant International, 198

Net income, 196

Net margins, 52

Net pension cost (benefit) components, 204 amortization of net deferred gains and losses, 204 amortization of prior service cost, 204 amortization of the transition amount, 204 expected return on plan assets, 204 gain or loss from settlement or curtailment, 204 interest cost on benefit obligation, 204 service cost, 204

Net present value, 357-358 Net2Phone, 68

New Jersey Casino Control Commission, 183

Newport, 239-244

New Valley Corporation, 64 New York Times, 68, 189 Nitec, 189

Nominal dollar, 358 Norris, Floyd, 189, 198 Nortel Networks, 33 Northeast Utilities, 205 Northern Pipeline, 336

Occidental Petroleum, 304 Off-balance sheet liabilities, 274-276 Olympia & York, 275

Online services

lack of profitability in, 154 Operating cash flow (definition), 177

Operating leverage, see Leverage, operating

Operating margins, 52, 81 Oralabs Holding, 324

Owens Corning, 19

Oxford Health Plans, 159-162 Oxley, Michael, 244

Paragon Trade, 324

Park Place Entertainment, 185 Parlux Fragrance, 324 Payment-in-kind security (PIK) (definition), 358

Payout ratio (definition), 358

Pension plans

bankruptcy and, 207

drawing conclusions about, 207 investment returns in, 201 net cost of, 201 net benefit of, 201 profits in, 201-207

SFAS No. 87, 203

Penta Advisory Services, 198 Pentagon, 60

Pepperdine University, 197

Percentage balance sheet, see Common form balance sheet percentage-of-completion method, 140

Perquisites, 86

Physician & Hospital Systems &

Services, 140

Pitt, Harvey, 244

Planet Hollywood, 183

Polaroid, 104, 107

Pooling-of-interests accounting, 67, 193, 200

definition, 359

GAAP and expected return, 205-206

potential for abuse of, 196 twilight of, 194-197

Portfolio (definition), 359

Powell, Dennis, 196

PPE Manufacturing Corporation, 328-330

Preferred stock, 273

Present value

definition, 359 formula, 359 of future income, 39

Price-earnings multiples, 84-88, 237

exaggerated, 87-88

exploiting difference in, 85, 86 low, reasons for, 327 normalizing earnings, 328-331 sustainable growth rate, 331-333

variation in, 325-333 Price-earnings ratio, 322-325 definition, 322

Price Waterhouse, 135, 144, 148

Privately held companies

tax minimization and, 93 Procter & Gamble (P&G), 46, 62-63, 64

Prodigy Services, 154 Professional Detailing, 140 Profit, 117-123

accounting profits, 117-118 bona fide profits, 117-118 definition, 117

measuring margin of, 280-283 overstatement of, 157-159 in pensions, 201-207

Profit margin, 280-283

Pro forma (definition), 359

Pro forma earnings

and core net earnings, 64

style='font-size:10.0pt'>as de facto GAAP, 65 divergent computational methods, 66-67

EBITDAM, 65

operating earnings versus operating income, 66

purpose of, 64

Pro forma financial statements

in acquisitions, 238-244 disadvantages of, 238 for divestments, 234-238 and spin-offs, 237-238 uses of, 234, 237

Projected balance sheet, 223-224 assumptions, 223

vs. historical balance sheet,

224

and projected statement of cash flows, 224 Projected income statement, 213-221

cost of goods sold, 216

depreciation, 213, 217 interest expense, 219-220 interest income, 221 net income, 213 operating income, 218 provision for income taxes, 221 research and development (R&D), 217-218 sales, 214-216 selling, general, and administrative expense (SG&A), 216-217 Projected statement of cash flows, 221-223

additions to property, plant, and equipment, 222

deferred income taxes, 221 dividends, 222-223 increase in notes payable, 223 projected income statement use in, 221

repayment of current maturities of long-term debt, 223 working capital changes (excluding cash and borrowings), 221-222

Property, plant, and equipment (PP&E), 69

additions to, 222

Publicly owned companies depreciation schedules for, 91-93

Purchase accounting, 194-195, 197, 200

definition, 359

strategies, 198-200

Quest Communications International, 66

Ralston Purina Co., 61, 334, 335

Rate-of-return measures, 287-291 annual earnings formula, 289 return on average equity formula, 289

return on equity formula, 288 Ratio trend analysis, 307-309 Rationalization (definition), 359 Ratios, 232

Raymond, David, 7

Rayovac Corporation, 91

Raytheon Engineers &

Constructors (RE&C), 84

Real dollar (definition), 360 Receivables turnover, 292 Reinsurance (definition), 360 Reorganization proceedings (definition), 360

Reported earnings (definition), 360

Research and development (R&D) forecasting, 217-218 write-offs of, 197

Restatements, 198

Restructuring, 61-64

as a catchall term, 61-62

Return on average equity, formula, 289

Return on equity

effect of debt on, 290

formula for, 288

Revaluation of debt

size=2 color=black face="Times New Roman">and historical cost, 31

Revenue, 118-120

defined, 118

Revenue recognition, 125-152

of annual fees, 139 danger signals, 130, 151 evidence of flawed, 130 financed membership fees, 137 GM exaggeration, 145-146 by Informix, 125 layaway sales, 136 loading the distribution channels,

141

patterns of behavior for noncompliant companies, 149

percentage-of-completion method, 140

reporting, 130

revenue adjustment case histories, 151-152

scope of the problem, 149 stratagems, 149-150 and understating short-run

profits, 147

Revenue, 69-72

from mergers and acquisitions,

70-72

from sales, 70-72

from stock market proceeds,

69-72

Ribis, Nicholas, 182-185

R. L. Polk, 146, 147

Rockefeller Foundation, 337

Rocker, David, 7

Rosenberg, Norman, 68

Royal Dutch/Shell Group of

Companies, 305

Sale-leaseback, 37

accounting method, 156 definition, 360

Sales

forecast, 214

to generate revenue, 70

Salomon Brothers, 135 Samuel Adams Brewery Company,

Ltd., 53

Samuels, Gary, 154

Sano, 151-152

Sara Lee Corp., 334, 335

Saylor, Michael, 7

Scale economics, see Economies of scale

Scanlon, Thomas, 148

Schilit, Howard, 7, 157

Schmidt, James K., 66

Scott Paper, 186

Shell Oil, 305

Short-term debt, 271-272 Shweppes Bottlers, 63

Sears, Roebuck & Co., 61, 154 Securities and Exchange

Commission (SEC), 7, 11, 61,

New Roman">62, 64, 89, 131, 138, 157,

187, 191, 197, 199, 206

and AOL, 155

definition, 361 inaccurate filings with, 68-69

Lernout & Hauspie investigation by, 8

material value criterion, 148

Select Medical (fictitious), 247-260 capital spending projection, 259 debt service projection pro

forma, 258

multiyear balance sheet, 249 multiyear cash flow statement,

250

multiyear income statement,

252-254

multiyear operating margins, 251, 255

multiyear projections, 247

quarterly income statement, 248 revenue projections, 256-257 working capital projection, 260 Selling, general and administrative expenses (SG&A), 80, 216-217

Senior debt, 277

definition, 361

Sensitivity analysis

applications of, 228-229 caution regarding, 230 definition, 227, 361 with projected financial statements, 224-230

September 11 terrorist attacks, 60 Sequoia Systems

SEC allegations against, 141 Serious Fraud Office (SFO), 158-159

Shakeout (definition), 361 Shandell, Tom, 183

Shareholder activism, 337 Sherwin-Williams, 33

Silicon Spice (fictitious), 239-244 Sitting Duck Corporation

(fictitious), 338-339

Six Flags, 83

cost of sales, 82

seasonality of, 82

Slack (definition), 361

Small Change (fictitious), 70, 84, 86

price-earnings multiple, 84 Smith Barney Shearson, 135 Smith, Brian J., 148

Solectron, 102

Sony Corporation, 64

Software and Information Industry

Association, 66

Spin-offs, 237-238 price-earnings multiple, 237 valuation after, 238

Staff Accounting Bulletin No. 101, 139

Standard & Poor’s, 33, 34, 37, 66, 67, 295, 298-309, 311 bond ratings (definitions), 298-301

Compustat database, 61

500 index, 66, 67, 203

400 index of industrial corporations, 38

Standard error of estimate (definition), 361

Statement of Financial Accounting

Standards (SFAS) definition, 361

SFAS 87, 201, 203, 205

SFAS 88, 206

SFAS 141, 31

SFAS 133, 46

Statement of stockholder’s equity (definition), 361-362

Statutory tax rate (definition), 362

Sterling Software, 130-131

Stier, Edwin H., 145

Stradling, Stuart, 157, 159

Straight-line method of depreciation (definition), 362

Subordinated debt, 277 definition, 362

Substainable growth rate, 333

Sunbeam, 186-189 bankruptcy of, 188

Sun City Industries, 186

Sunoco, 61

Sweetbaum, Henry, 158, 159

Syndicated Facility, 233

Synergy, 73 definition, 362

Sysco, 205

Taj Mahal casino, 183

Tarheel Tobacco (fictitious), 316-317

Tarkenton, Fran, 130

Teeters, Christopher, 162

Texaco, 305, 306

TheStreet.com, 68

Thompson, Thatcher, 198

Thomson Financial/First Call, 62,

66

Time Warner, 61

Total debt, 271-274

Total-debt-to-total capital ratio, 170

Total-debt-to-cash-flow ratio, 293-294

Total enterprise value definition, 362 and EBIT 178-179 and EBITDA 178-179 relating to net income,

164-168

Tractebel, Inc., 236

True economic value and depreciation, 32 estimation difficulty, 32

Trump Hotels & Casino Resorts, 182-185

press releases by, 184 quarterly report on form 10-Q, 183

T2Medical, 152

Turner, Lynn, 206

Turnover measures, 291-293 average days of receivables, 291 inventory turnover formula, 292, 293

receivables formula, 292

Tyco International, 197

Understatement of costs, 159-162

Unit price, 80

United States Surgical, 197, 198

United States Tax Code, 122 Units-of-production depreciation method (definition), 362-363

Unrecognized values, 342

U.S. West, 61

USG Corporation, 19

UST, 205

Value

historical cost, calculation of, 30 “instantaneous” wipeout of, 33 intrinsic, 30

long-run erosion in profitability, 37

overstated, 38

rate of return on fixed assets, 37 of real property, 30 reduction in, 37-39 true equity value, 38-40

Variable costs

definition, 363 versus fixed costs, 76-84

Veritas Software, 66

Viacom International, 277-279

Volcker, Paul, 244

Volume discounts, 73

Wall Street Journal, 62-63, 66, 135, 136, 137, 183, 187

Wal-Mart, 108-110, 136, 187 accounting method changes by, 136

stock problems of, 136

Walter Industries, 19

Washington Group International, 82-84

Waste Management, Inc., 233 Weirton Steel, 58

West Coast Whatsit (fictitious), 77 Western Union, 64 Westinghouse Electric, 206 White, Phillip E., 126, 127 Whitworth, Ralph, 145 Wickes PLC, 157-159

SFO investigation of, 158-159 Wiggins, Stephen F., 159, 160 Wolfe Food Company, 318-320, 322-323

Woolworth, 190

Working capital

in cash flow analysis, 177-179 definition, 363

requirements formula, 178

World Trade Center, 60

New Roman">World Wrestling Federation Entertainment, Inc., 233

World’s Fair casino, 183

W.R. Grace, 147-149

SEC allegations against, 147 Write-offs

for goodwill, 33

and ratings, 37

Yahoo!, 65

Zacks Investment Research, 135 Zeckhauser, Richard, 11, 12

In roughly the same period in which the Trump Hotels & Casino Resorts controversy arose, the gambling industry provided another example of the hazards of relying on company disclosures. Arthur Goldberg, chief execu­tive officer of Park Place Entertainment, entered the hospital in June 1999. The company attributed his confinement to a respiratory infection, but ru­mors began to circulate that he was gravely ill.⁸ By the time Goldberg was released from the hospital on July 7, Park Place’s stock had fallen by 6%. Over the same period, the 12 stocks constituting the Chicago Board Op­tions Exchange Gaming Index rose by an average of 8%.

As late as September 2000, Park Place denied a report that Goldberg planned to step down as CEO the following year.⁹ Asked about his health, the 58-year-old casino king tersely replied, “It’s okay. Things wear out as you get older.”¹⁰ On October 19, 2000, Goldberg died of complications of bone marrow failure—decidedly not a condition that develops suddenly.

The stock market’s reaction to Goldberg’s death was surprising, in view of his reputation as “the driving force behind Park Place Entertainment, the

Plainly, corporate disclosure does not invariably satisfy investors’ reason­able demands for information. What about the external auditors whom users of financial statements rely on to ensure that the information is pre­sented in accordance with GAAP? Judging by certain details of the Sunbeam affair of the late 1990s, this second line of defense does not always prove dependable.

Few corporate managers in history have generated as wide a range of reactions as Albert Dunlap has. In June 1996, on the day after he signed on as chairman and chief executive officer of Sunbeam, a manufacturer of small appliances, the company’s stock soared by nearly 50%. Dunlap’s au­tobiography, Mean Business, became a best-seller, and he reportedly com­manded fees of $100,000 per appearance¹² for lecturing on leadership. On the other hand, when Sunbeam’s board dismissed him on June 13, 1998, there was open rejoicing by some of the 18,000 employees he had fired over the preceding four years. (That cost-cutting rampage had earned him the nickname “Chainsaw Al.”) After hearing about the champion headcount­slasher’s own firing on a news telecast, Dunlap’s estranged son reported that he “laughed like hell,” delighted at his father’s failure. “He got exactly what he deserved,” added Al Dunlap’s sister.¹³

The hard-charging executive was determined to boost Sunbeam’s re­ported profits, thereby replicating his earlier successes at American Can,