5.
Carlton Electronics posted net income of $500,000 in 2009, compared with a loss of $100,000 in 2008. Over $200,000 of the 2009 profit was due to a problem with faulty approximation in its Toledo operations. The problem occurred when a tax liability had been accrued in prior years assuming a higher tax rate that was actually in effect when the taxes were paid.
Required:
How do you interpret this in terms of quality of earnings? How can a change in expected tax rates lead to a positive effect on reported earnings? Does the $200,000 represent an increase in overall wealth of the company?
6.
Xenon, a major defense contractor, was faced with huge liabilities and feared violation of debt covenants. Therefore, Xenon declared Chapter 11 bankruptcy protection. Under Chapter 11, a company continues to operate but is protected from creditors while it tries to work out a reorganization plan. At that time the company’s management chose to take several significant charges under bankruptcy proceedings, including a $1 million liability not required by GAAP, but that better reflected its commitments to employees.
Required:
Why would Xenon’s management have chosen to take these charges at this time?
7.
You are reviewing the annual report for Mega City Electronics. You noticed that Mega City cut its dividend last year and the stock price when up.
Required: Explain how a dividend cut could lead to an increased stock price.