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Homework Exercise for ACCT 70311

Homework Exercise for ACCT 70311. Mairin Talerico. 1. R&D Expense. Expensing R&D. Capitalizing R&D. Why is RNEA different under the two methods? When R&D is capitalized, NEA increases. This causes RNEA denominator to increase, making the ratio itself decrease. 1f. Forecasting only to 2016.

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Homework Exercise for ACCT 70311

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  1. Homework Exercise for ACCT 70311 MairinTalerico

  2. 1. R&D Expense

  3. Expensing R&D

  4. Capitalizing R&D Why is RNEA different under the two methods? When R&D is capitalized, NEA increases. This causes RNEA denominator to increase, making the ratio itself decrease.

  5. 1f. Forecasting only to 2016 Expensing R&D

  6. 1f. Forecasting only to 2016 Capitalizing R&D

  7. 1g. Cut R&D by $20m starting in 2016 Original method

  8. 1g. Cut R&D by $20m starting in 2016 Cutting R&D method Why is RNEA higher even though sales are growing at a slower rate and then declining on previous slide? because R&D expense is decreasing. This means net income is higher than under the Original method.

  9. 2. Earnings Management Three Year Depreciation

  10. Three Year Depreciation

  11. Five Year Depreciation

  12. Five Year Depreciation

  13. 2. Earnings Management • B) The 5 year depreciation method makes the firm more profitable in 2017. $329 > $302. This is because the longer estimated life allows the company to allocate costs over a longer period. • C) The intrinsic value does not change. Enterprise value is $1,808m. • D) Perhaps a premium is possible, but the intrinsic value will remain constant. • E) Recommend using 3 year depreciation life because residual income is higher in 2022 under 3 year than 5 year. $250 > $150

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