International Reporting Case Sepracor, Inc., a U.S. drug company, reported the f
ID: 2350095 • Letter: I
Question
International Reporting Case
Sepracor, Inc., a U.S. drug company, reported the following information. The company prepares its financial statements in accordance with U.S. GAAP.
2007 (,000)
Current Liabilities $ 554,114
Convertible Subordinated Debt 648,020
Total Liabilities 1,228,313
Stockholders’ Equity 176,413
Net Income 58,333
Analysts attempting to compare Sepracor to international drug companies may face a challenge due to differences in accounting for convertible debt under iGAAP. Under IAS 32, Financial Instruments, convertible bonds, at issuance, must be classified separately into their debt and equity components based on estimated fair value.
INSTRUCTIONS:
(a) Compute the following rations for Sepracor, Inc. (assume that year-end balances approximate annual averages.)
(1) Return on assets.
(2) Return on stockholders equity
(3) Debt to asset ratio
(b) Briefly discuss the operating performance and financial position of Sepracor. Industry averages for these ratios in 2007were: ROA 3.5%; return on equity 16%; and debt to assets 75%. Based on this analysis would you make an investment in the company's 5% convertible bonds? Explain.
(c) Assume you want to compare Sepracor to an international company, like Bayer (which prepares its financial statements in accordance with iGAAP). Assuming that the fair value of the equity components of Sepracor's convertible bonds is $150,000, how would you adjust the analysis above to make valid comparisons between Sepracor and Bayer
International Reporting Case
Sepracor, Inc., a U.S. drug company, reported the following information. The company prepares its financial statements in accordance with U.S. GAAP.
2007 (,000)
Current Liabilities $ 554,114
Convertible Subordinated Debt 648,020
Total Liabilities 1,228,313
Stockholders’ Equity 176,413
Net Income 58,333
Analysts attempting to compare Sepracor to international drug companies may face a challenge due to differences in accounting for convertible debt under iGAAP. Under IAS 32, Financial Instruments, convertible bonds, at issuance, must be classified separately into their debt and equity components based on estimated fair value.
INSTRUCTIONS:
(a) Compute the following rations for Sepracor, Inc. (assume that year-end balances approximate annual averages.)
(1) Return on assets.
(2) Return on stockholders equity
(3) Debt to asset ratio
(b) Briefly discuss the operating performance and financial position of Sepracor. Industry averages for these ratios in 2007were: ROA 3.5%; return on equity 16%; and debt to assets 75%. Based on this analysis would you make an investment in the company's 5% convertible bonds? Explain.
(c) Assume you want to compare Sepracor to an international company, like Bayer (which prepares its financial statements in accordance with iGAAP). Assuming that the fair value of the equity components of Sepracor's convertible bonds is $150,000, how would you adjust the analysis above to make valid comparisons between Sepracor and Bayer
Explanation / Answer
Current Liabilities = $554,114
Convertible Subordinated Debt = $648,020
Total Liabilities = $1,228,313
Stockholder’s Equity = $176,413
Net Income = $58,333
(1) Return on Assets = [Net Income / Total Assets]
Net Income = $58,333
Total Assets = [Total Liabilities + Stockholder’s Equity]
Total Assets = [$1,228,313 + $176,413]
Total Assets = $1,404,726
Return on Assets = [$58,333 / $1,404,726]
Return on Assets = 4.15%
(2) Return on Stockholder’s Equity = [Net Income / Total Stockholder’s Equity]
Net Income = $58,333
Total Stockholder’s Equity = $176,413
Return on Stockholder’s Equity = [$58,333 / $176,413]
Return on Stockholder’s Equity = 33.06%
(3) Debt to Assets Ratio = [Total Debt / Total Assets]
Total Debt (or) Total Liabilities = $1,228,313
Total Assets = $1,404,726
Debt to Assets Ratio = [$1,228,313 / $1,404,726]
Debt to Assets Ratio = 0.874 (or) 87.4%
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