Bear Stearns & Co

Bear Stearns & Co

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Please write 3 pages answering the 10 questions on instructions attached, use text Business Analysis Valuation: Using Financial Statements [PH] Krishna G. Palepu, Paul M. Healy Cengage Learning, 4th Edition, 2012 and 3 other references of your choice.

On May 9, 1989, Bear Stearns & Co. issued a report on Blockbuster Entertainment Corp., which is reproduced in part below. Blockbuster-Entertainment (Ticker symbol: BV, Price per share: $33 1⁄2) increased owned and franchised video stores from 19 at the end of 1986 to 415 at December 31, 1988. In the same period revenue jumped from $7.4 million to $136.9 million. Reported earnings also leaped; from $.34 per share in 1986 to $.57 per share in 1988. The stock carries an historical Price to Earnings ratio of 59, and there were 25,741,549 shares of common stock issued and outstanding as of 12/31/88.

A) Some of Blockbuster’s mergers with other video rental companies have been recorded as purchases. In a merger treated as a purchase, the price paid is first allocated to the fair values of assets that can be kicked, picked up or painted. Any excess paid for the company beyond these “fair values” becomes goodwill, which Blockbuster labels “intangible assets relating to acquired businesses.” APB Opinion 17 requires that goodwill be amortized to income (expensed) over 40 years or less.

 

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