CHAPTER 1

OVERVIEW OF FINANCIAL REPORTING, FINANCIAL STATEMENT ANALYSIS, AND VALUATION

Solutions to Questions, Exercises, and Problems, and Teaching Notes to Cases

1. Value Chain Analysis Applied to the Timber and Timber Products Industry. Exhibit 1.A below contains a depiction of the value chain. The links in the value chain are as follows:

1. Timber Tracts: Plant and maintain timber tracts (Weyerhaeuser) 2. Logging: Harvests timber (Weyerhaeuser) a. Sawmills: Cut timber into various grades of wood (Weyerhaeuser) b. Pulp and Paper Manufacturing: Grinds timber into pulp and converts the pulp into various grades of paper and cardboard (International Paper) a. Intermediate Users of Wood:
Microsoft. The basic idea of a commodity product is that the product offerings of one firm are so similar to those of other firms that customers can easily switch to competitors’ products if price becomes an issue. The technological attributes of computer software are duplicated relatively easily, a commodity attribute. However, Microsoft’s size permits it to invest in new technology development and keep it on the leading edge of new technologies. Microsoft also has a huge advantage in terms of installed base, meaning that most customers almost have to purchase its software to be able to use application programs and to communicate with other computer users. Thus, its products are inherently commodities but Microsoft is able to overcome some of the disadvantages of commodity status.

Johnson & Johnson. Johnson & Johnson operates in three business segments: consumer healthcare, pharmaceuticals, and medical equipment. It derives the majority of its revenue and profits from the latter two industries. Patents protect the products of these two industries, which give the firm a degree of market power. Until another firm creates a new product that dominates the patented product of Johnson & Johnson, its product is not a commodity. However, rapid technological change makes most products obsolete before the end of the patent’s life.