Bear & Co Essay

3968 Words Aug 23rd, 2015 16 Pages
Bear Stearns & Co

Bear Stearns & Co
Answer the following 10 questions, using the financial statement data from Blockbuster
Entertainment Corporation. Show your work (i.e., note what numbers you're using).

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 ½) 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
…show more content…
B) On April 20, Blockbuster announced an agreement to merge with its largest franchisee, Video
Superstore. Video Superstore was Blockbuster's largest customer for videotapes, accounting for 10%
of such sales in 1988, 21% in 1987, and 48% in 1986.
Since intra-company transactions are eliminated from the financial statements (it doesn't make sense
to record sales to yourself!), these sales will disappear next year.
3) What would have been the effect on earnings per share if Video Superstore purchases were
not included in 1988 revenues?
C) BV drastically slowed its depreciation (amortization) of "hit* video tapes at the start of 1988. In 1987
BV depreciated its rental videotape "hits" over nine months, straight line. At the start of 1988, it
switched to a method it called "36 month accelerated.” The financial statements do not disclose how
accelerated the curve is, but do say that the company uses 150% of straight line, computed on a
monthly basis. Thus, the resulting depreciation is as follows:
First 12 months

40%

Second 12 months

30%

Third 12 months

30%

4) Over what period does BV depreciate its "base stock” videotapes?
5) What was the effect on earnings per share of the change in depreciation method for “hit” tapes
(assume that hit tapes made up 25% of new tape purchases, and that the average hit tape
was owned for half the year)?
D) BV also sells…

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