Investments

The following summarizes the balance sheet and income statement for a property-casualty insurer. Numbers are in millions of dollars.Net income of $848 million for 2009 come from the following to which taxes have been allocated.Loss on underwriting activities, after tax……….$ 43Investment income and realized gains on investments, after tax…891In addition to net income in the income statement, unrealized losses on available-for-sale investments of $124 million were reported as part of other comprehensive income in the equity statement.

a. Calculate the residual income from under writing activities for 2009. Use beginning-of year balance sheet numbers in the calculation and a required return of 9 percent.

b. Value the equity under a forecast that the residual income from under writing will grow at 2 percent per year in thefuture.

The following information was reported by McDonald’s Corporation in its 2001 annual report.Evaluate McDonald’s Corporation’s investing decisions by computing the ratio of cash flow from operating activities to total assets for 1999 through 2001.

Compare the cash flow ratio with return on assets from E12-9. What do you conclude, given thisinformation?

Solution:

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