06 Jun 1Discussion CaseEnronOn December 2, 2001 Enron Cor
1Discussion CaseEnronOn December 2, 2001 Enron Corporation filed for bankruptcy and shocked the financial world.Enron was the seventh largest company (by revenue) in the United States. How could this highprofile company have failed? A number of articles and books have profiled the company’saggressive personnel policies where every year they weeded out a bottom tier of employees.There have been significant discussions of Enron’s use of special purpose entities and off balancesheet debt (however, there has been little discussion of off balance sheet assets). Other topicsinclude Enron’s use of mark-to-market accounting and other transactions designed to simplyallow Enron to hit targets so that managers could earn their bonuses. Some of these transactionsinvolved collusion with Enron’s lenders. Early in 2002, Congress, the SEC, the JusticeDepartment, and the press were all investigating this case for evidence of wrongdoing. You willfind a number of articles in business and news magazines from mid December 2001 throughMarch 2002 with substantial details about the Enron collapse. However, there is a significantaspect of the story that is not told. Few have discussed what could have been learnedfrom Enron’s financial statements.Required:Prior to coming to class, address the following questions based on your evaluation of Enron’sfinancial statements for the years 1999 and 2000 (available on the class website). An Excelspreadsheet with Enron financial data is also available on the class website under the filenameDiscussion Case Enron (Data) as is the Commonly Used Ratios under the filename DiscussionCase Enron (Ratios).Problem 1: Company1a. What was Enron’s business? Please answer in one-half page or less.1b. In order to understand Enron’s financial statements, one must first understand two areas ofthe company’s business. Please respond to the following questions using Enron’s financialstatements. What were Price Risk Management Activities? What were Merchant Assets and Investments?1c. How was Enron able to double revenues from 1999 to 2000? Please respond in one-half pageor less?Problem 2: Information for various ratiosUsing an Excel spreadsheet:2a. Show how you calculate net income to common shareholders (i.e. net income less minorityinterest and preferred dividends) for Enron Corporation for the year ended December 31,2000. Include any adjustments for earnings quality.Explain any assumptions you made in answering the question here.Assumptions made in calculating net income to common shareholders for the year ended:Year ended Dec 31,200022b. Show how you calculate sustainable operating cash flow for Enron Corporation for the yearended December 31, 2000.Explain any important assumptions you made in answering the question here.Assumptions made in calculating sustainable operating cash flow for the year ended:Year ended Dec 31,20002c. Calculate the Commonly Used Ratios for Enron Corporation for the years ended December 31,2000 and December 31, 1999. Note: For profitability ratios, first adjust for earnings qualityissues. Use sustainable cash flow from operations (as computed in 2b.) for cash flow fromoperations is all applicable ratios.Problem 3: Liquidity Risk3. Identify other financial resources (i.e. other than assets, etc.) at Enron’s disposal and indicatethe relevance of these resources to Enron’s liquidity as of December 31, 2000. Address anyconcerns about off balance sheet obligations that will need to be met during the upcomingyear. Also address any guarantees that Enron may be contingently liable for.
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