Blockbuster Case Analysis

653 words - 3 pages

1) What is Blockbuster's amortization timetable? Do you think it is appropriate? | | | | | | | | | | | | | | | | | | | |
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The guidelines with SEC requirements, BlockBuster's amortization timetable should be for 5-7 years. |   |   |   | | | | | | | | | | | | | | |
Solutions The rationale behind this, company's like Blockbuster's who are engaged in sophisticated technologies in times, and these | | | | | | | | | | | | | | |
technologies will be get outdated / obsolete very soon say 3-4 years. Hence it would be ideal to amortize the goodwill for 5-7 years. | | ...view middle of the document...

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3) What would have been the effect on earnings per share if Video Superstore purchases were not included in 1988 revenues? | | | | | | | | | | | | | | |
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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: |   |   |   | | | | | | | | | | | |
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First 12 months 40% | | | | | | | | | | | | | | | | | | | | | | | | |
Second 12 months 30% | | | | | | | | | | | | | | | | | | | | | | | | |
Third 12 months 30% | | | | | | | | | | | | | | | | | | | | | | | | |
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4) Over what period does BV depreciate its "base stock” videotapes? | | | | | | | | | | | | | | | | | | | | |
36-month, straight-line amortization period. | | | | | | | | | | | | | | | | | | | | | | |
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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)? | | | | | | | | | | | | | | | | | | | | | | | | |
EPS = NI-Pref Div / Avg Oustanding Common Stock. So if the depreciation method changes from straight-line to accelerated. | | | | | | | | | | | | | | | |
More depreciation expense is recognized up front and NI decreases. So the EPS ratio decreases. |   |   | | | | | | | | | | | | | | | |
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6) What was the effect on...

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