QUESTION 1

Brief looking at the historical income statement and balance sheet, the company was doing
alright because there is an improvement in the financial statement.
However, after a deeper analysis, we notice there are some odds hidden behind.
1. A constant increase in the total revenue from 2000 to 2004 first quarter which is brought
upon its affliates, from 141 stores in 2000 to 500 stores in 2004.
However, considering the huge number of increased in the number of stores, the revenue
should have gone even higher!
2. A constant increase in the balance sheet is shown too.
However, there is a significant portion in the stockholders equity and it makes up 68.4% .
3. In addition, taking into account other information about the accounting of the company,
there have been some manipulations such as the missing amortization that results in
lower expense and thus higher income. In addition, there is also manipulation on the
interest as their income. Also, this results in overstated of the intangible assets.
4. Lastly, Krispy Kreme might have grown too fast and that discontinued operation resulting
from divestiture Montana Mills resulted a huge loss in May 2004.
QUESTION 2
Financial ratios gives necessary information to help examining the financial statement, making it
comparable and thus analyzing the financial performance a lot easier, especially when it comes
to comparing with other company from the same industry
By looking at case Exhibit 7, there are a few questions raised, such as:
1. The debt-to-equity ratio and debt-to-capital ratio decreased to 0 in January 2001, and
increased gradually again in February 2002 and 2003. This increases a question of why
Krispy Kremes long-term debt could go to 0 in 1 year and increased again in the
following.
2. The times interest earned jumped extremely high from 38.73% in January 2001 to
124.29% in February 2002. This ratio then fell down again to 33.59% in Febr
By looking at Exhibit 8 and 9, the questions raised are:
1. The company is very liquid compared to other quick-service restaurants, since their
liquidity ratios are the highest among the others.
2.Krispy Kreme has significantly high proportion amount of trade receivables in its
current assets and low of cash. Thus, making the company to stand as the lowest
receivable turnover compared to other quick-service restaurants.
3. Unlike other quick-service restaurant companies, Krispy Kreme has a very low debt
while a very high shareholders equity

QUESTION 3
We feel that Krispy Kreme is having a quite a slowdown in its financial statements. On the first
quarter of 2004, operations were discontinued, causing a huge cut of $34,285,000 from their net
income and on the second quarter, only a bit of 480,000 was cut due to discontinued operations.
They also have a huge amount of long-term debt that needs to be paid. (A total amount of 50
million)
The total assets do not change significantly from Feb 2004 to August 2004 and the current
liabilities actually increases, while the shareholders equity decreases in the same timeframe. The
Earnings per Share ratio also sloped back to where it started, $0.38 on 2001 and $0.45 on late
2004. ( $1.17 on mid 2004)
QUESTION 4
We have two main reasons to account the firms recent declining share price:
1. This is due to the reason that the manipulation in the financial statement was revealed by
SEC and as the news was spread out and reached the investors, these investors lost faith
in Krispy Kreme and decided to pull out their investment. The manipulation such as not
accounting the amortization expense for the franchisee that it had been reacquired
resulted in higher income. The interest received by the loans to the franchise should not
be listed under the investing in cash flow statement and it should also be seperated from
its main income under the income statement.
2. In addition, due to the change of the trend to consuming less carbohydrates food,
investorS might decide to pull out their investment on heavy carbohydrates food such as
donuts
QUESTION 5
The intrisic value comes from the intangible assets, which is the well-known brand of Krispy
Kreme itself and also the synergy inside the company.