Healy 5th Edition Solutions Manual: Complete Chapter Solutions for Business Analysis and Valuation Using Financial Statements

Business Analysis and Valuation,
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Using Financial Statements 5t
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h Edition by Paul M. Healy
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CompleteVChapterVSolutionsVManualVar
eVincludedV(ChV1VtoV12)




** Immediate Download
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** Swift Response
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** All Chapters included
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, ChapterV1
AVFrameworkVforVBusinessVAnalysisVandVValuationVUs
ingVFinancialVStatements


DiscussionVQuestions

1. John,VwhoVhasVjustVcompletedVhisVfirstVfinanceVcourse,VisVunsureVwhetherVheVshouldVtakeVaVcour
seVinVbusinessVanalysisVandVvaluationVusingVfinancialVstatements,VsinceVheVbelievesVthatVfinancialVa
nalysisVaddsVlittleVvalue,VgivenVtheVefficiencyVofVcapitalVmarkets.VExplainVtoVJohnVwhenVfinancialVa
nalysisVcanVaddV value,VevenVifVcapitalVmarketsVareVgenerallyVseenVasVbeingVefficient.

TheVefficientVmarketVhypothesisVstatesVthatVsecurityVpricesVreflectVallVavailableVinformation,Vas
VifVsuchVinformationVcouldVbeVcostlesslyVdigestedVandVtranslatedVimmediatelyVintoVdemandsVfo
rVbuysVorVsells.VTheVefficientVmarketVhypothesisVimpliesVthatVthereVisVnoVfurtherVneedVforVana
lysisVinvolvingVaVsearchVforVmispricedVsecurities.

However,VifVallVinvestorsVadoptedVthisVattitude,VnoVequityVanalysisVwouldVbeVconducted,Vmispri
cingVwouldVgoVuncorrected,VandVmarketsVwouldVnoVlongerVbeVefficient.VThisVisVwhyVthereVmu
stVbeVjustVenoughVmispricingVtoVprovideVincentivesVforVtheVinvestmentVofVresourcesVinVsecurit
yVanalysis.

EvenVinVanVextremelyVefficientVmarket,VwhereVinformationVisVfullyVimpoundedVinVpricesVwithi
nVminutesVofVitsVrevelationV(i.e.,VwhereVmispricingVexistsVonlyVforVminutes),VJohnVcanVgetVrew
ardsVwithVstrongVfinancialVanalysisVskills:
1. JohnVcanVinterpretVtheVnewlyVannouncedVfinancialVdataVfasterVthanVothersVandVtradeVonVi
tVwithinVminutes;Vand
2. FinancialVanalysisVhelpsVJohnVtoVunderstandVtheVfirmVbetter,VplacingVhimVinVaVbetterVpo
sitionVtoVinterpretVotherVnewsVmoreVaccuratelyVasVitVarrives.
MarketsVmayVbeVnotVefficientVunderVcertainVcircumstances.VMispricingVofVsecuritiesVmayVexist
VdaysVorVevenVmonthsVafterVtheVpublicVrevelationVofVaVfinancialVstatementVwhenVtheVfollowin
gVthreeVconditionsVareVsatisfied:
1. relativeVtoVinvestors,VmanagersVhaveVsuperiorVinformationVonVtheirVfirms’VbusinessVstrategi
esVandVoperation;
2. managers’VincentivesVareVnotVperfectlyValignedVwithVallVshareholders’Vinterests;Vand
3. accountingVrulesVandVauditingVareVimperfect.
WhenVtheseVconditionsVareVmetVinVreality,VJohnVcouldVgetVprofitVbyVusingVtradingVstrategiesV
designedVtoVexploitVanyVsystematicVwaysVinVwhichVtheVpubliclyVavailableVdataVareVignoredVor
VdiscountedVinVtheVprice-settingVprocess.


CapitalVinVmarketVefficiencyVisVnotVrelevantVinVsomeVareas.VJohnVcanVgetVbenefitsVbyVusingVfi
nancialVanalysisVskillsVinVthoseVareas.VForVexample,VheVcanVassessVhowVmuchVvalueVcanVbeVcr
eatedVthrough

,acquisitionVofVtargetVcompany,VestimateVtheVstockVpriceVofVaVcompanyVconsideringVinitialVpubli
cVoffering,VandVpredictVtheVlikelihoodVofVaVfirm’sVfutureVfinancialVdistress.

2. InV2009,VLarryVSummers,VformerVSecretaryVofVtheVTreasury,VobservedVthatV“inVtheVpastV20-
yearVperiod,VweVhaveVseenVtheV1987VstockVmarketVcrash.VWeVhaveVseenVtheVSavingsV&VLoanVdeba
cleVandVcommercialVrealVestateVcollapseVofVtheVlateV80’sVandVearlyV90’s.VWeVhaveVseenVtheVMexic
anVfinancialVcrisis,VtheVAsianVfinancialVcrisis,VtheVLongVTermVCapitalVManagementVliquidityVcrisis,
VtheVburstingVofVtheVNASDAQVbubbleVandVtheVassociatedVEnronVthreatVtoVcorporateVgovernance.V
AndVnowVwe’veVseenVthisV[globalVeconomicVcrisis],VwhichVisVmoreVseriousVthanVanyVofVthat.V Twen
tyVyears,V7VmajorVcrises.VOneVmajorVcrisisVeveryV3Vyears.”V HowVcouldVthisVhappenVgivenVtheVlarg
eVnumberVofVfinancialVandVinformationVintermediariesVworkingVinVfinancialVmarketsVthroughoutVth
eVworld?VCanVcrisesVbeVavertedVbyVmoreVeffectiveVfinancialVanalysis?

FinancialVintermediariesVperformVaVvarietyVofVfunctionsVthatVareVdesignedVtoVmitigateVproblemsVin
VourVfinancialVmarkets.


AuditorsVcertifyVtheVcredibilityVofVfinancialVreports;VauditVcommitteesVhireVtheVexternalVauditorsV
andVoverseeVbothVtheVinternalVandVexternalVauditorsVtoVensureVthatVtheyVdoVaVthoroughVjobVofVa
ssuringVtheVcompany’sVfinancialVinformationVisVreliableVandVnotVfraudulent.VCorporateVboardsVare
VtaskedVwithVmonitoringVandVappointingVtheVfirm’sVCEOVandVwithVoverseeingVitsVstrategy.VFinan
cialVanalystsVevaluateVaVfirm’sVfinancialVperformanceVandVvaluationVandVassessVwhetherVaVstockVi
sVaVworthwhileVinvestment,VandValsoVensureVthatVthereVisVcommonVinformationVonVaVstockVinVth
eVmarketVtoVreduceVadverseVselectionVproblems.VInvestmentVbanksVhelpVtoVprovideVgoodVcompani
esVwithVaccessVtoVcapitalVandVtoVhelpVinsureVthatVinvestorsVcanVallocateVcapitalVtoVgoodVbusiness
es.VAndVsoVtheVlistVgoesVon,VincludingVinvestmentVmanagers,VhedgeVfundVmanagers,VandVtheVbus
inessVpress.

ItVisVanVinterestingVquestionVasVtoVwhyVtheseVvariousVinstitutionsVfailedVtoVdetectVtheVproblemsVu
nderlyingVtheVcrisisVidentifiedVbyVLarryVSummers.VOneVexplanationVisVthatVtheyVfaceVtheirVownVc
onflictsVofVinterest.VAuditorsVhaveVcertainlyVreceivedVcriticismVforVauditVfailures.VSomeVsuggestVth
atVthisVarisesVbecauseVauditorsVareV(perhapsVunconsciously)VreluctantVtoVtakeVaVhardVlineVagainstVi
mportantVclientsVforVfearVofVlosingVtheVaccount.VSimilarVconcernsVhaveVbeenVraisedVaboutVfinanci
alVanalysts,VwhichVeitherVworryVaboutVtheVreactionsVofVcorporateVmanagers,VmajorVclients,VorVinve
stmentVbankersVatVtheirVfirmVifVtheyVwriteVnegativeVreportsVaboutVcompaniesVtheyVfollow.VCorpor
ateVboardsVhaveVbeenVcriticizedVforVbeingVbeholdenVtoVtheVseniorVexecutivesVofVtheVcompaniesVth
eyVoversee.VRecentVgovernanceVchangesVwereVintendedVtoVcorrectVsomeVofVtheseVconflictsVofVinter
est.VForVexample,VinVtheVU.S.VtheVSarbanesVOxleyVActVwasVintendedVtoVgiveVAuditVCommitteesV
moreVcloutVandVchangeVtheVincentivesVofVauditors.VTheVGlobalVFinancialVSettlementVandVRegulati
onVFairVDisclosureVwereVintendedVtoVreduceVtheVconflictsVofVinterestVforVfinancialVanalysts.VMany
VofVtheseVchangesVwereValsoVimplementedVoutsideVtheVU.S.VHowever,VitVisVdifficultVtoVeliminateV
theVconflictingVincentivesVofVintermediaries,VwhoVbyVtheirVnatureVareVinVtheVdifficultVpositionVofVt
ryingVtoVworkVforVtwoVbosses.

AVsecondVpotentialVexplanationVisVthatVhumanVbeingsVareVsubjectVtoVbehavioralVbiasesVthatVleadVt
hemVtoVmakeVcommonVmistakes.VForVexample,VmostVretailVinvestorsVextrapolatedVperformancesVat
VEnron,VinternetVstocks,VandVmortgageVbackedVsecuritiesVtoVconcludeVthatVtheseVwouldVcontinueVt
oVbeVterrificVinvestments.VTheyVpouredVmoneyVintoVtheseVsectorsVandVstocksVandVshowedVlittleVin
terestVinVhearingVfromVanalysts,Vauditors,VinvestmentVbankers,Vetc.VwhoVhadVaVcontrarianVpointVof
Vview.VForVexample,VatVtheVheightVofVtheVinternetVboom,VWarrenVBuffetVexpressedVconcernVabout
VtheVsectorVbutVwasVdismissedVasVaVdinosaurVwhoVdidn’tVunderstandVtheVnewVeconomy.VLessVinf
ormedVorVlessVconfidentVintermediariesVwouldVfindVit

, difficultVtoVchallengeVtheVpopularVviewVofVsuchVhotVmarketsVorVtoVjudgeVwhenVsuchVhotVmarketsV
wouldVcrash.

GivenVtheseVproblems,VweVwillVprobablyVcontinueVtoVhaveVcrisesVunlessVweVcanVcorrectVtheVfunda
mentalVconflictsVofVinterestVthatVpervadeVtheVindustryVandVcanVfigureVoutVhowVtoVmodifyVhumanV
behavior.


3. AccountingVstatementsVrarelyVreportVfinancialVperformanceVwithoutVerror.VListVthreeVtypesVofVerro
rsVthatVcanVariseVinVfinancialVreporting.

ThreeVtypesVofVpotentialVerrorsVinVfinancialVreportingVinclude:
1. errorVintroducedVbyVrigidityVinVaccountingVrules;
2. randomVforecastVerrors;Vand
3. systematicVreportingVchoicesVmadeVbyVcorporateVmanagersVtoVachieveVspecificVobjectives.

AccountingVRules.VUniformVaccountingVstandardsVmayVintroduceVerrorsVbecauseVtheyVrestrictV
managementVdiscretionVofVaccountingVchoice,VlimitingVtheVopportunityVforVmanagers’VsuperiorV
knowledgeVtoVbeVrepresentedVthroughVaccountingVchoice.VForVexample,VSFASVNo.V2VrequiresV
firmsVtoVexpenseVallVresearchVandVdevelopmentVexpendituresVwhenVtheyVareVoccurred.VNoteVth
atVsomeV researchVexpendituresVhaveVfutureVeconomicVvalueV(thus,VtoVbeVcapitalized)VwhileVoth
ersVdoVnotV(thus,VtoVbeVexpensed).VSFASVNo.V2VdoesVnotVallowVmanagers,VwhoVknowVtheVfir
mVbetterVthanVoutsiders,VtoVdistinguishVbetweenVtheVtwoVtypesVofVexpenditures.VUniformVaccou
ntingVrulesVmayVrestrictVmanagers’Vdiscretion,VforgoVtheVopportunityVtoVportrayVtheVeconomicV
realityVofVfirmVbetterVand,Vthus,VresultVinVerrors.

ForecastVErrors.VRandomVforecastVerrorsVmayVariseVbecauseVmanagersVcannotVpredictVfutureV
consequencesVofVcurrentVtransactionsVperfectly.VForVexample,VwhenVaVfirmVsellsVproductsVonVc
redit,VmanagersVmakeVanVestimateVofVtheVproportionVofVreceivablesVthatVwillVnotVbeVcollectedV
(allowanceVforVdoubtfulVaccounts).VBecauseVmanagersVdoVnotVhaveVperfectVforesight,VactualVde
faultsVareVlikelyVtoVbeVdifferentVfromVestimatedVcustomerVdefaults,VleadingVtoVaVforecastVerror.

Managers’VAccountingVChoices.VManagersVmayVintroduceVerrorsVintoVfinancialVreportingVthro
ughVtheirVownVaccountingVdecisions.VManagersVhaveVmanyVincentivesVtoVexerciseVtheirVaccoun
tingVdiscretionVtoVachieveVcertainVobjectives,VleadingVtoVsystematicVinfluencesVonVtheirVfirms’V
reporting.VForVexample,VmanyVtopVmanagersVreceiveVbonusVcompensationVifVtheyVexceedVcerta
inVprespecifiedVprofitVtargets.VThisVprovidesVmotivationVforVmanagersVtoVchooseVaccountingVpo
liciesVandVestimatesVtoVmaximizeVtheirVexpectedVcompensation.

4. JoeVSmithVarguesVthatV“learningVhowVtoVdoVbusinessVanalysisVandVvaluationVusingVfinancialVstate
mentsVisVnotVveryVuseful,VunlessVyouVareVinterestedVinVbecomingVaVfinancialVanalyst.”VComment.

BusinessVanalysisVandVvaluationVskillsVareVusefulVnotVonlyVforVfinancialVanalystsVbutValsoVfor
VcorporateVmanagersVandVloanVofficers.VBusinessVanalysisVandVvaluationVskillsVhelpVcorporateV
managersVinVseveralVways.VFirst,VbyVusingVbusinessVanalysisVforVequityVsecurityVvaluation,Vco
rporateVmanagersVcanVassessVwhetherVtheVfirmVisVproperlyVvaluedVbyVinvestors.VWithVsuperior
VinformationVon