Financial Analysis & Valuation Exam 1 Questions and Answers

Financial Analysis & Valuation Exam 1 Questions and Answers Financial Statement Analysis The process of extracting information from financial statements to better understand a company's current and future performance and financial condition. Financial statements serve many objectives such as (4) 1. Management 2. Investors and analysts 3. Creditors, lenders, and rating agencies 4. Regulatory agencies What is Valuation The process of drawing on the results of financial statement analysis to estimate a company's worth (enterprise value). Four step framework for analysis & valuation & why is it important in estimating a firms value 1. Understanding the Business Environment and Accounting information (where does the firm operate) 2. Adjusting and Accessing Financial Information and Accounting Information (where is the firm currently) 3. Forecasting Financial Information (where is the firm going) 4. Using information for Valuation (what is the firm worth) Important because it shows the company's current and future performance and financial condition 4 financial statements 1. Balance sheet 2. Income statement 3. Statement of stockholders equity 4. Statement of cash flows Balance sheet COGS, Gross Margin, SG&A, Assets= Liabilities+ Stockholders equity. Nonowner: financing from banks, creditors and suppliers Owner: financing from stockholders Managers and employees Gauge current and future financial health Investment analysts Predict future performance Creditors/Suppliers determine loan terms, loan amounts, interest rates, and collateral Stockholders and directors assess profitability and risks and glean other information useful in their investment decisions Customers and strategic partners assess a company's ability to provide products or services and assess the company's staying power and reliability Regulators and tax agencies for antitrust assessments, public protection, setting prices, import-export analyses, and setting tax policies Voters and their representatives economic, social, taxation, and other initiatives, and to monitor government spending. Income statement A financial statement showing the revenue and expenses for a fiscal period. statement of stockholders' equity Reports on year over year changes in the equity accounts that are reported on the balance sheet. Contributed capital and retained earnings Statement of cash flows Reports cash inflows and outflows from 3 types of activities: 1. Operating 2. Investing 3.Financing 3 frameworks to analyze business environment 1. Porters value chain model 2. Porters 5 forces 3. SWOTTN model Porters 5 forces 1) Industry competitors 2) Bargaining power of buyers 3) bargaining power of suppliers 4) threat of substitution 5) threat of entry Profitability profit margin (PM) Net Income/Sales Productivity asset turnover AT Sales / Average Assets ROA Net Income/average assets ROE Net Income / Average Stockholders' Equity ROE Reflects the return to stockholders, which is different from the return for the entire company (ROA) 4 types of data analytics Three main groups of financial statements users 1. Investors and equity analysts 2. Lenders and credit analysts 3. Company managers and employees Companies undertake four types of activities 1. Plan business activities 2. Finance those activities 3. Invest in those activities 4. Then engage in Operating activities 2 primary reports that companies must supply 1. Form 10-K: 4 financial statements, explanatory notes, managements discussion and analysis 2. Form 10-Q: the unaudited quarterly report: summary versions of the four financial statements, limited additional disclosures