Summary Financial Statement Analysis (FSA) All rules, tips and helpfull answers from previous exams

FSA regels
Vraag 1
 Enterprise value = mv of equity + mv of debt(= often bv)

 DDM not good because dividends irrlevancy and dividends are a redistribution of the firm
capital funds

 DCF not good, I perceived as value destroying, C-I is excess cash, connection to value is
weak, management discretion

 Earnings/(1+r).. not good: double counting, discounting assumes e1 is reinvested at r, with no
div e1 contributes to e2 (e2=(1+r)er). Disc. Implicitely assumes e1 = 50 is reinvested at 5%
discount rate. E2 explicitelty takes into account reinvestment of e1.

  Correct for earnings that we would expect Re(t) = e(t) -r*bv(t-1)

 Case 1: Re =0, cv=0. Case 2: Re = constant, cv = Re/r, AEG = 0, cv=0. Case 3: Re grows at
rate g, cv =Re/(r-g), AEG grows at rate g, cv = AEG/(r-g)

 Normal forward P/E ratio=1/r. P0/E1 > 1/r, market expects postive future AEG

 Normail trailing P/E ratio = (1+r)/r. Trailing P/E =current mv +div paid/Current
periodEarnings

 Firms comprehensive income is independant on FCF (C-I)

 Normal PEG ratio = (1+r)/r*100%. PEG ratio = (forward p/e)/ 2-year ahead earnings growth.
PEG> normal, market overprices expected growth. In theory lower PEG, the better, paying
less for future earnings growth. Although other explanation for first sentence…

 Why sell put warrants: Compmay believes stock is undervalued, commitment to repurchase
program.

 Without NFE, OI=CI

 Financing activities don’t create value, only operating assets.  influence ROCE

 RE or AEG creats value for common shareholders.

 Financial leverage increases investment risk of common shareholders  affects cost of
capital. Re = rf + Vd/Ve (rf-rd). Re increases with financial leverage

 Unleverd P/B = NOA mv/NOA bv

 Levered P/B = CSE mv/CSE bv


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 Enterprise price = equity price + NFO

 Rf on firms OA does not depend on the degree of financial leverage

,  Alle Hidden Dirty Surpluses uit equity statement gaan ook Income Statement in, CI van de 2
moet hetzelfde zijn

 Differences between P and E and P and B reflects future expectations of the market, the higher
the difference, the higher the expectations.  But growth in future earnings doesnt have tob e
high necessarily

 Comparebles not a good valuation model, also not in effecient markets

 Effect of FINLEV depends whether spread is positive or negative

 HDS can involve cash payments

 The difference between dirty and Hidden dirty surplus: dirty surpus flows are reported in the
financial statements

 SF2 forecast assumes reinvestments do not create value, ?SF3 does?

 Normal P/E ratio decreases with financial leverage

 Not the granting but exersizing of stock options results in HDS

 AEG model assumes earnings for each period are persistent

 Use re when doing P/E, not rf

 Required rate of return rf on the firms net operating does not depend on the degree of financial
leverage.

 Screening results in a trading strategy

 Timing of future pay outs is only value irrelevant when reinvestments earns the required rate
of return

 Pv of ReOI is not the same as PV of AOIG

 In Re model, g cant be greater than r, in cv??

 The normal P/E ratio is equal to 1/r . Since r increases with the degree of Fnancial leverage,
the normal P/E ratio decreases with the degree of financial leverage.

 A simple forecast type SF3 assumes that residual operating income and net operating assets
grow at the same rate.

 The forward P/E ratio doesnt have to be lower than the trailing P/E ratio.

 For a high tech firm with many intangible assets, the abnormal earnings growth model is
prefered over the residual income model.

 Information gained from a pro_t and growth analysis is not used in a simple type SF2 forecast.

 A simple forecast type SF3 depends on the _rm's future investments in net operating assets.