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financial reporting financial statement analysis and valuation

Questions and Answers of Financial Reporting Financial Statement Analysis And Valuation

M4-18. Risk Analysis Using Profitability, Coverage, Liquidity and Solvency BEST BUY Following are liquidity, solvency and coverage ratios for Best Buy for fiscal years ended February 2019(BBY) and
M4-17. Risk Analysis Using Liquidity, Solvency and Coverage Ratios 27.6%7.2 9.9%1.1 Following are liquidity, solvency and coverage ratios for Pier 1 Imports for two recent fi scal years. Is the
M4-16. Analyzing Notes, Yields, Financial Ratios, and Cr edit Ratings Following are selected ratios from Exhibit 4.8 computed for Comcast Corp. from its December 2019 Form 10-K. Comcast is rated
M4-1S. Calculating and Interpreting Cr edit Risk L02 Consider the following information for three companies($ millions). (a) Determine expected credit loss for each company. (b) Which company has the
Q4-14. Explain in general terms, the Altman bankruptcy prediction model. What do each of the five model variables measure?
Q4-13. What is a credit rating? Why do companies care about their credit ratings?
Q4-12. Why do lenders impose debt covenants on borrowers? Explain the three types of debt covenants.
Q4-11. Why do lenders require collateral? What are some common types of collateral?
Q4-10. What two factors determine a company's level of credit risk? Explain what each factor tries to measure.
Q4-9. Explain the concepts of liquidity and solvency. Why is performance on these two dimensions crucial to company survival? How does coverage analysis differ from measures of liquidity and solvency?
Q4-8. Why are missing or understated liabilities especially critical for credit analysis?
Q4-7. What are the four steps to assess the chance of default for a company?
Q4-6. What is credit risk? What is the main purpose of performing a credit analysis?
Q4-5. Identify and explain at least three means that banks have to extend credit to companies.
Q4-4. Distinguish between a line of credit and a letter of credit. Why do companies obtain lines of credit?
Q4-3. Identify at least three parties that routinely supply credit to companies.
Q4-2. Explain how a company's need of cash for investing activities differs over that company's life cycle. Suggest three reasons a company would borrow cash for financing activities.
Q4-1. Companies often borrow money to fund operating activities. Why do lenders distinguish between cycli- cal cash needs and cash needed to fund operating losses?
How long do you think it will take South Korea to develop a vibrant stock market?What are the impediments? Are the changes contemplated adequate for the development of a vibrant stock market? What
Is it a good idea for South Korea to rely more on the stock market as a source of corporate finance? Is it a good idea from the perspective of the chaebols?AppendixLO1
To prevent another bad loan problem in the future, what changes should be made in South Korean banks?AppendixLO1
What are the merits and demerits of a stock versus a bank system of financing?AppendixLO1
Four steps for business analysis are discussed in the chapter (strategy analysis, accounting analysis, financial analysis, and prospective analysis). As a financial analyst, explain why each of these
Joe Smith argues that “learning how to do business analysis and valuation using financial statements is not very useful, unless you are interested in becoming a financial analyst.”
Accounting statements rarely report financial performance without error. List three types of errors that can arise in financial reporting.AppendixLO1
John, who has just completed his first finance course, is unsure whether he should take a course in business analysis and valuation using financial statements, since he believes that financial
QI0-1. Under the lease standards effective for 2019, how are leases treated on the balance sheet?
QI0-2. What are the four criteria that distingu ish a finance lease from an operating lease?
QI0-3. Is the expense of a lease over its entire life the same for operating and finance leases? Explain.
QI0-4. What are the economic and accounting differences between a defined contribution plan and a defined benefit plan?
QI0-5.Under what circumstances will a company report a net pension asset? A net pension liability?
QI0-6.What are the components of pension expense that are reported in the income statement?
QI0-7.What effect does the use of expected returns on pension investments and the deferral of unexpected gains and losses on those investments have on income?
QI0-8.What are the two components of income tax expense?
QI0-9.Why do deferred taxes arise?
QI0-10.What is a valuation allowance for deferred tax assets?
QI0-11.Describe the income statement effect if a company reduced a deferred tax asset valuation allowance by $10 million.
QI0-12. What is a tax loss carryforward and how does it create an economic benefit for a company?
QI0-13. How do companies compute income tax expense for financial reporting purposes?
Qll-1.Identify at least two applications that use forecasted financial statements.
Qll-2.In what order do we normally forecast the financial statements? Explain the logic of this order.
Qll-3.Why do we begin the forecasting process by adjusting the financial statements?
Qll-4.What does the concept of financial statement articu lation mean in the forecasting process?
Qll-5.Analysts commonly perform a sensitivity analysis following preparation of financial forecasts. What is meant by sensitivity analysis, and why is it important?
Qll-6.Cash is forecast as the last item on the balance sheet. Why is this the case?
Qll-7.In addition to recent revenues trends, what other types and sources of information can we use to help us forecast revenues?
Qll-8.Why do we refine the forecasted cash balance? How might we deal with a cash balance that is much too low compared with the company's normal cash level?
Qll-9.Identify at least three sources of additional information we could use to refine our forecast assumptions.
Qll-10.Capital expenditures are usually an important cash outflow for a company, and they figure prominently into forecasts of net operating assets. What sources of information about capital
QI2-1.Describe how to compute the present value of a debt security such as a bond.
QI2-2.Discuss differences between valuing a bond and valuing the equity of a company.
QI2-3.What is a market beta? Discuss what a beta of 1.0 represents. What does a beta of 0.5 represent?A beta of 2.0?
QI2-4.Discuss the limitations associated with using beta to compute the cost of equity capital.
QI2-S.Discuss the diffe rence between a company's intrinsic value and the company's stock price.
QI2-6.Describe how to compute the after-tax cost of debt capital.
QI2-7.Explain what the market premium represents. Describe how to compute the cost of equity capital using beta, the risk-free rate, and the market premium.
QI2-8.What is a company's cost of capital? Explain.
Ql2-9.What are the three criteria for a series of payments to be considered an annuity?
Ql2-10.What is a pe rpetuity? How is the present value of a perpetuity computed?
Ql2-ll.Describe how to compute the present value of an increasing perpetuity.
QI2-12.Describe the ci rcularity that occurs when beta is used to help estimate an intrinsic value for comparison to market prices.
M12.13. Computing the Present Value of a Debt Security Compute the present value of a five-year bond with a face value of $1,000, a l 0% annual cou pon payment, and an 8% effective rate.
MI2-14. Computing the Present Value of a Debt Security Compute the present value of a three-year bond with a face value of $5,000, an 8% annual coupon payment, and a 9% effective rate.
Ml2-IS. Estimating Cost of Equity Capital Assume that a company's market beta equals 0.8, the risk-free rate is 5%, and the market retu rn equals 8%. Compute the company's cost of equity capital.
MI2-16. Estimating Cost of Equity Capital Assume that the company's market beta equals -0.8, that the risk-free rate is 5%, and the market return equals 8%. Compute the company's cost of equity
Ml2-17. Estimating the Implied Cost of Equity Capital Assume that a company's beginning-of-period price is $ 10 per common share, its dividends are $0.25 per share, and its end-of-period price is$ I
Ml2-18. Estimating the Implied End-of-Year Share Price Assume that a company's beginning-of-period price is $15 per common share, its dividends are$ I per share, and its expected cost of equity
MI2-19. Estimating Cost of Debt Capital Assume that the interest rate on a company's debt is 6% and that the company's tax rate is 21 %. Compute the company's cost of debt capital.
Ml2-20. Estimating Cost of Debt Capital Assume that a company's financial statements report that its average outstanding debt totals$ L.6 bi llion, and its total interest expense equals $80 million.
Ml2-21. Estimating Weighted Average Cost of Capital Assume that a company has $ 1.2 bill ion in debt, its cost of debt is 5%, it has $2 billion in equity, and its cost of equity capital is 7%.
Ml2-22. Estimating Weighted Average Cost of Capital Assume that a company has $1 bi ll ion in preferred stock and $3 billion in common stock. Also, it pays 6% dividends on preferred stock and its
M12-23. Estimating Company Value Using DDM with Constant Perpetuity LOS Assume that a company's dividends per share are projected to remain at $ 1.20 each year, and that its cost ii of equity capital
M12-24. Applying DDM with Constant Perpetuity LOS Assume that a company's dividends per share are projected to remain at $1.10 in perpetuity, and that its per share stock price is $22. Estimate the
M12-25. Estimating Company Value Using DDM with Increasing Perpetuity L06 Assume that a company's dividends per share are projected to grow at 2% each year, its next year's dividend •per share is $
M12-26. Estimating Company Value Using DDM with Increasing Perpetuity L06 Assume that a company paid $ 1.20 dividend per common share this year, its dividend per share is expected to grow at a
Q13-1.Explain how information contained in financial statements is useful in pricing securities. Are there some components of earnings that are more useful than others in this regard? What
Q13-2.In general, what role do expectations play in pricing equity securities? What is the relation between security prices and expected returns (the discount rate, or WACC, in this case)?
Q13-3.What are free cash flows to the firm (FCFF) and how are they used in the pricing of equity securities?
Q13-4.Define the weighted average cost of capital (WACC).
Q13-S.Define net operating profit after tax (NOPAT).
Q13-6.Define net operating assets (NOA).
Q14-1. In general , what role do expectations play in pricing equity securities? What is the relation between security prices and expected returns (the discount rate, or WACC, in this case)?
Q14-2. Define the weighted average cost of capital (WACC).
Q14-3. Define net operating profit after tax (NOPAT).
Q14-4. Define net operating assets (NOA).
Q14-S. Define the concept of residual operating income (ROPI). How is residual operating income used in pricing equity securities?
Q14-6. What insight does disaggregation of RNOA into net operating profit margin and net operating asset turnover provide for managing a company?
Q14-7. Explain what is meant by the phrase "steady state" when applied to equity valuation models.
Q14-8. What is one way to refine equity valuation models for companies that have not achieved steady state?
Q15-1. Identify the advantages of valuation using market multiples compared to valuation using discounted cash flows or discounted residual operating income.
Q15-2. Identify the disadvantages of valuation using market multiples compared to valuation using discounted cash flows or discounted residual operating income.
Q15-3. This module referred to the residual operating income model described in Module 14. Explain what a company-value-to-net-operating-assets ratio equal to 1 implies about future residual
Q15-4. Describe the factors that should be considered in choosing comparable companies for computation of the market multiples company-value-to-net-operating-assets and the price-to-book-value.
Q15-5. The "E" in the PE ratio can be determined in several ways. Identify at least three different variations in measuring earnings for the PE ratio.
Q15-6. Referring to residual income, PE can be expressed in terms of cost of equity capital, the present value of expected changes in residual income, dividends, and earnings. Explain what a PE ratio
QlS-7. Barron's Online posted the following headline in early October 2007: Cisco: Goldman Ups Target On'Stronger Multiple Outlook'. Explain what this headline means .
Q3-1. Explain in general terms the concept of return on investment. Why is this concept important in the analysis of financial performance?
Q3-4. When might a reduction in operating expenses as a percentage of sales denote a short-term gain at the cost of long-term performance?
Q3-5. Describe the concept of asset turnover. What does the concept mean and why is it so important to understanding and interpreting financial performance?
Q3-6. Explain what it means when a company's ROE exceeds its RNOA. What about when the reverse occurs?

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