1. a)Why is the Statement of Cash Flows the most useful tool for analyzing highly leveraged companies? (b) What is the risk of heavy reliance on external financing for rapid growth?

2. a)Explain what analyst evaluating the Leveraged Buyout (LBO) would miss if they focused on earnings instead of cash flows?

(b) Given that expectations about future cash flows are not realized, and investors find themselves lacking the cash required to meet interest expense and the scheduled principal payments, discuss the options available to these investors.

3.Explain the two assumptions that misconstrue the motives that frequently underlie financial reporting, and what is the real scandal involving major financial reporting violation when they come to light?

4.Explain the main advantages of using historical cost as the basis of a system to value assets, and describe some of its disadvantages?

5 Determine the ROE for firms A and B tabulated below, using a tax rate of 40% and an Annual market interest rate of 10%

Based on the above information, calculate

	A	B
EBIT	100	100
Equity	2000	2500
Debt outstanding	500	0

a) ROE for Firms A and B; (b) ROE for each firm if the EBIT for each is $500; and (c) Compare the ROE for the two firms for two levels of operating activity. What is your conclusion regarding the effect of debt on ROE?

6(a) Explain the advantages of using market capitalization as a measure of equity, and then,its drawbacks.

(b)Explain how looking at the ratio of total assets to total liabilities can mislead the analyst.

7.Describe how the careful study of financial statements can help raise warning flags regarding risk in merger and acquisitions driven stock for stock transactions, and explain some examples of the need to watch for earnings discontinuities.

8 Explain some of the ways that companies downplay expenses? (b) What do most analysts do to benefit from the insights provided by the careful scrutiny of financial statements?