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financial statement analysis
Financial Statement Analysis Workbook A Practitioners Guide 4th Edition Martin S. Fridson, Fernando Alvarez - Solutions
Case 3 A corporation is currently reporting annual net earnings of $20.0 million.Assume that five years from now, when its growth has leveled off somewhat, the corporation will be valued at 12 times earnings.Further assume that the company will pay no dividends over the next five years and that
Case 2 A corporation is currently reporting annual net earnings of $20.0 million.Assume that five years from now, when its growth has leveled off somewhat, the corporation will be valued at 20 times earnings.Further assume that the company will pay no dividends over the next five years and that
Case 1 A corporation is currently reporting annual net earnings of $30.0 million.Assume that five years from now, when its growth has leveled off somewhat, the corporation will be valued at 15 times earnings.Further assume that the company will pay no dividends over the next five years and that
25. For the investor____________ who takes a longer view, provides an____________ invaluable reference point for____________ valuation.
24. A focus on multiples,____________ the best-known form of fundamental analysis,____________ is not the investor’s to relying on technicians’ stock charts.
23. Today’s may be a precursor of tomorrow’s bankruptcy by a company that has economized its way to ____________.
22. A leveraged buyout can bring about improved profitability for either of two reasons:a.____________ b.____________
21. In future bear markets, when stocks again sell at depressed priceearnings multiples, ____________investors will probably renew their focus on____________.
20. At least in the early stages,____________ before some raiders became overly aggressive in their financial forecast assumptions, i____________t was feasible to extract value without creating undue bankruptcy risk, simply by____________ .
19.____________ Management’s main adversaries in battles over were aggressive____________ .
18. Some companies have the potential to raise their share prices by____________ , while others can increase their value by.
17. Besides introducing greater volatility into the____________ , adding debt to the balance sheet demonstrates____________ .
16. Like most ratio analysis, the Du Pont Formula is valuable not only for but also for____________ .
15. To the extent that the company funds share buybacks with idle cash, the increase in is offset by____________ a reduction arising from____________.
14. One way to increase earnings per share is to____________ .
13. Leverage reaches a limit, since lenders will not continue advancing funds beyond a certain point as____________ .
12. Earnings per share will not grow merely because____________ .
11. Analysts should be especially wary of companies ____________that have tended to jump on the____________ bandwagon of associated with the of the moment.
10. A building-materials manufacturer may claim to be cushioned against fluctuations in housing starts because of a strong emphasis in its product line on ____________.
9. It is appropriate to assign an____________ discount factor to the earnings of a company that competes against larger,____________ better-capitalized firms. A small company of depth in management and concentration of____________ .
8. The ability to vary the ____________, and therefore to assign a or multiple to a company’s earnings,____________ is the equity analyst’s defense against earnings by management.
7. Cash generated from____________ , which is generally more difficult for companies to manipulate than____________ , can legitimately be viewed as the preferred measure of future____________ .
6. Many analysts argue that____________ , rather than ____________, is the true determinant of dividend-paying capability.
5. As a rule,____________ a company will not increase its dividend on a regular____________,____________ annual basis.
4. The company’s earnings growth rate may diverge from its sales growth due to changes in its____________ .
3. By thinking through the logic of the method, the analyst will find that value always comes back to____________ .
2. Of the methods of fundamental common stock analysis, ____________no other approach matches the intuitive appeal of regarding the stock price as the____________ of expected dividends. This approach is analogous to the calculation for a ____________bond and therefore facilitates the comparison of
1. In this chapter, the discussion focuses primarily on the use of financial statements in____________ .
39. Like the quantitative models consisting of____________ , the default risk models based on stock prices provide useful,____________ but____________ , signals.
38. Quantitative models such as Zeta, as well as others that have been devised using various mathematical techniques, have several distinct benefits such as:a.____________ b.____________ c.____________
37.____________ or financial ratios can have different implications for different companies.
36. Beyond a certain point, calculating and comparing companies on the basis of financial ratios contributes little____________.
35. Line of business is another basis for defining ____________.
34. Expected have an important bearing on the decision to or credit,____________ as well as on the____________ of debt securities.
33. Built from two comparatively hard numbers, the ratio of to provides one of the best single measures of____________ .
32. Fixed-charge coverage,____________ too,____________ has a weakness, for it is based on ____________, which are subject to considerable manipulation.
31. A is a possible explanation of declining inventory turnover. In this case,____________ the inventory may not have suffered a severe reduction in value, but there are nevertheless unfavorable implications for____________ . Until the inventory glut can be worked off by to match the
30. The underlying notion of a turnover ratio is that a company requires a certain level of and to support a____________ given volume of sales.
29. A limitation of combination ratios that incorporate balance-sheet figures is that they have little meaning if____________ .
28. Analysts cannot necessarily assume that all is well simply because capital expenditures consistently exceed depreciation. Among the issues to consider are:a.____________ b.____________ c.____________ d.____________
27. Unlike earnings, is essentially a programmed item,____________ a cash flow assured by the accounting rules. The higher the percentage of cash flow derived from____________ , the higher is the of a company’s cash flow, and the____________ its financial flexibility on the vagaries of the
26. A company that suffers a prolonged downtrend in its ratio of is likely to get more deeply into debt,____________ and therefore____________ become with each succeeding year.
25. Given corporations’ general reluctance to sell new equity,____________ a recurrent cash shortfall is likely to be made up with financing, leading to a rise in____________ ratio.
24. Ratios related to sources and uses of funds measure credit quality at the most elemental level—a company’s ability to____________ .
23. Companies sometimes argue that the denominator of the fixed-charge____________ coverage ratio should include only expense, that is, the difference between and income derived from ____________, generally consisting of marketable securities.
22. The two complications that arise in connection with incorporating operating lease payments into the fixed-charge coverage calculation are:a.____________ b.____________
21. Regardless of whether it is or____________ , however, all interest accrued must be covered by____________ and____________ should therefore appear in the of the fixed-charge coverage calculation.
20. Fixed-charge coverage is an ratio of major interest to credit analysts. It measures the ability of a company’s to meet the on its debt, the lender’s most direct concern. In its simplest form,____________ the fixed-charge coverage ratio indicates the by which suffice to pay____________.
19. Operating margin shows how well management has run the business wisely, controlling before taking into____________ account financial policies, which largely determine____________ , and ,____________ which is outside management’s control.
18. The cumulative effect of a change in accounting procedures will appear or after have already been deducted.The sum of net income and provision for income taxes will then differ from the that appears in the income statement.
17. The contemporary view is that profits are ultimately what sustain and .____________ High profits keep plenty of cash____________ flowing through the system and confirm the value of productive assets such a____________s and____________ .
16. In general, credit analysts should assume that the achievement of bond ratings____________ is a goal of corporate management.
15. The precise formula for a ratio is less important than____________ the assurance that it is for all companies being evaluated.
14. Under SFAS , balance sheet recognition is now given to pension liabilities related to employees’ service to date. Similarly, SFAS ____________ requires recognition of postretirement health care benefits as an on-balance sheet liability.
13. A corporation can employ leverage yet avoid showing debt on its consolidated balance sheet by____________ or forming____________ .
12. In addition to including capital leases in the total debt calculation, analysts____________ should also take into account the liabilities represented by contractual payments on____________ , which are reported as in the to Financial Statements.
11. In general, the credit analyst must recognize the heightened level of risk implied by the presence of preferred stock in the____________ . One formal way to take this risk into account is to calculate the ratio of to____________ .
10. Analysts should remember that the ultimate objective is not to but to____________ .
9. Public financial statements typically provide information about the extent to which the issuer has its exposure to interest rate fluctuations through ____________.
8. Exposure to interest rate fluctuations can also arise from longterm ____________. Companies can limit this risk by using ____________.
7. Current maturities of long-term debt should enter into the calculation of ____________, based on a conservative assumption that the company will replace maturing debt with____________ .
6. A firm that “zeros out” its at some point in ____________each operating cycle can legitimately argue that its “true” leverage is represented____________ by the on its balance sheet.
5. Aggressive frequently try ____________to satisfy the letter of a ____________leverage limit imposed by lenders, without fulfilling the behind it.
4. The greater the amount by which asset values could deteriorate, the greater the____________ , and the greater the creditor’s sense of____________ . Equity is by definition minus ____________.
3. Illiquidity manifests itself as an excess of current____________ , over ____________. The ratio gauges the risk of this occurring by comparing the claims against the company that will become ____________payable during with the assets that are already in the form of cash or that will be converted
2. If a company is dependent on raw materials provided by a subsidiary, there may be a presumption that it will stand behind the subsidiary’s____________ , even ____________.
1. Financial statements tell much about a borrower’s____________ to repay a loan,____________ but disclose little about the equally important to repay.
25. The lack of is what makes financial forecasting so____________ . When betting huge sums in the face of____________ , it is essential that investors understand as fully as they possibly can.
24. ____________Of the various types of analysis of financial statements, projecting and requires the greatest skill and produces____________ .
23. Radical financial restructurings such as ____________, ____________, and necessitate projections.
22. A____________ investor buying a 30-year bond is certainly interested in the issuer’s financial prospects beyond____________ . Similarly, a____________ substantial percentage of the present value of future dividends represented by a stock’s price lies .
21. The earnings shown in a merger-related pro forma income statement may be higher than the company can sustain because:____________a. The acquired company’s owners may be shrewdly selling out at top dollar, ____________anticipating a that is foreseeable by____________ , but not to the acquiring
20. Pro forma adjustments for a divestment do not capture the potential benefits ____________of increased on the company’s____________ .
19. A pro forma income statement for a single year provides no information about in sales and earnings of that is____________ being spun off.
18. It is unwise to base an investment decision on historical statements that antedate a major financial change such as:a.____________ b.____________ c.____________ d.____________
17. It is generally inappropriate to compare a item(EBITDA)____________ with a balance sheet figure,____________ especially in the case of a company.
16. Analysts are generally not arrogant enough to try to forecast the figures accurately to the first decimal place, that is, to the for a company with revenues in the____________ .
15. An interest rate decline will have limited impact on a company for which interest costs represent a____________ . The impact will be greater on a company with a large interest cost component and with much of its debt at____________ . This assumes the return on the company’s assets
14. A firm may have considerable room to cut in the short run if it suffers a decline in funds provided by . ____________A projection that ignored this could prove overly pessimistic.
13. Typically, the analyst must modify the underlying assumptions, ____________and therefore the projections, several times during the year as diverges from ____________.
12. A sizable might be presumed to be directed toward share____________ repurchase, reducing ,____________ if management has indicated a desire to and is by its board of directors.
11. Before assuming a constant-percentage relationship, the analyst must verify that____________ .
10. The completed income statement projection supplies____________ of the projected statement ____________of cash flows.
9. Accurately projecting interest ____________expense for companies is important____________ because may depend on the size of they must cover each quarter.
8. The key to the forecasting interest expense method employed here is to____________ estimate the firm’s embedded cost of debt, that is, the on the company’s ____________.
7. The R&D ____________percentage may change if, ____________for example, ____________the company in an industry that is either significantly more, or significantly less, than its existing operations.
6. Since the segment information____________may show only operating income, and not ____________, the analystmust add to operating income, then make assumptions about the allocation of____________ , and expense by segment.
5. The expected intensity of industry competition,____________ which affects a company’s on to customers or to retain____________ , influences the forecast.
4. Basic industries such as ,____________ , and____________ tend to lend themselves best to the described here. In technology-driven industries and “hits-driven” businesses such as and____________ , the connection between and the will tend to be looser.
3. Sales projections for the company’s business can be developed with the help of such sources as ,____________ , and firms that sell models.
2. The process of financial projections is an extension of and , based on assumptions about future,____________ , and____________ .
1. It is that determine the value of a company’s stock and____________ the____________ that determines credit quality.
30. Oddly, ____________the person who achieved the greatest renown for early recognition of the Parmalat’s house of cards was , but a ____________.
29. Another hazard signal emerged on February 26, 2003, when Parmalat suddenly canceled its plan____________ . The company said it would instead____________ , suggesting the market had less confidence in Parmalat’s than management had thought.
28. Merrill Lynch analysts downgraded Parmalat to SELL, saying that the company’s ,____________ while reporting , threw into question____________ .
27. A major red flag was Parmalat’s____________ , despite claiming to have a____________ .
26. Investors had little official warning of trouble until Parmalat’s collapse. As late as October 2003, Deutsche Bank’s equity research group rated the company’s stock , highlighting ____________, and Citibank put out report in November. Furthermore,____________ the company’s debt carried
25. In the view of experts in the field, internal checks and balances also broke down at HealthSouth.____________ The board’s audit committee met during 2001,____________ than the minimum recommended by the SEC.
24. The most dismaying aspect of the performance of HealthSouth’s auditor,____________ Ernst & Young LLP, was to challenge a in cash.
23. Compounding Scushy’s legal problems, federal prosecutors disclosed in July 2003 that they had uncovered evidence of:a.____________ b.____________ c.____________ d.____________ e.____________
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