Financial Statement Analysis Essay Sample

Technical analysis – survey of corporate market section. as expressed in buying/selling of assets to foretell future behavior * Based on the thought that monetary values are determined by supply and demand * Persons who trade affect the monetary values

* Better informed persons = bargain in larger volumes
* Key premise: efficient markets hypothesis does non keep – market monetary values reflect both rational and irrational behaviour * Uses portion monetary value and trading volume informations to project a mark monetary value * Not concerned with placing the grounds for trading. but merely what trades have occurred * Advantage: existent monetary value and volume informations is discernible. can be applied to the monetary values of assets that do non bring forth future hard currency flows ( dividends or involvement ) . such as trade goods. can be used when fraud occurs * Disadvantages: limited in markets where monetary value and volume informations might non truly reflect supply and demand ( e. g. illiquid markets and markets that can be manipulated ; currency market )

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Cardinal analysis – efforts to find the intrinsic value of an plus
* Uses fiscal statements
* Data used is capable to assumptions/restatements
* Require subjective judgement

Line Charts
* Simplest proficient analysis chart
* Monetary values of each period as a uninterrupted line

Bar Charts
* Display high/lows for each trading period
* Often include opening monetary value
* Each period displayed as a perpendicular line with
* Closing monetary value is dash on the right side of the line
* Opening monetary value is dash on the left side of the line

Candlestick Charts
* Same information as saloon charts. but there is a box around opening/close alternatively of a line ; box can be:
* Clear – shutting monetary value is higher than opening
* Filled in – shutting monetary value is lower than gap

Point and figure charts
* Useful in placing alterations in way of monetary value motions
* Drawn on graph paper ; monetary value is on y-axis
* Price increases chosen = box size for the chart
* Unique characteristic: x-axis represents alteration in way ( non unit of clip )

Volume charts – typically displayed below monetary value charts with each period’s volume shown as a perpendicular line

Relative strength analysis – to execute this. you need to cipher the ratios of an asset’s shutting monetary values to benchmark values and draws a line chart of the ratios * Increasing tendency surpassing benchmark ( positive comparative strength ) * Decreasing tendency underachieving the benchmark ( negative comparative strength ) Trendlines

* Identifies whether a tendency is continuing/reversing
* Breakdown/breakup can mean terminal of the old tendency
* Represent degree of support opposition
* Support degree – purchasing prevents farther monetary value lessening
* Resistance degree – selling prevents farther monetary value addition
* Breakdown/breakout tend to happen at of import monetary values or historical high/lows

Uptrend
* Monetary values are invariably making higher highs
* Monetary values are abjuring to higher depressions
* Demand is increasing comparative to provide
* Trendline connects increasing depressions in monetary value
* Breakdown – monetary value crosses uptrend by a important sum

Downtrend
* Monetary values are systematically worsening to take down depressions
* Monetary values are abjuring to take down highs
* Supply ( selling force per unit area ) increasing comparative to demand
* Trendline connects diminishing highs in monetary value
* Breakout – monetary value crosses downtrend by a important sum

Change in mutual opposition – belief that breached opposition degrees support degrees and breached support degrees opposition degrees

Reversal patterns for uptrends – when a tendency approaches a scope of monetary values but fails to go on beyond that scope * E. g. caput and shoulders pattern – demand that drives the uptrend slices. particularly if each of the highs occurs on diminishing volume * Indicates weakening in the purchasing force per unit area that has been driving uptrend * Uses size of caput and shoulders to project monetary value mark for resulting downtrend * Size = difference between caput ( highest monetary value reached ) and neckline ( back up degree to which the monetary value retracted after the left shoulder and caput have formed ) * E. g. Double ( or three-base hit ) top – similar to caput and shoulders pattern as it shows a decelerating down of the purchasing form driving the uptrend * Size of a double/triple top form can be used to project a monetary value mark for the following downtrend

Reversal patterns for downtrends
* E. g. opposite caput and shoulders. dual underside and ternary underside * Can be analyzed the same manner as the reversal patterns for uptrends

Continuance spiels – intermission in a tendency instead than a reversal Triangles –forms when monetary values reach lower highs and higher depressions over a period of clip * Buying/selling force per unit area have become approximately equal

* Do non connote a alteration in way of the tendency
* Size of the trigon can be used to put a monetary value mark. assumptive monetary value interruptions out of the trigon and the old tendency continues Rectangles – forms a scope between a support degree and a opposition degree * Suggests predominating tendency will restart and can be used to put a monetary value mark

Flags and crowns – rectangles and trigons that appear on short term monetary value charts

Price-Based Indexs
Traveling mean lines – the mean of the last n shutting monetary values * Used to smooth fluctuations in a chart of any clip series
* Often viewed as support/resistance degrees
* Makes alterations in tendencies easier to see
* Longer period = ST fluctuations removed from the line ; may obcrue alterations in a monetary value tendency
* Short term and long term periods can be used together
* Golden cross – ST crosses above LT ; signals uptrend “buy” * Dead cross – ST crosses below LT ; signals downtrend “sell”

Bollinger bands – constructed based on venereal disease. dev of shutting monetary values over the last n periods * Can pull high/low bands a figure of venereal disease. dev above and below the n-period moving mean * Bands travel off from one another when monetary value volatility increases * Bands move closer together when monetary value volatility decreases * Useful for bespeaking when monetary values are utmost by recent criterions on either high/low side * Monetary values at or above upper Bollinger set overbought market – one that is excessively high and likely to diminish in the close term * Monetary values at or below the lower Bollinger band oversold market – one that is excessively low and likely to increase in the close term * Possible scheme: bargain when at the lower set. sell at upper set * An illustration of contrarian scheme – buys when most bargainers are selling and sells when most bargainers are purchasing * Contrarians believe markets get overbought/oversold because investors buy/sell at the incorrect times. so it can be profitable to merchandise in the opposite way

Oscillators
* Group of tools proficient analysts use to place overbought/oversold markets * Based on market monetary values. but scaled so that they ‘oscillate’ around a given value or between two values * Extreme high values = overbought market

* Extreme low values = oversold market
* Can be used to place convergence or divergency of oscillator and market values * Convergence – oscillator shows same form as monetary values * Price tendency is likely to go on
* Divergence – oscillator shows different form than monetary values * Indicates possible alteration in the monetary value tendency

Examples of Oscillators
1. Rate of Change Oscillator ( ROC ) – besides known as a impulse oscillator * Difference between latest shutting monetary value and the shutting monetary value N periods earlier x 100 * Oscillates around 0
* Buy = oscillator alterations from negative to positive during uptrend * Sell = oscillator alterations from positive to negative during downtrend * IF they use the ratio of Current monetary value to the past monetary value in topographic point of the difference. ROC oscillates around 100

2. Relative strength index ( RSI )
* Based on ratio of entire monetary value additions to entire monetary value lessenings over a given period * Oscillates between 0-100
* High ( & gt ; 70 ) = overbought
* Low ( & lt ; 30 ) = oversold

3. Traveling mean convergence/divergence ( MACD )
* Drawn utilizing exponentially smoothed traveling norms. which place a greater weight on more recent observations * “MACD line” – difference between two exponentially smoothed traveling norms of the monetary value * “signal line” – exponentially smoothed traveling norm of the MACD line * oscillate around 0 ( non bounded )

* points where two lines cross = trading signals
* bargain = traversing line above smoother line
* sell = MACD line traversing below signal line

4. Stochastic Oscillator
* Calculated from latest shutting monetary value and highest & A ; lowest monetary values reached in a recent period * Sustainable uptrend monetary values tend to shut nearer to the recent high * Sustainable downtrend monetary values tend to shut nearer to the recent low * Bound by 0-100

* % K line difference between latest monetary value and recent low as a per centum of the difference between recent high and low * % D line 3 period norm of % K line

Non-Price-Based Indexs
* Technical indexs above assume investor sentiment is reflected in monetary value and volume informations * Analysts can besides look at indexs of investor sentiment and capital flows to derive insight into possible emerging tendencies * Sentiment indexs – can be used to spot the positions of possible purchasers & A ; Sellerss * Bullish – investors expect increasing monetary values

* Bearish – investors expect diminishing monetary values
* Can include sentiment polls – step investor sentiment straight. every bit good as steps that are based on market informations: * Put-call ratio – put volume divided by call volume * Highly high ratios = bearish sentiment ( oversold ) * Highly low ratios = bullish sentiment ( overbought ) * Volatility Index ( VIX ) – calculated by the Chicago Board Options Exchange * High values investors fear diminutions

* Largely interpret the VIX in a contrarian manner. sing a preponderantly bearish investor mentality as a bullish mark. and a preponderantly bullish investor mentality as a bearish mark * Margin debt

* Info available because agents are required to describe this information * Suggests aggressive purchasing and strong positive sentiment * Increases = aggressive purchasing by bullish border investors * As border investors reach their bounds of border recognition. their ability to purchase lessenings and can do monetary values to worsen * Margin debt is straight correlated with market monetary values * Besides a utile flow of financess ( see below ) index

* Increasing border debt = purchasing
* Decreasing border of debt = merchandising
* Short involvement ratio
* Suggests strong negative sentiment
* Shares sold short = strong negative sentiment
* Short involvement – figure of portions investors have borrowed and sold short * Must be reported by agents
* High short involvement ratio = expect stock monetary value to diminish and connote future purchasing demand when short Sellerss must return their borrowed portions * Analysts divided about how the ratio should be interpreted

Short involvement ratio = short involvement / mean day-to-day trading volume

Flow of financess
* Used to detect alterations in the supply of securities and the demand for them

1. Weaponries Index ( Short term trading index – TRIN )
* Measure of financess fluxing into advancing/declining stocks

TRIN = ( # progressing issues/ # worsening issues ) / ( volume progressing / volume worsening ) * TRIN = 1 ; fluxing flushing to advancing/declining stocks * TRIN & gt ; 1 ; bulk of volume is in worsening stocks

* TRIN & lt ; 1 ; volume is in progressing stocks

2. Margin Debt
* Increasing = purchasing
* Decreasing = merchandising

3. Common fund hard currency place
* Ratio of common financess hard currency: entire assets
* Uptrends = put hard currency rapidly because hard currency earns merely the hazard free rate of return and therefore lessenings fund returns * Downtrends = fund hard currency balances increase overall fund returns * Common fund hard currency places tend to:

* Increase when the market is falling
* Decrease when the market is lifting
* Contrarian index
* High common fund hard currency ratio = mkt monetary values likely to increase * Low common fund hard currency ratio = mkt monetary values reflect their purchases

4. New Equity Issuance ( IPO ) and Secondary Offers
* Add to provide of stocks
* Because issuers tend to sell new portions when stock P are high. additions in issue of new portions may frequently co-occur with market extremums

Cycle Time periods
* 4 twelvemonth presidential rhythms
* 10 twelvemonth decennial forms
* 54-year Kondratieff moving ridge
* Elliot moving ridge theory

Elliott Wave Theory
* Financial mkts can be described by interrelated rhythms * Upward = 5 moving ridges
* Downward = 3 moving ridges
* If prevalent tendency down. downward moves have 5 moving ridges and upward has 3 * Each moving ridge is composed of smaller moving ridges of the same general signifier * Size of moving ridges correspond with fibonacci Numberss ( 0. 1. 1. 2. 3. 5. 8… ) * Useful for gauging monetary value

* Converge to 0. 618 or 1. 618 as Numberss in the sequence get larger

Intermarket analysis – analysis of interrelatednesss among the market values of major plus categories ( i. e. stocks. bonds. trade goods. currencies. etc. ) * Relative strength ratios are utile for finding which are surpassing others

Bullish| Bearish|
* Margin debt outstanding| * Short involvement ratio * Put/call ratio for stock index|

Std dev = Bollinger sets
RSI ( comparative strength index ) = monetary value additions vs. decreases Stochastic oscillators = highest/lowest monetary values
MACD oscillators = exponentially smoothed norms ; current monetary values greater impact

Study Session 5 – Assigned Reading # 18 – Understanding Business Cycles

RECAPBusiness rhythm ( 4 phases )
1. Expansion – rGDP increasing
* Increasing end product. employment. ingestions. investing and rising prices 2. Peak – rGDP stops increasing. Begins diminishing
3. Recession ( contraction ) – rGDP diminishing
4. trough – rGDP stops diminishing and Begins increasing

Inventory-to-sales ratio
* enlargement extremum. stock list to gross revenues addition from buildup * trough

nucleus rising prices – removes volatile ( nutrient and energy ) goods from index

Deflation – negative growing
Disinflation – downward growing. but rising prices remains greater than zero Hyperinflation – extreme rising prices

laspeyres index – tends to be biased upward because it represents existent ingestion of base period * permutation prejudice
* quality betterment prejudice
* new goods prejudice

cut downing permutation prejudice
-use pasche index – current ingestion weights for basket of anterior and current basket of goods -fisher monetary value index – geometric mean of laspeyres and paasche index

| Business rhythm cause| Solution|
Neoclassical| Technology| Nothing – impermanent divergences from LR equilibrium| Keynes| Expectation of concern owners| “downward sticky” rewards can non increase short tally aggregate supply hence must utilize addition aggregative demand ( pecuniary or financial policy ) | New Keynes| Expectation of concern owners| “downward sticky” monetary values of productive inputs extra barriers therefore same| Monetarist | Inappropriate pecuniary decisionsExternal shocksInappropriate lessenings in money supply| Steady and predictable additions in MS| Austrian| Government intercession ( i. e. lessening involvement rates ) | n/a| New Classical| Real external shocksIntroduced RBC – existent economic variables| Applies public-service corporation theoryPolicy shapers should non seek to work out concern rhythms because they represent existent external shocks|

Cost-push rising prices vs. Demand-Pull rising prices
See diagram on page 161 and 162 in book 2
*Note* cost push GDP ab initio declines. but demand pull GDP ab initio increase

Study Session 11 – Assigned Reading # 36 – Capital Budgeting

Capital budgeting – procedure of placing and measuring capital undertakings ; where the CF to the house will be received during a period & gt ; 1 twelvemonth

Capital Budgeting Administrative stairss:
1. Idea coevals
* Generate good undertaking thoughts
* Can come from directors. divisions. employees. etc.
2. Analyzing undertaking proposals
* Make a hard currency flow prognosis for the proposals and analyze to measure its hereafter profitableness 3. Firm-wide budget
* So that you can prioritise so that the timing is aligned with the company’s strategic program 4. Monitoring determinations and carry oning a post-audit
* Compare consequences to jutting consequences and explains divergences

Capital Budgeting Process’s 5 Key Principles
1. Decisions are based on CF. non accounting income
* Relevant CF to see are incremental hard currency flows – the CF that will happen if the undertaking is taken * Sunk costs should non impact the capital budgeting determination * Externalities – the effects the credence of a undertaking may be hold on other firm’s hard currency flows within other sections * E. g. cannibalism – new gross revenues take from bing gross revenues * E. g. positive outwardness – when taking on a undertaking has a positive consequence on another company section * Conventional CF form – one mark alteration in the series of CF * Unconventional CF form – more than one mark alteration in the series of CF 2. Cash flows are based on chance costs

* Opportunity costs – CF that a house will lose by set abouting the undertaking under analysis * These are CF generated by an plus that the house already owns that would be gone if the house undertakes the undertaking in inquiry 3. Timing of hard currency flows

4. Cash flows are analyzed on an after-tax footing
5. Financing costs are reflected in the project’s required rate of return * Do non see funding costs specific to the undertaking when gauging incremental hard currency flows ; price reduction rate used in the capital budgeting analysts already takes into history the firm’s cost of capital

Independent undertakings – undertakings that are unrelated to each other. can be evaluated individually and can both be accepted Mutually sole undertakings – merely one undertaking can be selected. non more than one out of the group Internal Rate of Return ( IRR ) – price reduction rate that makes the present value of the expected incremental after-tax hard currency influxs equal to the initial cost of the undertaking * PV inflow = PV outflow

IRR determination regulation:
If IRR & gt ; cost of capital ( i. e. required rate of return ) accept the undertaking If IRR & lt ; cost of capital ( i. e. required rate of return ) reject the undertaking

Payback period ( PBP ) – figure of old ages it takes to retrieve the initial cost of an investing * Measure of liquidness
* Disadvantages: does non take into history TVM or payments beyond the payback period. which means the terminal/salvage value is non considered * Payback period is useless as a step of profitableness

Discounted payback period – uses the present values of the project’s estimated CF to cipher the sum of clip it takes a undertaking to retrieve its initial investing

Discounted payback period & gt ; payback period ( without price reduction ) due to TVM

Profitability index ( PI ) – present value of a project’s hereafter hard currency flows / initial hard currency spending: PI = PV / Co = ( 1 ) + ( PV/Co ) = 1+ ( NPV/Co ) = ( Co+PV ) / ( Co )

* If PI & gt ; 0: accept the undertaking ( & gt ; 0 signifies that NPV is positive ) * IRR & gt ; cost of capital
* If PI & lt ; 0: reject the undertaking ( & lt ; 0 signifies NPV is negative ) * IRR & lt ; cost of capital

NPV Profiles – graph that shows a project’s NPV for different price reduction rates * X intercept = IRR
* Crossover rate – rate where NPV A = NPV B
* If greater hard currency flows come tardily in a project’s life. the price reduction rate falls faster ab initio until the crossing over point

| Advantages| Disadvantages|
NPV| * Direct step of the expected addition in the value of the house * Theoretically the best method| * Does non see the size of the undertaking ( comparative size of the input – e. g. what is NPV is 1 for Co = $ 200| IRR| * Measures profitableness as a per centum. demoing the return on each dollar invested * We can state how much below the IRR ( estimated return ) the existent undertaking could fall before we reach a negative NPV| * For reciprocally sole undertakings. can consequences can differ from what NPV indicates * Undertakings can hold multiple IRRs or no IRRs|

Capital budgeting considerations:
1. Location – EU use payback more or equal to NPV. IRR methods 2. Size – larger = more likely to utilize price reduction methods like NPV. IRR 3. Public V. Private – private = payback. public – NPV. IRR 4. Management instruction – higher instruction will utilize NPV. IRR

Relationships between NPV and stock monetary value
* Positive NPV will do an addition in stock monetary value

Study Session 11 – Assigned Reading # 37 – Cost of Capital * Taxes affect the cost of debt. but non the cost of preferred/common portions * Because the corporate rate on debt is revenue enhancement deductible * A company increases its value and creates wealth for its stockholders by gaining more on its investings in assets than what is required by those who provide the capital for the house * Upward inclining MC of capital curve

* Downward inclining investing chance agenda
* Optimal capital budget – where the MC of capital curve intersects the investing chance agenda * Wacc is the appropriate price reduction rate for undertakings that have the same degree of hazard * Higher hazard higher wacc

* Lower hazard lower wacc
* Another premise is that the capital construction will remain the same

Cost of debt = market involvement rate ( YM ) or new ( fringy ) debt. non the voucher rate on the firm’s bing debt| Cost of debt * ( 1-t ) | Cost or preferable stock | Preferred dividends / mkt monetary value of preferable stock| Cost of equity capital ( common stock ) There are 3 ways to happen this| 1. CAPM: K = releasing factor +? ( E ( rmkt ) – releasing factor ) Or2. dividend price reduction model*Rearrange: Price = dividend ( 1+g ) / ( cost of equity capital – growing rate ) Or3. Bond output plus hazard premiumCost of equity capital = bond output + hazard premium| * for other inquiries refering to cost of equity. you do non necessitate to cipher Div1. Merely when they specify the dividend price reduction theoretical account do you necessitate to utilize Div1 in the numerator.

g = ( ROE ) ( 1-payout rate )
g = ( ROE ) ( keeping )

Undertaking beta – step of its systemic ( i. e. market ) hazard
* We can utilize beta to gauge its needed return on equity * We can besides utilize beta to set for differences between a specific project’s hazard and the mean hazard of a firm’s undertakings

Pure-play method – a method to happen a project’s beta that involves happening the beta of a company or group of companies that are strictly engaged in a concern similar to that of the undertakings and are hence comparable * Greater debt funding = higher beta for the house

* Be careful because the undertaking beta calculated utilizing the pure-play method is non needfully related in a predictable manner to the beta of the house that is executing the undertaking

UNLEVERING/LEVERING BETA – PAGE 44

Problems with gauging beta of a comparable company equity 1. beta is estimated utilizing historical returns informations ( sensitive to the clip used and frequence ) 2. affected by the index chosen to stand for the market return 3. betas are believed to return to 1 over clip ; need to set for this 4. estimations of beta of little cap houses may necessitate to be adjusted upward to reflect hazard inherent in little houses that is non captured by the usual appraisal methods

Disadvantages of the CAPM theoretical account
* does non take into consideration state hazard premium ( CRP ) – the hazard associated with puting in a underdeveloped state * general hazard of the underdeveloped state is represented in its autonomous output spread

CRP = autonomous output spread * ( annualized venereal disease. dev of equity index of developing state / annualized venereal disease. dev of soverign bond mkt in term so fhte developed mkt currency )

Soverign yield dispersed = bond output – t-bill output

CAPM now becomes = releasing factor + ? ( E ( rmkt ) – rf + CRP )

Break points – points where the constituents of a company’s WACC alterations Break point = sum of capital at which the component’s WACC alterations / weight of the constituent in the capital construction

Flotation costs – fees charged by investing bankers when a company raises external equity capital * you need to take into history the capital construction ( specifically the propotion of equity that the house has ) to cipher the floatation sum. E. g. if a proect requires 180K and finances the undertaking with 60 % equity 40 % debt and the flotation cost for equity is 4 % . the floatation costs will be: ( 0. 60 ) ( 180. 000 ) ( 0. 04 ) = 4. 320 * callback that the initial spending is negative. and so is the floatation cost. so: CF0 = – ( initial spending + flotation cost ) negative of the amounts

* ( risk free rate ) ? ( WACC ) ? ( 1/tax rate )

Study Session 11 – Assigned Reading # 38 – Measures of Leverage Leverage – the sum of fixed costs a house has
Business hazard – hazard associated with a firm’s runing income and the consequence of uncertainness about a firm’s grosss and the outgos necessary to bring forth those grosss Business hazard = gross revenues hazard + operating hazard

Gross saless risk – uncertainness about a firm’s gross revenues
Operating hazard – extra uncertainness about operating net incomes caused by fixed operating costs ( greater FC: VC proportion = greater hazard ) Financial hazard – extra hazard that the equity holders bear when a house uses fixed cost ( debt ) funding * when a house introduces debt. it takes on fixed disbursals in the signifier on involvement payments

When a house takes on more debt. they:
1. Increase ROE
2. Increase the rate of alteration for ROE

Degree of operating purchase ( DOL ) – per centum alteration in runing income ( EBIT ) that consequences from a given per centum alteration in gross revenues DOL = per centum alteration in EBIT / per centum alteration in Gross saless DOL = Q ( P – VC ) / Q ( P-VC ) – FC

DOL = Gross saless – TVC / Gross saless – TVC – FC
* DOL depends on the degree of gross revenues

Degree of fiscal purchase – per centum alteration in net income ( EPS ) to the per centum alteration in EBIT DFL = per centum alteration in EPS / per centum alteration in EBIT
DFL = EBIT / ( EBIT – involvement )
* Use of FL additions hazard and possible wages to common stockholders

* If non FC. Operating purchase = 1
* If no involvement cost. fiscal purchase = 1

Degree of entire purchase ( DTL ) – combines the grade of operating purchase and fiscal purchase * Measures the sensitiveness of EPS ( net income ) to a alteration in gross revenues

DTL = DFL * DOL

Why is ROE larger when a house takes on debt?
When a house takes on debt. they incur a fixed involvement disbursal that is proportionate the to the sum of debt that they take on. While this decreases net income. the lower net income value is spread over a much smaller figure of shareholder’s equity. thereby amplifying ROE.

Breakeven measure of gross revenues – measure of gross revenues where gross = sum costs. so that NI = 0

Contribution border = Sales/unit – VC/unit

QBE = TC / ( sales/unit – VC/unit )
= ( fixed runing cost + fixed funding cost ) / ( sales/unit – VC/unit )

Operating breakeven measure of gross revenues – where merely fixed operating costs ( disregard fixed funding costs )

QOBE = fixed runing cost / ( unit monetary value – unit VC )

Important FormulasDegree of operating purchase = EBIT / gross revenues = Q ( Punit-UVC ) / [ Q ( Punit-UVC ) – TFCDegree of fiscal purchase = Net income ( or gross revenues ) / EBIT=EBIT / ( EBIT-interest exp ) Degree of entire purchase = DOL * DFLROE: EBIT-interest = B*rB=EBT-Taxes = EBT*tax rate=NI = EBT * ( 1-tax rate ) Equity amountROE = NI/Equity|

Study Session 11 – Assigned Reading # 39 – Dividends and Share Repurchases

Cash dividends – repayable to stockholders in hard currency ; has 3 signifiers 1. Regular dividends – company pays out net incomes consistent to a agenda 2. Particular dividends/extra dividend/irregular dividend – when favourable fortunes allow the house to do erstwhile hard currency payments to stockholders in add-on to regular dividends 3. Neutralizing dividends – when a company goes out of concern and distributes the returns to stockholders * These are treated as a return of capital and sums over what the investor is allowed is treated as a capital addition

* After a dividend is issued. the stock monetary value should drop by the sum of the dividend

Stock dividends – paid out in new stock. instead than hard currency
* Since there are more portion outstanding. the value of each portion is less * Ex. A 20 % stock dividend 1 old stock = 1. 2 new stock

Stock split – divide bing portions into multiple portions ; increase stock figure. but does non increase stockholder value because stock monetary value and EPS are adjusted proportionately * More portions
* Stock monetary value falls ( because value is split between more portions ) * No alteration in owner’s wealth
* Ex. 3 to 1 stock split 1 old portion = 3 new portions
* Stock monetary values tend to lift after a stock split or stock dividend * Increase because they are perceived as a positive mark from direction about future net incomes * If a study of good net incomes does non follow a stock split/stock dividend. monetary values tend to return to original degrees * Stock splits and dividends cut down liquidness due to higher per centum of securities firm fees on lower priced stocks

Reverse stock splits – contrary of stock splits ; consequences in fewer portion O/S. but a higher stock monetary value ; stockholder wealth is unchanged because although there are less # portions o/s. there is a higher stock monetary value * Companies can make this because investors typically consider a stock monetary value & lt ; $ 5/share less than investing class * Company within fiscal distress state of affairss whose stock has fallen dramatically may declare a contrary stock split to increase the stock monetary value

Effectss on fiscal ratios
Cash dividends lessening in assets ( hard currency ) and lessening is shareholder’s equity ( retained net incomes ) * Decrease hard currency lessening liquidness ratio
( i. e. debt-to-asset ) * Decrease in maintained net incomes lessening debt-to-equity ratio

Stock dividends. stock splits. and rearward stock splits have no consequence on a company’s purchase or liquidness ratios. as they do non alter the value of a company’s assets or shareholder’s equity. but merely changes the figure of portion o/s

A B = ( C -2days ) C D

A declaration day of the month – board of managers approve the dividend

**to receive the dividend. an single must purchase the stock C -3 yearss

B ex-dividend day of the month – foremost twenty-four hours a portion of stock trades without the dividend ; stock monetary values should fall the sum of the dividend. but in actuality. the monetary value may be closer to the after-tax value of the dividend * Cutoff day of the month for having the dividend and occurs 2 yearss before the holder-of-record day of the month * If you buy the portion on ( or after ) the ex-dividend day of the month. you will non have the dividend

C holder-of-record day of the month – day of the month where the stockholders of record are designated to have the dividend
D payment day of the month – dividend cheques are mailed out/electronically transferred

Share repurchase – dealing in which a company buys back portions of its ain common stock ; can be done in 3 ways: 1. Buy in the unfastened market – purchase at the predominating market monetary value * Authorized by board of managers for a certain figure of portions * Gives the company flexibleness in the timing of purchase 2. Buy a fixed figure of portions at a fixed monetary value – doing a stamp offer to buy back a specific figure of portions at a premium to the current monetary value 3. Repurchase by direct dialogue – negotiate straight with a big stockholder to purchase back a block of portions. normally at a premium to the market monetary value * Results in an addition in wealth for the marketer. and an equal lessening in wealth for the staying house stockholders

* Share repurchase addition in EPS
* Share redemption by company financess cut down involvement income and net incomes * Share repurchase with borrowed financess increase involvement costs. which will cut down net incomes straight by the after revenue enhancement cost of involvement ; relativity of lessening in net incomes and the figure of portions repurchased will find the consequence of an addition or lessening in EPS * If after-tax cost of borrowed financess & gt ; net incomes output. EPS will fall * If after-tax cost of borrowed financess & lt ; net incomes output. EPS will increase

Net incomes per portion with borrowed debt
= [ entire net incomes ( without debt ) – after revenue enhancement cost of financess ] / [ entire portions after redemption ]

Share redemptions and their impact on the book value of a portion of stock * If BVPS & gt ; repurchase monetary value BVPS addition
* If BVPS & lt ; repurchase monetary value BVPS lessening

Study Session 11 – Assigned Reading # 40 – Working Capital Management

Primary beginnings of liquidity| Secondary beginnings of liquidity| * Cash from daily activities * Short-run investings ( trade credits from sellers. line of recognition from Bankss ) * Improbable to alter the company’s normal operations| * Neutralizing ST/LT assets. negociating debt understandings. registering for bankruptcy. reorganising the company * Will probably change the company’s fiscal construction & A ; operations|

* A company’s liquidness improves when hard currency flows in more rapidly and flows out more easy * Factors that weaken a company’s liquidness are called retarding forces and pulls on liquidness * Drags on liquidness – delay/reduce hard currency influxs. or increase adoption costs * e. g. ungathered AR. dad debt. disused stock list ( longer to sell/sharp price reductions ) . tight ST recognition due to economic conditions * Pulls on liquidness – accelerate hard currency escapes

* e. g. paying sellers earlier than what is optimum. alterations in recognition footings that require refund of outstanding balances * Some company’s have weak liquidness places. due to factors that affect the company/industry

Measures of Liquidity
Current Ratio= CA/CL| * Best known step of liquidness * If & lt ; 1. company has negative working capital and is likely confronting a liquidness crisis| Working capital ratio=CA-CL

Quick Ratio ( or acid test ratio ) = ( cash+ST marketable securities + receivables ) / ( CL ) | * More rigorous step of liquidness because it does non include stock list and other assets that aren’t as liquid| Receivables turnover= recognition gross revenues / mean receivables| * Desirable = near to industry norm| Number of yearss of receivables ( mean aggregation period or mean days’ gross revenues outstanding ) = 365/receivables turnover=average receivables/average day’s recognition sales| * Desirable = near to industry norm * Collection period excessively high = clients slow in paying measures ; excessively much capital is tied up in assets * Collection period excessively low = firm’s recognition policy is excessively strict. which may be haltering sales| Inventory turnover= COGS/average inventory|

* Measures a firm’s efficiency with processing and stock list management| Average stock list processing period ( or figure of yearss of stock list ) = 365/inventory turnover= mean inventory/average day’s COGS| * Desirable = near to industry norm * Too high = excessively much capital tied up in stock list ; could indicate that stock list is disused * Too low = house has unequal stock on manus. which could ache sales| Payables turnover ratio = purchases / mean trade payables| | Payables payment period ( or figure of yearss payables ) = 365/payables turnover= mean payables / mean day’s payables| * Average sum of clip it takes the company to pay its bills|

Operating rhythm – mean # of yearss it take to turn natural stuffs into hard currency returns from gross revenues Operating rhythm = yearss of stock list + yearss of receivables

Cash transition rhythm ( aka cyberspace runing rhythm ) – clip it takes to turn the firm’s hard currency investing back into hard currency. in the signifier of aggregations from the gross revenues of that stock list Cash transition rhythm = ( avg. yearss of receivables ) + ( avg. yearss of stock list ) – ( mean yearss of payables ) * High hard currency transition rhythms = unwanted

* Implies an inordinate sum of investing in working capital

Short-run securities that can gain involvement
* T-bills. ST Federal. bureau securities. bank certifications of sedimentation. banker’s credences. clip sedimentations. redemption understandings. commercial paper. money market common financess. adjustable-rate preferable stock

* Adjustable-rate preferable stock has a dividend rate that is reset quarterly to current market outputs and offers corporate holders a revenue enhancement advantage because a per centum of the dividends received are exempt from federal revenue enhancement * ST adoption ( from Bankss or from publishing commercial paper ) is besides used to pull off day-to-day hard currency places

% Discount = ( face value – monetary value ) / ( face value )

Discount footing output = [ ( face value – monetary value ) / ( face value ) ] * ( 360/days to adulthood ) = % price reduction * ( 360/days to adulthood )

Keeping period output = ( face value – monetary value ) / ( monetary value )

Money market output = [ ( face value – monetary value ) / ( monetary value ) ] * ( 360/days to adulthood ) =Holding period output * ( 360/days to adulthood )

Chemical bond tantamount output = [ ( face value – monetary value ) / ( monetary value ) ] * ( 365/days to adulthood ) =HPY * ( 365/days to adulthood )

% discount| Holding period yield|
= ( face value – monetary value ) / ( face value ) | ( face value – monetary value ) / ( monetary value ) | Deviations: 1. Discount footing output = x ( 360/days to adulthood ) | Deviations: 1. Money market output = x ( 360/days to adulthood ) 2. Bond tantamount output = x ( 365/days to adulthood ) |

* “2/10 net 60” term = if the house pays within 10 yearss. it will acquire a 2 % price reduction. otherwise. the net sum is due in 60 yearss from the bill

If the company does non take the price reduction. what is the cost involved? Cost of trade recognition = [ 1+ ( ( % discount/ ( 1 – % price reduction ) ^ ( 365/days by price reduction ) ] – 1

Beginnings of short term support from Bankss
1. Line of Credit
Uncommitted line of recognition – extends an offer of recognition for a certain sum but may decline to impart if the fortunes alteration Committed ( regular ) line of recognition – charges a fee. typically term is less than a twelvemonth. involvement rates are in footings of ST mention rates ( LIBOR or the US premier rate + border ) Revolving line of recognition – for longer footings ( can be twelvemonth ) ; most unafraid Bankers credences – used by houses that export goods ; warrant from the bank that that the goods will be paid for upon reception of the goods – the exporting company can sell this credence at a price reduction to bring forth immediate financess Factoring – existent sale of receivables at a price reduction from the face value ; monetary value depends on how long it is until the receivables are due. the creditworthiness of the firm’s recognition clients. and the firm’s aggregation history 2. Non-bank beginnings of ST funding

Finance companies – typically used by smaller houses with hapless recognition ; cost of support is higher than other beginnings. typically used by houses that are unable to acquire ST support from the bank Commercial paper – issued from big responsible companies ; involvement costs are less than the rate they get from the bank

Study Session 11 – Assigned Reading # 41 – Financial Statement Analysis Proforma BS/IS – frontward looking statements that are constructed based on premises * Menachem begins by placing a driver of income and balance sheet points

Constructing sales-driven pro forma Degree fahrenheit:
1. Estimate relationship b/w alterations in gross revenues and alterations in sales-driven income statement and balance sheet points 2. Estimate future revenue enhancement rate. involvement rates on debt. rental payments. etc. 3. Forecast gross revenues for the period of involvement

4. Estimate fixed operating costs and fixed fiscal costs 5. Integrate estimations into pro-forma statements

Estimating gross revenues
* One attack: calculate mean compound growing rate of gross revenues over a 5 or 10-year period ; utilize the deliberate growing rate for the pro forma * More complex method – arrested development analysis to gauge the relationship between GDP growing and growing in house gross revenues * Surplus = ( L+OE ) – A

* We can utilize this to pay off debt

Study Session 11 – Assigned Reading # 42 – The Corporate Governance of Listed Companies: A Manual for Investors

Corporate administration – set of internal controls. procedures. and processs by which houses are managed * Defines rights. functions. duties of direction. board of managers. stockholders

Good corporate administration seeks:
* Board of managers protects stockholder involvement
* Firm acts legitimately and ethically in traffics with stockholders * Rights of stockholders are protected and that they have a voice in administration * Board acts independently from direction

* Proper processs and controls cover management’s daily operations * Firm’s fiscal. operating. and administration activities are reported to stockholders in a just. accurate. and timely mode

Study Session 13 – Assigned Reading # 47 – Market Organization Structure

Functions of the fiscal system
1. Let entities to save/borrow money. raise equity capital. manage hazards. trade assets presently or in the hereafter. and trade based on their estimations of plus values 2. Determine the returns ( i. e. involvement rates ) that equate the entire supply of nest eggs with the entire demand for borrowing 3. Allocate capital to its most efficient utilizations

* Best at carry throughing the functions when the markets are liquid. dealing costs are low. information is readily available. and when ordinance ensures the executing of contracts *

Financial Statement Analysis Essay Sample

Financial Statement Analysis Essay Sample

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