Financial Statement Analysis Chpt. 2: problems 2, 4, 6, 8, 10* (read appendices to chapter 2) *requires access to S&P Market Insight.

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Financial Statement Analysis Chpt. 2: problems 2, 4, 6, 8, 10* (read appendices to chapter 2) *requires access to S&P Market Insight

Corporation - definition “An artificial person or legal entity created by, or under the authority of, the laws of a state... The corporate is distinct from the individuals who comprise it.” (Black’s Law Dictionary) “An ingenious device for obtaining individual profit without individual responsibility” (Devil’s Dictionary)

Corporate Governance: separation of ownership and control Management Shareholders Board

Goals of Corporate Financial Management Maximize share price ?

Oracle

What drives the stock price (value)? –How do we use the information in financial statements? –Do accounting earnings correspond to real cash flows? –How can we better measure cash flow?

Review of financial statements I. Balance sheet The balance sheet identity Liquidity Market value vs. book value II. Income statement GAAP vs. cash flow timing Non-cash items III. Statement of cash flows Operating activity Investment activity Financing activity

Review of ratio analysis Solvency Current ratio = CA/CL Quick ratio = (CA-inventory)/CL Asset utilization (turnover) Total assets turnover = sales/TA Days’ sales in inventory = 365/(COGS/inventory) Leverage Debt to capital ratio ("debt financing ratio") = Debt/(debt+equity) Debt to equity ratio = debt/equity COVERAGE RATIO = EBIT/interest Profitability Profit margin = NI/S Return on assets: ROA = NI/TA Return on equity Roe = NI/E = profit margin x turnover x leverage

Sustainable growth model (Chapter 3 not assigned) g = b[ROE] where b = retention ratio = 1- payout ratio

Managing earnings GAAP vs. cash flow timing Revenue recognition Capitalize operating expenses (R&D) Write offs Reserves

GAAP Accounting

Free cash flow Definition: After tax operating cash flow minus reinvestment Operating CF = EBIT – taxes + noncash accounting charges = EBIT(1-T) + depreciation FCF = OCF - capital spending - working capital spending = OCF - capex - ΔNWC

FCF = pmts to creditors + FCFE Free cash flow to equity (FCFE) = cash left over after meeting all financial obligations including debt payments, and after providing for capex & NWC. FCFE = FCF - Interest(1-T) - principal repayments + new debt issues