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| __ using financial statements examines ST liquidity risks and LT solvency risks |
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| __ is the near-term ability to generate cash to service working capital needs and debt service requirements |
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| current ratio, quick (acid test) ratio, op CF to CLs, ARTO, InvTO, APTO, Op cycle |
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| 7 equations used for st liquidity risks |
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| (cash + mktable securites such as AFS + cash equiv 3 mo maturity or less + trade AR)/CL |
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| if InvTO is __: demand weak, inv obsolete, company anticipating increase in sales, prices are going up for inv. if InvTO is __: worry about stockouts |
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| if Time AR Outstanding is __: credit terms are too easy (earnings mgmt?), customers in trouble, firm doesn't chase debtors as they should |
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| if cash cycle eq is __: borrow money |
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| debt ratio, debt to equity ratio, debt to asset ratio, interest coverage ratio |
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| 4 equations for lt solvency risk |
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| (st + lt debt)/(st + lt debt + s.hold equity) |
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| (st + lt debt)/(s.hold equity) |
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| 1. reason for the loan 2. are CFs sufficient to repay the loan? 3. value of the collateral 4. Margin of safety for new debt 5. Contingencies whose outcomes may be negative 6. Character of management 7. Covenants |
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| 7 Factors for analyzing credit risk |
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| credit collection problems, financing inventories (e.g. seasonal busn), new construction (lt loan), development of new products (lt loan) |
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| 1. reason for the loan (affect riskiness of loan). 4 items |
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| growth in AR and inv exceed growth in sales? increases in AP exceed increases in inv? negative CF from ops? reductions in capital expenditures over time? shift from lt to st borrowing? reduction/elimination of div payments? |
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| 2. Are CFs sufficient to repay the loan? 7 questions |
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| high debt ratios = higher credit risk and lower unused capacity for debt. off BS obligations shouldn't be ignored (purchases commitments, op leases). assess interest coverage ratios including fixed rent payments. |
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| 4. Margin of safety for new debt. 3 bullets |
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| lawsuits, guarantees of subsidiary's debts |
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| 5. Contingencies whose outcomes may be negative. 2 items |
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| do they successfully weather problems and challenges? have they delivered on past projections? reputation for honesty |
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| 6. Character of mgmt. 3 items |
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| financial and non-financial |
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| __ are good if from ops, not as good if from sale of assets, issuing debt, or issuing stock |
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| a company with __ cash and __ debt can get through hard times |
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| competitive advantage, late credit sales (possibly channel stuffing), skews the ARTO |
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| low AR to sales may mean __. high AR to sales may indicate __. Selling receivables skews the __. |
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| 1. are earnings and inv on a corresponding rise? 2. there may be an increase in inv in anticipation of sales 3. increase in inv w/o corresponding rise in sales may mean obsolete inv or poor inv mgmt 4. LIFO v FIFO can cause problems in inv ratios. |
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| 1. High earnings power can easily cover current liabilities. A company can tap commercial paper for st needs. |
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| a current ratio less than _ may not be bad. why? |
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| internally rather than with debt |
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| companies should be able to finance new PP&E __ (especially important when products change rapidly). |
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| __ is financing developed by intangible assets not shown on the BS. A company's brand name may be its greatest asset. |
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| look at the amt of lt debt and when payments are due. does the company have sufficient yearly earnings to pay off all its debt within a few years? what ratio used for this? |
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| highly profitable companies w/ little debt may be the targets of __. |
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| debt/equity ratio should be __, by the ratio may be __ if the company buys T. Stock. |
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| issuing p. stock may be an expensive alternative to __. unlike interest, divs arent an expense. |
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| buying t. stock __ s.holder's equity and __ ROCE. is the high ROCE due to t. stock or successful operations? |
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| CF from ops - capital expenditures (PP&E expenditure) |
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| if earnings are __ than capital expenditures over the years, then debt may need to be issued (increasing interest payments) |
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| stock price x # outstanding shares |
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| stockholder's equity (net assets) |
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| mkt to book ratio. reflects earnings potential which may result in a market premium over book value. mkt premium may be for competitive advantage or unrecognized assets (brand name) |
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| __ ratio can be interpreted as the stock price premium for current and future eps. if this ratio is high it is usually associated with a high growth company that is expecte4d to generate substantial increases in EPS in the future. this ratio is an indicator of investor confidence in future earnings growth |
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| to incorporate growth P/E is divided by annual __ to yield the PEG ratio. PEG indicates whether a stock is over/undervalued |
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| Peg > 1: mkt price is __ relative to growth. PEG < 1: opposite |
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| __ is a measure of nondiversified (systematic) risk--the overall market risk. a stock that moves more slowly than the market has a Beta of __, considered less risky. |
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| div per share/stock price |
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| dividend yield eq. young growing companies tend to pay little if any cash divs. mature companies w/ limited growth prospects are likely to pay a substantial portion of earnings as divs. |
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| mkt cap + mkt val of debt, minority interest, and preferred shares - cash & cash equivs |
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| enterprise value eq. can be thought of as the theoretical takeover price |
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