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ACCT 447 - Exam 3
Finc Stmt Anal - 3rd Exam
51
Accounting
Undergraduate 4
11/17/2009

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Term
risk analysis
Definition
__ using financial statements examines ST liquidity risks and LT solvency risks
Term
st liquidity risks
Definition
__ is the near-term ability to generate cash to service working capital needs and debt service requirements
Term
current ratio, quick (acid test) ratio, op CF to CLs, ARTO, InvTO, APTO, Op cycle
Definition
7 equations used for st liquidity risks
Term
CA/CL
Definition
current ratio eq
Term
(cash + mktable securites such as AFS + cash equiv 3 mo maturity or less + trade AR)/CL
Definition
quick (acid test) ratio
Term
CF from ops/avg CL
Definition
op CF to CLs
Term
sales/avg trade AR
Definition
ARTO
Term
365/ARTO
Definition
days AR outstanding eq
Term
cogs/avg inv
Definition
InvTO
Term
365/InvTO
Definition
days Inv on hand
Term
low, high
Definition
if InvTO is __: demand weak, inv obsolete, company anticipating increase in sales, prices are going up for inv. if InvTO is __: worry about stockouts
Term
high
Definition
if Time AR Outstanding is __: credit terms are too easy (earnings mgmt?), customers in trouble, firm doesn't chase debtors as they should
Term
purchases/avg trade AP
Definition
APTO
Term
op cycle - (365/APTO)
Definition
cash cycle eq
Term
positive
Definition
if cash cycle eq is __: borrow money
Term
(365/ARTO)+(365/InvTO)
Definition
op cycle eq
Term
debt ratio, debt to equity ratio, debt to asset ratio, interest coverage ratio
Definition
4 equations for lt solvency risk
Term
(st + lt debt)/(st + lt debt + s.hold equity)
Definition
debt ratio
Term
(st + lt debt)/(s.hold equity)
Definition
debt to equity ratio
Term
(st+lt debt)/assets
Definition
debt to asset ratio
Term
(EBIT + int exp)/int exp
Definition
interest coverage ratio
Term
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
Definition
7 Factors for analyzing credit risk
Term
credit collection problems, financing inventories (e.g. seasonal busn), new construction (lt loan), development of new products (lt loan)
Definition
1. reason for the loan (affect riskiness of loan). 4 items
Term
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?
Definition
2. Are CFs sufficient to repay the loan? 7 questions
Term
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.
Definition
4. Margin of safety for new debt. 3 bullets
Term
lawsuits, guarantees of subsidiary's debts
Definition
5. Contingencies whose outcomes may be negative. 2 items
Term
do they successfully weather problems and challenges? have they delivered on past projections? reputation for honesty
Definition
6. Character of mgmt. 3 items
Term
financial and non-financial
Definition
7. Covenants. 2 types
Term
large amounts of cash
Definition
__ are good if from ops, not as good if from sale of assets, issuing debt, or issuing stock
Term
high, low
Definition
a company with __ cash and __ debt can get through hard times
Term
competitive advantage, late credit sales (possibly channel stuffing), skews the ARTO
Definition
low AR to sales may mean __. high AR to sales may indicate __. Selling receivables skews the __.
Term
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.
Definition
4 issues in inv
Term
1. High earnings power can easily cover current liabilities. A company can tap commercial paper for st needs.
Definition
a current ratio less than _ may not be bad. why?
Term
internally rather than with debt
Definition
companies should be able to finance new PP&E __ (especially important when products change rapidly).
Term
internal financing
Definition
__ is financing developed by intangible assets not shown on the BS. A company's brand name may be its greatest asset.
Term
income/LT debt
Definition
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?
Term
LBOs
Definition
highly profitable companies w/ little debt may be the targets of __.
Term
low, higher
Definition
debt/equity ratio should be __, by the ratio may be __ if the company buys T. Stock.
Term
debt`
Definition
issuing p. stock may be an expensive alternative to __. unlike interest, divs arent an expense.
Term
decreases, increases
Definition
buying t. stock __ s.holder's equity and __ ROCE. is the high ROCE due to t. stock or successful operations?
Term
CF from ops - capital expenditures (PP&E expenditure)
Definition
free cash flows
Term
less
Definition
if earnings are __ than capital expenditures over the years, then debt may need to be issued (increasing interest payments)
Term
stock price x # outstanding shares
Definition
mkt capitlization eq
Term
stockholder's equity (net assets)
Definition
book val
Term
mkt cap/bv
Definition
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)
Term
p/e
Definition
__ 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
Term
earnings growth rate
Definition
to incorporate growth P/E is divided by annual __ to yield the PEG ratio. PEG indicates whether a stock is over/undervalued
Term
high
Definition
Peg > 1: mkt price is __ relative to growth. PEG < 1: opposite
Term
beta. < 1
Definition
__ 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.
Term
div per share/stock price
Definition
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.
Term
mkt cap + mkt val of debt, minority interest, and preferred shares - cash & cash equivs
Definition
enterprise value eq. can be thought of as the theoretical takeover price
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