Term
| What starts financial analysis? |
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Definition
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Term
| What determines a firm's profit potential? |
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Definition
| Industry choice, competitive positioning, business model/synergies |
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Term
| When does a competitive advantage exist? |
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Definition
| Firm earns or has potential to earn a persistently higher rate of profit or ROA |
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Term
| Two types of competitive advantages |
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Definition
| Cost advantage (cost leadership) or differentiation |
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Term
| Two examples of cost advantages |
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Definition
| Economies of scope, quality |
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Term
| Two examples of differentiation |
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Definition
| Marketing, complementary service |
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Term
| Value Chain Analysis can identify what 3 things? |
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Definition
| Company capabilities, opportunities, business model design |
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Term
| Name Porter's 5 (with the 6th) Forces |
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Definition
| SSERBC: Substitutes, Supplier Power, Entry, Rivalry, Buyer Power, Complements |
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Term
| What are the phases of the Product Life Cycle? |
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Definition
| Introduction, Growth, Maturity, Decline |
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Term
| How is the length of the product life cycle determined? |
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Definition
| Reinvestment frequency, payback period |
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Term
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Definition
| strengths, weaknesses, opportunities, threats |
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Term
| Business model analysis includes what 5 groups? |
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Definition
| CRIC: cost drivers, revenue, investment size, competitive advantages |
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Term
| What is a cross-sectional analysis, give example |
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Definition
| Analyzes multiple firms at single point in time. Can be common size statements |
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Term
| What is a time-series analysis, give example |
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Definition
| Same firm over time, like % change statements or base year trend statements |
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Term
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Definition
| ROA = (NI + (1-T)*Int expense)/Avg total assets |
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Term
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Definition
| ROA = profit margin * asset turnover |
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Term
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Definition
| [Net Income + (1-tax)*int expense]/sales |
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Term
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Definition
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Term
| What are the 5 levels of ROA |
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Definition
| COGS profit margin, SGA profit margin, A/R Turnover, Inventory Turnover, Fixed Asset Turnover |
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Term
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Definition
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Term
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Definition
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Term
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Definition
| (NET sales on account)/Avg A/R |
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Term
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Definition
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Term
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Definition
| Sales/Avg NET Fixed Assets |
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Term
| Three elements effecting ROA differences |
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Definition
| operating leverage, cyclicality of sales, stage/length of product life cycle |
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Term
| What is operating leverage? |
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Definition
| Means a higher proportions of fixed costs. More risk, in general. |
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Term
| What is cyclicity of sales? |
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Definition
| Sensitivty to economy and associated risk |
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Term
| What is the stage/length of product life cycle? |
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Definition
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Term
| How is the mix of profit margin and asset turnover decided? |
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Definition
| Microeconomic theory (competition and maximizing profit), business strategy (marketing and specifics), value chain analysis (higher ROA as you move down) |
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Term
| Above what level is ROA competitive? |
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Definition
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Term
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Definition
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Term
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Definition
| (NI - preferred stock dividends)/Avg C/S |
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Term
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Definition
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Term
| Most changes in ROCE come from changes in |
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Definition
| ROA, not capital structure |
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Term
| What is finanial leverage? |
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Definition
| using lower cost creditors to increase C/S return, i.e. via tax shield |
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Term
| When will C/S be better off with debt/financial leverage? |
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Definition
| if ROA>after tax cost of debt and preferred dividends |
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Term
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Definition
| liquiduity, solvency, credit, bankruptcy |
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Term
| Cash conversion cycle or Net trade cycle = |
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Definition
| days inventory held + days A/R outstanding days A/P outstanding |
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Term
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Definition
| days inventory held + days A/R outstanding |
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Term
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Definition
| current asses/current liabilities |
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Term
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Definition
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Term
| The quick ratio, which is (Cash + Mkt Securities + Receives)/Current liabilities, is different from the current ratio essentially because it |
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Definition
| doesn't include inventory |
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Term
| Five ratios that determine liquidity |
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Definition
| A/R, A/P, Inventory turnover, and current, quick ratios |
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Term
| Six ratios that determine solvency |
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Definition
| LT debt ratio, D/E ratio, Liabilities/Assets ratio, LT debt/tangible assets ratio, interest coverage ratio, operating cash flow coverage ratio |
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Term
| Generally, solvency is better when the ratios go up or down? |
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Definition
| DOWN for the debt ratios, UP for the coverage ratio |
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Term
| What are the two different types of interest coverage ratios? Why are they different? |
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Definition
| The normal one is EBIT/int expense, the other is CF.O.BIT/int expense. Essentially, instead of earnings, use cash flow. |
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Term
| What are the two different types of operating cash flow coverage ratios? why are they different? |
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Definition
| They differ on what they are try to cover. One covers debt, (CF from operations/avg debt), and the others covers CAPEX, (CF from operations/CAPEX) |
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Term
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Definition
| Circumstances, Cash flow, Collateral, Contingencies (lawsuits), character, conditions |
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Term
| What operating cash flow coverage for current debt is common for healthy firms? |
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Definition
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Term
| What operating cash flow coverage for total debt is common for healthy firms? |
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Definition
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Term
| What operating cash flow coverage for CAPEX means more sources of capital are needed for CAPEX? |
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Definition
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Term
| What is a type I error in bankrupcty? |
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Definition
| Allow survival but bankruptcy anyway, financial cost |
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Term
| What is a type II error in bankruptcy? |
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Definition
| Force bankrupcy but would have survived, opportunity cost |
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Term
| What model allows you to predict bankruptcy? |
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Definition
| Multivariate Bankruptcy Prediction Model Z-Score |
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Term
| What are the ranges for assuming bankruptcy? |
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Definition
| Below 1.81, high probability. Between 1.81 and 3, at risk. Above 3, little risk. I.E. further away from 0 is better. |
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Term
| First step in forecasting |
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Definition
| Sales & other revenue, perhaps based on CAGR |
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Term
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Definition
| Compound Annual Growth Rate |
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Term
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Definition
| (Current value/Base Value)^(1/n) - 1 |
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Term
| Second step in forecasting |
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Definition
| Operating expenses, usually % of sales or historical |
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Term
| Third step in forecasting |
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Definition
| Assets needed for revenue and operating expenses. Either as % of total assets prediction, or individually with cash or LT debt as the plug. Use turnover ratios for operating assets. |
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Term
| What is a sawtooth pattern? |
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Definition
| Large or small % change in asset in recent year. Use CAGR to fix |
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Term
| Fourth step in forecasting |
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Definition
| Liabilities & equity, again as either % based on total/common size, or project each with historical data or turnover ratios |
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Term
| Fifth step in forecasting |
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Definition
| Dependent expenses like taxes, interest, dividends, R/E. Apply the plug here. |
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Term
| Sixth step in forecasting |
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Definition
| CF statement, straightforward |
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Term
| Seventh step in forecasting |
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Definition
| Check for coherency, extreme ratios, sensitivity, operational support issues, financial feasibility issues |
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Term
| Eighth step in forecasting |
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Definition
| Start over if it doesn't make sense. |
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