Financial Analysis Concepts
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Questions and Answers

Should the company invest in the project, given the information provided?

  • The company should not invest because their return on capital is/will be lower than their cost of capital
  • The company should invest because their cost of capital is/will be lower than their return on the project (correct)
  • The company should invest because their return on capital is/will be lower than their cost of capital
  • The company should not invest because their cost of capital is/will be lower than their return on the project

    • Which industry is least likely to increase prices without experiencing a change in demand?

  • Agriculture or wheat and corn
  • Technology product manufacturers
  • Duopoly software developers (correct)
  • Regulated monopoly utility

    • What is the expected impact on DEF's stock price due to a conflict affecting oil supplies?

  • Any shortfall can be met by solar energy and wind farms.
  • There’s no positive or negative impact because natural gas can only be transported through underground pipes.
  • Global warming will neutralize the impact.
  • DEF prices will rise because worldwide supplies will fall. (correct)

    • In a cyclical industry, what valuation method is most appropriate during the full economic cycle?

    <p>P/normalized earnings</p> Signup and view all the answers

    Given a 40% incremental margin, what is the expected EBIT next year if revenue is projected to be $600?

    <p>120</p> Signup and view all the answers

    What happens to the valuation of a cyclical company that is currently being valued on P/E?

    <p>Valuation should also consider macroeconomic conditions.</p> Signup and view all the answers

    What is the terminal cash flow or enterprise value of the firm?

    <p>1.25 billion</p> Signup and view all the answers

    Which variable cost per widget is specified in the information provided?

    <p>$0.45/unit</p> Signup and view all the answers

    What will likely happen to gross margin following a 4.5% sales growth and an 11% inventory growth?

    <p>Gross margin will fall</p> Signup and view all the answers

    Which sector likely experienced the least impact during the pandemic?

    <p>Travel and lodging</p> Signup and view all the answers

    Where can interest expense be typically found during the building phase of a facility financed through debt?

    <p>Cash from investments</p> Signup and view all the answers

    Which location will be negatively impacted by the devaluation of the dollar?

    <p>US global locations for airlines</p> Signup and view all the answers

    Which statement best describes the relationship between interest rate risks and earnings per share (EPS) for banks?

    <p>Positive impact for banks</p> Signup and view all the answers

    In a cyclical company being valued on a P/E ratio, which additional valuation method should be considered?

    <p>EV/EBITDA</p> Signup and view all the answers

    When calculating tangible book value, which of the following is excluded?

    <p>Patents and other acquired intangibles</p> Signup and view all the answers

    If a beverage brand increases its prices and unit sales among older customers decrease, which elasticity applies?

    <p>Over 50 inelastic, under 50 elastic</p> Signup and view all the answers

    Which factor contributes to greater earnings leverage with rising GDP?

    <p>Computer manufacturers</p> Signup and view all the answers

    In the context of dilution, which factor would NOT contribute to it?

    <p>Share repurchase</p> Signup and view all the answers

    Which measure is NOT typically considered a leading economic indicator?

    <p>Stock market performance</p> Signup and view all the answers

    What happens to a company's debt-to-equity ratio if it starts recovering from a distressed level with positive net income growth?

    <p>D/E ratio improves towards pre-distress levels</p> Signup and view all the answers

    When calculating FCFF, which items are typically considered?

    <p>Net income, depreciation, and change in working capital</p> Signup and view all the answers

    Which valuation method is most appropriate for a company with low Capex, low depreciation, and no debt?

    <p>EV/Rev</p> Signup and view all the answers

    Which of the following factors would have the least impact on an unlevered DCF analysis?

    <p>Interest expense</p> Signup and view all the answers

    What distinguishes GAAP from non-GAAP in financial reporting?

    <p>Depreciation can be higher under GAAP</p> Signup and view all the answers

    Which asset type is amortized as a periodic expense on the income statement?

    <p>Software development costs</p> Signup and view all the answers

    What is the impact of using accelerated depreciation on reported earnings?

    <p>Earnings will be understated</p> Signup and view all the answers

    How does inflation impact profitability in the consumer staples sector in the short-term?

    <p>Short-term positive, but long-term neutral</p> Signup and view all the answers

    What should normalized earnings consider?

    <p>Cyclical peaks and troughs OR a 10-year average</p> Signup and view all the answers

    In a recession, which indicator suggests economic growth?

    <p>Increased consumer confidence</p> Signup and view all the answers

    Which company description is characterized by a PE ratio significantly lower than the historical average?

    <p>Cyclical company with great variability in earnings</p> Signup and view all the answers

    Which factor primarily constitutes financial leverage?

    <p>Claims creditors have over shareholders</p> Signup and view all the answers

    What is the best definition of enterprise value (EV)?

    <p>The sum of net debt and market capitalization</p> Signup and view all the answers

    Which of the following best explains how a company can return cash to its shareholders?

    <p>Cash dividends and stock buybacks</p> Signup and view all the answers

    What would be the likely market characteristic of a stock with a relative PE of 0.6 to 1.9, and why?

    <p>Cyclical company at the bottom of its earnings cycle</p> Signup and view all the answers

    Which formula gives the 'percentage of earnings'?

    <p>Net income - dividends/net income</p> Signup and view all the answers

    What happens to the prices of widgets in the short term and long term when Company Y increases spending on facilities?

    <p>Both prices will increase in the long term</p> Signup and view all the answers

    Which ratio indicates how effectively a company uses its assets to generate sales?

    <p>Asset turnover</p> Signup and view all the answers

    Which factor is MOST important in determining the long-term value of an M&A acquisition?

    <p>Increase in return on invested capital</p> Signup and view all the answers

    Which financial metric would likely decrease as a result of issuing stock to pay off debt?

    <p>Return on equity</p> Signup and view all the answers

    What is the likely impact on earnings if a company accelerates depreciation on a long-lived asset?

    <p>Earnings will be understated immediately</p> Signup and view all the answers

    Which of the following implies an increase in a company's operational efficiency?

    <p>Increase in accounts receivable turnover</p> Signup and view all the answers

    What effect would a decrease in working capital generally have on a company?

    <p>Increase in asset turnover</p> Signup and view all the answers

    If consumer staples experience inflation, what happens to earnings short term and long term?

    <p>Both short term and long term earnings increase</p> Signup and view all the answers

    What is the effect of a company having a dividend payout ratio of 50% with a net income of $20 MM?

    <p>All of the above</p> Signup and view all the answers

    In the context of a company repurchasing shares, what is the likely outcome for ROE?

    <p>ROE increases and book value per share decreases</p> Signup and view all the answers

    What would happen to a company's WACC if it pays off debt by issuing stock?

    <p>WACC increases</p> Signup and view all the answers

    Why would an analyst be concerned about a positive litigation settlement for a company?

    <p>Uncertain implications of the litigation</p> Signup and view all the answers

    How is the beta of a firm calculated with respect to its cost of equity?

    <p>Using risk-free rate and expected market return</p> Signup and view all the answers

    Which of the following provides the BEST explanation for increased EPS estimates?

    <p>Switching from LIFO to FIFO during inflation</p> Signup and view all the answers

    What is the effect of a highly leveraged company when interest rates increase?

    <p>Diminished profit margins</p> Signup and view all the answers

    Which of the following actions will likely result in an increase in the company’s return on capital?

    <p>Reducing short-term debt</p> Signup and view all the answers

    What is the relationship between net profit margin and sales?

    <p>Higher sales can impact net profit margin positively</p> Signup and view all the answers

    What would a research analyst prioritize to understand an industry's barriers to entry?

    <p>Discussions with industry participants</p> Signup and view all the answers

    Which impact does a high percentage of fixed costs have on a company's margins when sales increase?

    <p>Margins increase faster</p> Signup and view all the answers

    Which financial metric measures the proportion of income generated from sales?

    <p>Net profit margin</p> Signup and view all the answers

    How will retiring half of a company's debt affect its unlevered Free Cash Flow?

    <p>Unlevered FCF remains unchanged</p> Signup and view all the answers

    What does the asset turnover ratio signify?

    <p>Revenue generated per dollar of assets</p> Signup and view all the answers

    What major effect does slowing sales growth have on a highly leveraged company?

    <p>Increased financial difficulties</p> Signup and view all the answers

    Which factor is most likely to affect the terminal value of a company negatively during a capital restructuring?

    <p>High risk of bankruptcy</p> Signup and view all the answers

    Which scenario reflects a decrease in asset turnover for a company?

    <p>Sales decrease while average assets increase</p> Signup and view all the answers

    What is the expected consequence of Country 2 imposing a tariff on the exports from Country 1?

    <p>Decrease in exports from Country 1 to Country 2</p> Signup and view all the answers

    Which statement best describes the working capital of a successful, new company?

    <p>It would be positive and growing</p> Signup and view all the answers

    What is the main reason for the upward slope of the supply curve?

    <p>Higher prices encourage businesses to supply more goods</p> Signup and view all the answers

    During a recession, which sector is expected to perform the best?

    <p>Pharmaceuticals</p> Signup and view all the answers

    Which of the following strategies allows a company to return cash to shareholders?

    <p>Cash dividends and stock buybacks</p> Signup and view all the answers

    What is a likely characteristic of companies producing non-durable goods?

    <p>Expanding margins</p> Signup and view all the answers

    How will inflation impact the profitability of the consumer staples sector in the long term?

    <p>Short-term negative, long-term neutral</p> Signup and view all the answers

    What will likely happen to the margins of a manufacturing company producing durable goods during a contraction phase?

    <p>Margins will fall during the expansion phase</p> Signup and view all the answers

    Which sector typically faces the greatest long-term risk in print media?

    <p>Online advertising</p> Signup and view all the answers

    In an economic peak, which companies are likely to have the strongest earnings momentum?

    <p>Financials</p> Signup and view all the answers

    Which sector exhibits the most stable margins?

    <p>Snack foods</p> Signup and view all the answers

    During a pandemic, which business sector is generally least impacted?

    <p>Consumer staples</p> Signup and view all the answers

    Which method allows an analyst to find a stock's intrinsic value based on expected dividends?

    <p>Dividend growth model</p> Signup and view all the answers

    What does a forward PE of 13 indicate about Company X?

    <p>It is a growth company and its growth has slowed</p> Signup and view all the answers

    What is the BEST valuation metric for a company with growing EPS, low CapEx, steady sales growth, and consistent dividends?

    <p>Price-to-earnings ratio</p> Signup and view all the answers

    What is the PEG ratio for NXT Corporation if its forward PE is calculated from the provided information?

    <p>1.36</p> Signup and view all the answers

    Which event will NOT directly affect EPS?

    <p>Declaration of a cash dividend</p> Signup and view all the answers

    If Company A acquires Company B, what will be the pro-forma consolidated revenue?

    <p>Revenue of $200, income of $75</p> Signup and view all the answers

    Based on previous data, what is the estimated per share price at the end of 2020?

    <p>$13.20</p> Signup and view all the answers

    Using cash flow information, what will the company’s share price be at the end of 2020 if it was $12 at the end of 2019?

    <p>$13.20</p> Signup and view all the answers

    What would indicate an industry with zero economic profit?

    <p>Individual companies may still generate accounting profits.</p> Signup and view all the answers

    What indicates the correct application of valuation methods for ZZ Corporation’s price target?

    <p>The analyst should use a range rather than a single point share value.</p> Signup and view all the answers

    What factor BEST explains the sustained demand for solar panels despite the expiration of tax credits?

    <p>There are significant green energy concerns.</p> Signup and view all the answers

    What is the best rationale for the sustained demand for Product X after the expiration of its tax credit?

    <p>There's a lack of a substitute product.</p> Signup and view all the answers

    What happens to currency exchange rates if real interest rates rise in Country A?

    <p>Country A's currency will strengthen.</p> Signup and view all the answers

    What is the impact on terminal value in a DCF model if the discount rate increases?

    <p>The terminal value will decrease.</p> Signup and view all the answers

    Which company is likely to benefit the MOST from the FRB raising rates?

    <p>Banks</p> Signup and view all the answers

    Which statement regarding cost of goods sold (COGS) is correct?

    <p>The cost of goods sold has increased.</p> Signup and view all the answers

    Which formula accurately represents free cash flow (FCF)?

    <p>Operating cash flow minus capital expenditures.</p> Signup and view all the answers

    Considering a company with an EPS of $1.00 and an expected earnings growth of 10%, what is true if its forward PE ratio is 30?

    <p>The stock is undervalued at a price of $20.</p> Signup and view all the answers

    In which industries is an increase in capital spending likely to be beneficial?

    <p>Technology and Industrials.</p> Signup and view all the answers

    Which of the following best illustrates economies of scope?

    <p>Utilizing the same resources to produce multiple products.</p> Signup and view all the answers

    Which statement about open market operations is false?

    <p>Increasing rates automatically increases economic activity.</p> Signup and view all the answers

    What is the formula used to calculate the terminal value of a firm?

    <p>Terminal Value = FCFF ÷ (1 + WACC)</p> Signup and view all the answers

    Which factor is least influential on healthcare REITs?

    <p>Government rent caps on REITs</p> Signup and view all the answers

    What is the highest percentage of earnings returned to shareholders for a company given a 56% dividend payout?

    <p>The company does stock buybacks and pays dividends.</p> Signup and view all the answers

    Which fundamental factor is most critical in affecting the profitability of a healthcare REIT with senior residential housing?

    <p>Zoning regulations on the beachfront</p> Signup and view all the answers

    How would you calculate the free cash flow yield (FCF/Price) for a company?

    <p>Dividing free cash flow by the total market cap.</p> Signup and view all the answers

    If ABC Corporation has a relative PE of 1.5, what can be concluded about its stock price?

    <p>It supports that the stock price would be around $30.</p> Signup and view all the answers

    What presents the greatest risk to apartment REITs?

    <p>Problems with tenants</p> Signup and view all the answers

    Given a free cash flow multiple of 10.5 and the 2020 EPS is $3.65, what is the estimated price of CF Corporation?

    <p>$37</p> Signup and view all the answers

    Which statement about raising interest rates is TRUE?

    <p>It typically results in lower consumer borrowing.</p> Signup and view all the answers

    What financial ratio provides insight into a company's ability to cover interest payments?

    <p>Interest coverage ratio.</p> Signup and view all the answers

    Where is the interest expense recorded after a construction project is completed?

    <p>Balance sheet</p> Signup and view all the answers

    Which valuation metric is most suitable for assessing an unlevered company?

    <p>EBITDA margin and EV-to-EBITDA ratio</p> Signup and view all the answers

    Which company had the highest stock buyback proportion as a percentage of earnings?

    <p>Wells.</p> Signup and view all the answers

    What is Viking Corporation's cash flow from operations given the provided data?

    <p>$115</p> Signup and view all the answers

    What happens when securities are sold in an open market operation?

    <p>It withdraws money from the financial system.</p> Signup and view all the answers

    What is the financial statement impact of an inventory write-down?

    <p>Assets decrease, net income decreases, and operational cash flow remains unchanged.</p> Signup and view all the answers

    Which is the best indicator for estimating a company's future dividend outlook?

    <p>Free cash flow after capital expenditure</p> Signup and view all the answers

    How does a decline in depreciation affect a company's financial statements?

    <p>Net income increases with no change in retained earnings.</p> Signup and view all the answers

    If the U.S. dollar strengthens, which company may face the most significant challenges?

    <p>A Japanese exporting construction company</p> Signup and view all the answers

    Which company will most likely be negatively affected by a weakening U.S. dollar?

    <p>A U.S.-based global pharmaceutical firm</p> Signup and view all the answers

    What is the predicted driver for growth in the U.S. parent company from its Canadian subsidiary?

    <p>Adopting stronger inventory practices to lower COGS</p> Signup and view all the answers

    Given Company X's historical PE ratio averagely at 24.58 and currently at 7.93, what does this signify?

    <p>Company X's market perception is worse than historical trends.</p> Signup and view all the answers

    What is the most likely impact on a domestic company due to a shortfall in liquid natural gas (LNG) supplies?

    <p>LNG prices will rise because worldwide supplies will fall.</p> Signup and view all the answers

    Which option best describes financial leverage?

    <p>The amount of debt in a company’s capital structure.</p> Signup and view all the answers

    What conclusion can an analyst draw from the shift in consumption patterns after a beverage company's price increase?

    <p>Older consumers demonstrate more price sensitivity than younger consumers.</p> Signup and view all the answers

    If the cost of college education rises faster than inflation and the government forgives a significant amount of loans, what is likely to happen?

    <p>Spending and inflation are likely to accelerate among college students.</p> Signup and view all the answers

    The primary reason for a discrepancy between a company's book value and tangible book value is typically due to which factor?

    <p>Goodwill impairment.</p> Signup and view all the answers

    To determine the pro-forma consolidated revenues and income after Company A acquires Company B, what will be the resulting figures?

    <p>Revenue of $200 million, income of $25.2 million.</p> Signup and view all the answers

    After acquiring Company B for $35 million and considering its book and asset values, what is a true statement regarding goodwill?

    <p>The amount of goodwill is $10 million.</p> Signup and view all the answers

    Assuming no change in revenue for Cover-All Paint Company, which input expense increase will have the largest impact on gross margin?

    <p>Resin increases by 7%.</p> Signup and view all the answers

    Given Gemini Corporation's current debt and forecasted income, in how many years will its debt-to-equity ratio return to its historical level?

    <p>Approximately four years.</p> Signup and view all the answers

    Which scenario would most likely improve the credit profile of a company?

    <p>An improvement in the company’s EBITDA-to-interest expense ratio over several quarters.</p> Signup and view all the answers

    In forecasting EPS for a company that has increased its market share significantly, what is the first step an analyst should take?

    <p>For earnings, go back 6 years and forward 3 years.</p> Signup and view all the answers

    When valuing a cyclical company in a recession, which earnings figure is most appropriate to use?

    <p>EPS at trough.</p> Signup and view all the answers

    What is the most likely impact of a new company entering a market dominated by an oligopoly?

    <p>Market share of the oligopoly will reduce.</p> Signup and view all the answers

    To collect data for determining industry growth rates, where should an advisory analyst start?

    <p>Download time series of indicators from a known data vendor.</p> Signup and view all the answers

    Where can an analyst find information about barriers to entry for a new company?

    <p>10K/10Q</p> Signup and view all the answers

    What concern might an analyst have regarding a gain in net income when the income is significantly assisted by legal settlements?

    <p>Ramification of legal agreement</p> Signup and view all the answers

    What would be shareholders' likely reaction to a company's performance if EPS growth expectations are not met?

    <p>Negative</p> Signup and view all the answers

    Using the if-converted method, what does the intrinsic value per share indicate if the company has convertible preferred shares?

    <p>42</p> Signup and view all the answers

    What would be the outcome when a company pays off debt by issuing stock without changes in other costs?

    <p>The WACC decreases.</p> Signup and view all the answers

    Which economic indicator is regarded as a leading indicator of economic performance?

    <p>New orders for manufacturing goods</p> Signup and view all the answers

    What is the time frame for a company with a float greater than $75 million to file its 10Q report?

    <p>60 days after the end of the quarter</p> Signup and view all the answers

    Which company would be most adversely affected by a weakening U.S. dollar?

    <p>A U.K.-based global biscuit company</p> Signup and view all the answers

    What element is typically amortized as a periodic expense on an income statement?

    <p>Software development costs</p> Signup and view all the answers

    Why does the supply curve slope upwards?

    <p>Because there’s a willingness to provide more for larger profits as the unit price rises.</p> Signup and view all the answers

    During a pandemic, which business sector is least likely to be impacted?

    <p>Consumer staples</p> Signup and view all the answers

    What is the likely outcome for the consumer staples sector if inflation continues to rise?

    <p>Short-term positive, but long-term neutral</p> Signup and view all the answers

    Which industry is likely to perform best in the early stages of a recession?

    <p>Healthcare</p> Signup and view all the answers

    What does financial risk primarily relate to?

    <p>The amount of debt in a company’s capital structure</p> Signup and view all the answers

    What conclusion could an analyst draw from age-specific consumption patterns after a price increase?

    <p>That younger customers' demand is elastic, while older customers' demand is inelastic.</p> Signup and view all the answers

    What is the calculated Price to Earnings Growth (PEG) ratio for NXT Corp given the information?

    <p>0.83</p> Signup and view all the answers

    Who stands to gain the most from an increase in interest rates?

    <p>Financial firms</p> Signup and view all the answers

    Which method can a company use to return cash to its shareholders?

    <p>Cash dividend and stock buybacks</p> Signup and view all the answers

    If interest rates rise, which company will be affected the most based on dividend payout ratios?

    <p>Co.A because it trades more like a fixed income asset</p> Signup and view all the answers

    What action should an analyst take if there is a disruption in the credit markets while using credit spreads as a benchmark?

    <p>Adjust method</p> Signup and view all the answers

    What will improve a company’s cost of capital?

    <p>None of the above</p> Signup and view all the answers

    Which of the following would most significantly affect the valuation of a company with high operating leverage?

    <p>Slowing sales growth</p> Signup and view all the answers

    How many days does an accelerated filer have to file Form 10-Q?

    <p>40 days after the end of the fiscal year</p> Signup and view all the answers

    How are investors likely to respond if a company indicates it is trending similarly to peers with 10% operating margins?

    <p>Negatively for not outperforming peers</p> Signup and view all the answers

    Which of the following situations would be considered dilutive to a company’s shareholders?

    <p>The company issuing 500,000 new shares</p> Signup and view all the answers

    Which choice is considered dilutive to earnings per share (EPS)?

    <p>In-the-money employee stock options</p> Signup and view all the answers

    Which change in a balance sheet would increase operating cash flows?

    <p>An increase in accrued vacation</p> Signup and view all the answers

    How does an inventory write-down affect a company’s financial statements?

    <p>Assets will decrease and operating cash flows will not change</p> Signup and view all the answers

    What is NOT defined as a leverage ratio?

    <p>Interest coverage ratio</p> Signup and view all the answers

    What is the expected share price of the company at the end of 2020 based on the provided information?

    <p>$14.45</p> Signup and view all the answers

    Which of the following is a leading economic indicator?

    <p>Index of consumer expectations</p> Signup and view all the answers

    What could explain the sustained high demand for Product X despite the expiration of its tax credit?

    <p>Lack of substitute products</p> Signup and view all the answers

    What factor remains constant in calculating the current price when analyzing future dividends?

    <p>Dividend payout ratio</p> Signup and view all the answers

    Which year's data would indicate the best asset turnover margin?

    <p>0.75</p> Signup and view all the answers

    What signals sales growth in a company?

    <p>Increasing accounts receivable turnover</p> Signup and view all the answers

    What does channel stuffing indicate within a company?

    <p>Rising accounts receivable and increasing sales</p> Signup and view all the answers

    What likely occurs when Company M pays off its outstanding debt by issuing stock?

    <p>Cost of equity increases</p> Signup and view all the answers

    Which factor will not affect earnings per share (EPS)?

    <p>Declaration of a cash dividend</p> Signup and view all the answers

    What does a low current PE ratio suggest about company X compared to its historical average?

    <p>It is a growth company with slowed growth</p> Signup and view all the answers

    What would be the best evaluation metric for a company with growing EPS, low Capex, and steady sales growth?

    <p>Enterprise Value/EBITDA</p> Signup and view all the answers

    What is the short-term impact on a currency if real interest rates rise in Country A?

    <p>Strengthen</p> Signup and view all the answers

    What occurs to terminal value in a DCF model when discount rates are on the rise?

    <p>Terminal value decreases</p> Signup and view all the answers

    If the government has previously given tax credits for solar panel producers that are now removed but demand remains, what could be a reason for this?

    <p>Low confidence in the electric grid</p> Signup and view all the answers

    Study Notes

    Financial Analysis and Valuation Concepts

    • Company Performance Metrics: Companies often report sales, operating profit, net income, beta, risk-free rate, debt/equity ratio, after-tax cost of debt, WACC, and terminal cash flow.
    • Investment Project Analysis: Assessing the profitability of a new project may compare the project's return on capital to the company's cost of capital. If the project return is higher, investment is likely advisable.
    • Inflation Impact: Inflationary periods can lead to increased prices of goods and services, without necessarily impacting demand. Industries dependent on commodity costs or labor, like agriculture, are typically affected more acutely than heavily regulated, monopoly industries.
    • Conflict's Economic Impact: Conflict reducing supply in a commodity market (like oil) can potentially increase prices. This impact depends on the availability of alternatives.
    • Valuation Metrics for Cyclical Industries: Valuing cyclical industries requires considering normalized earnings and/or FCF yield. EV/EBITDA is often a relevant metric due to high fixed costs or capital expenditure required for manufacturing.
    • Incremental Margin Analysis: Calculating expected EBIT given future revenue projections, using the known current margins, is a key step for projections.
    • Valuation Metrics for Growing Companies: Companies with growing revenue streams and low or zero capital expenditures and depreciation might be best valued using metrics like price/sales (P/S) or enterprise value/revenue (EV/Rev) rather than price/earnings (P/E). High emphasis is placed on the use of no debt or low debt company’s to calculate the metrics.
    • DCF Valuation: Depreciation expense and Capex aren't as impactful for an unlevered DCF valuation as EBITA margin and Interest expense (potentially).
    • GAAP vs. Non-GAAP Earnings: Key differences are often due to one-time gains or losses and other extraordinary items. The treatment of stock-based compensation and depreciation can differ; if a company uses straight-line depreciation for reporting, this understates the current earnings and thus overstates the depreciation expense over a longer time.
    • Amortization vs. Depreciation: Goodwill and other intangibles may not be amortized, but intangible assets with definite lives (e.g., software development costs) may be amortized. Intangibles with indefinite lives (e.g., trademarks) are subject to impairment testing, but they are not depreciated. PP&E on balance sheet is depreciated.
    • Inflation and Consumer Staples: Short-term impact of inflation on consumer staples is usually positive (prices are raised and passed to the consumer quickly, thus improving margins). The long-term impact is usually neutral due to the relative inelasticity of the product.
    • Normalized Earnings: Normalizing earnings for cyclical companies usually involves using a 10-year average or consideration of both peaks and valleys in the economic cycle.
    • Relative Valuation Metrics: A firm with a high relative PE ratio compared to its benchmark index is indicative of a growth stock or cyclical and at the top of an earnings cycle; whereas a low relative PE ratio may indicate a cyclical stock at the bottom of an earnings cycle.
    • Financial Leverage: Financial leverage is the impact of debt financing on a company. It is measured by the relative amount of debt in a firm's capital structure.
    • Enterprise Value (EV): EV is the value of the total company, calculated using market capitalization and net debt. It measures the entire value of the firm, not just for equity investors.
    • Fed Rate Hikes and Impact: Fed rate hikes positively impact banks by improving their earnings per share (EPS) estimates and negatively impact financial firms by potentially having a negative impact on EPS estimates.
    • Cash Return to Shareholders: Companies return cash to shareholders by issuing dividends, repurchasing stock, or both.
    • Information for a Research Analyst: Analysts use annual reports, SEC filings, patent filings, and financial media publications to understand industries, barriers to entry, and more.
    • Increased EPS Estimates: Factors causing expected higher earnings per share (EPS) may involve more sales or cost efficiencies and reduced costs from inventory adjustments, and more cost effective management techniques.
    • Inventory Write-Downs: Inventory write-downs decrease assets and net income; they decrease shareholder's equity but don't affect operational cash flow directly.
    • Leading Economic Indicators: Leading economic indicators precede economic shifts (e.g., new orders).
    • Valuation Metrics & Company Characteristics: When choosing a valuation method, it would be worthwhile to research the characteristics of the company (e.g., high leverage/debt - use EV/EBIDTA multiple; or no leverage, low capex, but high growth- use Price to Sales or price to book value multiple).
    • Impact of Currency Devaluation: A currency devaluation negatively impacts companies earning revenue in an overseas market. A global company will be better positioned to withstand or offset such impact.
    • Interest Rate Risks and EPS: Rising interest rates frequently correlate with a positive positive impact to the EPS performance for banks and financial services, whereas it may not have the same kind of impact on asset management firms and may cause volatility.
    • Long-term Value: An important consideration in valuation analysis for companies. Metrics like return on invested capital and accretive EPS should form part of the assessment.
    • Price Calculation from ROE & Div Growth, or FCF: Calculating share price requires information on the cost of equity, dividends per share, growth in earnings, and current and forecasted earnings.

    Additional Concepts

    • Free Cash Flow (FCFF): FCFF is the cash flow available to the firm and measures cash available to both investors and debt holders. It is calculated as operating cash flow less capital expenditures.
    • Economic Profit: Zero economic profit indicates a price that reflects cost.
    • Elasticity: Measuring demand responsiveness to price changes is important.
    • Working Capital: Working capital (current assets minus current liabilities) is positive and growing for a successful company, but its impact needs to be considered for all companies.
    • Operating Leverage: Companies with high fixed costs benefit from higher sales growth, creating greater earnings leverage.
    • Barriers to Entry and Exit: This is information an analyst might look for to assess the competitive landscape in industries.
    • Tax Rate Calculation for Combined Companies: Determining combined tax rates for an acquisition involves considering ownership percentages and relevant tax rates in those countries.
    • Goodwill: This is the excess of the acquisition price over the fair market value of the net assets of the acquired company.
    • Economic indicators in analysis: Economic indicators (leading or lagging) are important for financial analysts when attempting to gauge or model financial data related to or involving an economy.
    • Stock prices and financial statements: Increases in specific accounts/items on the statement of cash flows or income statement could be indicative of certain stock price actions or patterns.

    These notes cover a broad range of financial analysis topics, and the specific application or calculations will depend on the details provided in the specific questions.

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    Description

    This quiz covers essential financial analysis and valuation metrics such as company performance indicators, the impact of inflation, and investment project profitability. It also explores how economic conflict affects commodity prices and considers specific valuation metrics for cyclical industries.

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