CH. 9: Financial Statement Risk Analysis

Question 1

Describe each of the part of the following capital raising process!
Investors -> Capital -> Assets

Answer 1

Investors: supply capital either as debt or equity
Capital: is used to buy assets
Assets: go to work to produce sales, revenue, or cash flow.

*Assets are than used to reward investors based on what they require.

Question 2

Investors use Financial statement to…………

Answer 2

compare and judge the performance of companies, and then decide whether they want to supply assets or not.

Question 3

what does the matching principle mean?

Answer 3

Matching principle:
Current assets are used to pay current liabilities, while
Long term assets are used to pay long term liabilities

Question 4

T/F: The interest payment of a debt instrument is always fixed!!

Answer 4

True

Stock holders get the residual money

Question 5

What are the parts of CF Statment

Answer 5

CF from Operations
CF from Investing
CF from Financing

Question 6

In the finance world, risk can be…………

Answer 6

uncertainty as to outcome, aka volatility or vulnerability of cash flow or earnings

Question 7

Financially, there are 2 types of risk, what are they?

Answer 7

1. Business risk cost structure (operating leverage)

2. Financial Risk cost structure (financial leverage)

Question 8

Degree of operational leverage:

Answer 8

Earnings_before_FC / Earnings_after_FC

Question 9

Define comprehensive income!

Answer 9

A measure of income that goes beyond that reported on the income statement by including items such as unrealized gains and losses.

Question 10

Which intangible asset item on Yarmil Company’s balance sheet can be used to list the difference between the price that Yarmil paid for Mavon and Mavon’s book value?

Answer 10

Good will!

Question 11

Large purchases are called:

Answer 11

Capital expenditure

Question 12

1. Publicly traded companies are required to file a quarterly report with the US Securities and Exchange Commission. The quarterly report is called the:
2. What about annually filed reports?
3. And what is it for reports that are current?

Answer 12

1. 10-Q
2. 10-K
3. 8-K

Question 13

Jordan is the risk manager for Cai Company and is analyzing the company’s ability to meet its obligation to pay cash for the amounts it owes to its suppliers. In the analysis, Jordan is looking at working capital and current ratio. What type of risk is Jordan analyzing?

Answer 13

Liquidity risk

Question 14

1. Working Capital (liquidity measure) is founded by:
2. Current ratio:
3. Quick ratio:

Answer 14

1. Subtracting current Liab. from current Assets
2. Current assets / current liab.
3. (Cash + Marketable securities + A/R) / current liabilities

Question 15

The company’s degree of operating leverage is

Answer 15

% increase in profit / % increase in sales.

Question 16

What is Financial Leverage, and what is its disads?

Answer 16

the use of fixed cost funds (debts) to increase returns to shareholders. The more debt the higher Return on equity and earnings per share (financial leverage)
Disads:
1. Additional cost of high debt (the more the costly it gets)
2. Reduce cash flow flexibility.

Question 17

What is operating leverage?

Answer 17

means the high percentage of fixed costs of the org’s cost structure will be leveraged to make its operating profit more volatile. Small change in sales result in magnified change in profit.

Question 18

What is operating expenditure?

Answer 18

Disbursements for assets that will be consumed in a relatively short period, usually within one year.

Question 19

Forward contract?

Answer 19

an informal agreement traded through a broker-dealer network to buy and sell specified assets, typically currency, at a specified price at a certain future date.

Question 20

In The Money,

Out The Money!

Answer 20

1. Spot price < Strike Price

2. Spot Price > Strike Price

Question 21

Hedging addresses:

Answer 21

Price Fluctuation