Chapter 2

Question 1

Financial statements

Answer 1

i) balance sheet
ii) income statement
iii) statement of cash flows
iv) statement of changes in shareholders’ equity

Question 2

Asset book value

Answer 2

value after accumulated depriciation

Question 3

Shareholder equity

Answer 3

Assets - Liabilities (worth of the firm)

Question 4

Assets = ?

Answer 4

Liabilities + Shareholders Equity

Question 5

Firm’s market value

Answer 5

market price per share * shares

Question 6

Liquidation value

Answer 6

what would be left if the firm sold all its assets and paid its liabilities

Question 7

Market - Book ratio

Answer 7

market value of equity / book value of equity

Question 8

What does a >1 Market Book ratio mean?

Answer 8

That the value of the firm’s assets as used currently exceeds their liquidation value

Question 9

Debt- equity ratio (Leverage)

Answer 9

Total debt / Total equity

Question 10

Value stocks

Answer 10

low market to book ratio

Question 11

Growth stock

Answer 11

high market to book ratio

Question 12

Enterprise value

Answer 12

Market capitalization + debt - cash

Question 13

EPS (earnings per share)

Answer 13

Net Income / Shares outstanding

Question 14

Gross margin

Answer 14

Gross profit / sales

Question 15

Operating margin

Answer 15

Operating income / sales

Question 16

Net profit margin

Answer 16

Net Profit / Sales

Question 17

Asset turnover

Answer 17

Sales / Total assets

Question 18

Fixed asset turnover

Answer 18

Sales / Fixed assets

Question 19

Accounts receivable days (average collection period or days sales outstanding)

Answer 19

Accounts receivable / Average daily sales

Question 20

Inventory turnover

Answer 20

Cost of goods sold / inventory

Question 21

Interest coverage ratio

Answer 21

Interest / Earnings

Question 22

Return on equity

Answer 22

Net income / Book value of equity

Question 23

Return on assets

Answer 23

Net income / Total assets

Question 24

DuPont identity

Answer 24

(Net income/sales) * (Sales/ Total assets) * (Total assets/ total equity) {profit margin x asset turnover x equity multiplier} these are the key drivers of net income.

Question 25

Price-Earnings ratio (P/E)

Answer 25

Market capitalization / Income = Share price / Earnings per share

Question 26

Income Statement

Answer 26

Shows revenues and expenses over a period. Bottom line shows the Net income, a measure of post taxation profitability.

Question 27

Statement of cash flows

Answer 27

Measures the change in cash over a period. Divided by 3 parts.

a) operating activities
b) investment activities
c) financing activities

Question 28

Auditor

Answer 28

neutral third party that ensures that corporations’ financial statements are prepared according to GAAP and IFRS (Reporting standards).
To verify the info is reliable.

Question 29

Earnings

Answer 29

what is left for the shareholders once all expenses have been paid for

Question 30

Dilution

Answer 30

growth in the amount of shares in a corporation, reducing the earnirngs per share

Question 31

Off-balance-sheet transactions

Answer 31

joint ventures, operating lease, R&D

Question 32

Sarbanes-Oxley Act

Answer 32

2002, the US Congress passed the Sarbanes-Oxley Act. This act requires, among other things, that CEOs and CFOs of US corporations certify the accuracy and appropriateness of their firm’s financial statements. Penalties if statements proved fraudulent.