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AFM212 > cumulative > Flashcards

cumulative Flashcards

1
Q

What are the Porter’s 5 Forces?

A
  1. Barrier to Entry
  2. Existing Competition
  3. Entry & Exist
  4. Threat of Substitute Products
  5. Bargaining Power of Buyers
  6. Bargaining Power of Suppliers
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2
Q

Describe the Business Cycle

A
  1. Expansion
  2. Peak
  3. Recession
  4. Depression
  5. Trough
  6. Recovery
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3
Q

Describe the Life Cycle Stages

A
  1. Introduction
  2. Growth
  3. Maturity
  4. Decline
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4
Q

What are the different External Factors that affect Industries?

A
  • Economic Environment (recession, interest rate, taxes)
  • International (political instability, economic & labour conditions, gov’t regulations)
  • Political Environment (regulations, pres. elec., trade agreement, policies)
  • Social Environment (cultural, ethic/issues)
  • Technology (new process & product)
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5
Q

Categorize the SWOT Analysis into External & Internal + Positive & Negative Factors

A

Internal: Strengths & Weaknesses
External: Opportunities & Threats

Positive: Opportunities & Strengths
Negative: Threats & Weaknesses

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6
Q

How would you analyze Competitive Advantage?

A
  1. Does the company actually have a competitive advantage → what factors explain it?
  2. Is it sustainable?
  3. If the company has no competitive advantage → does management have a plan to develop a sustainable competitive advantage to be implemented in an acceptable period of time & w/ a reasonable amount of investment?
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7
Q

How to achieve Competitive Advantage?

A
  1. Barriers to entry (patents & copyrights, regulatory & licensing, scarce resources - higher prices)
  2. Product/Service differentiation (tech innovation & product design, marketing & customer experience)
  3. Cost leader (low-cost raw material, manufacturing/service/scale efficiencies, bargaining power w/ supplier)
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8
Q

What is Common-Size Analysis? What are its advantages?

A

Definition: Vertical Statement (all line items expressed as a % of net revenue/total assets)

Advantages: allows for meaningful comparisons
- over time
- between firms

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9
Q

What are Percentage Change Statements?

A

Horizontal statements (amounts expressed as a % of a base year) w/ focus on growth in each line item over time

Caution: small (immaterial) accounts may hold huge change in %, but it doesn’t necessarily mean they are important

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10
Q

What does the Quality of Forecasts depend on?

A
  1. Quality of prior analysis (understanding business & thorough examination + adjustments)
  2. Realistic & achievable assumptions (supporting evidence)
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11
Q

What is the order to Forecast f/s?

A
  1. Income Statement
  2. Balance Sheet
  3. Statement of Cash Flow
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12
Q

Explain ROE

A

ROE = Net Income / Avg. Shareholders’ Equity

Measures return from perspective of company’s stockholders

*must use value attributable to parent company (do not consider non-controlling interest)

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13
Q

Explain ROCE

A

Return on Common Equity = (Net Income - Preferred Dividends)/(Avg. Stockholders’ Equity - Avg. Preferred Equity)

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14
Q

What are the 2 methods to measure ROE Drivers?

A
  1. DuPont Analysis (disaggregates ROE into components of profitability, productivity & leverage)
  2. Operating Focus (distinguishes b/w operating & non-operating activities)
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15
Q

Describe the DuPont Disaggregation of ROE

A

ROE = Net Income / Avg. Shareholders’ Equity = (Net Income / Avg. Total Assets) x (Avg. Total Assets / Avg. Shareholders’ Equity)

ROE = ROA (PM x AT) = FL

ROE is higher w/ more more debt & less equity for given level of assets (higher risk)

Reflects a blend of the return on a company’s operating assets & its non-operating return

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16
Q

Explain ROA

A

ROA = Net Income / Avg. Total Assets

Measures return from perspective of entire company (enterprise value)

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17
Q

Explain PM

A

Profit Margin = Net Income / Sales

What the company earns on each sales dollar

18
Q

Explain AT

A

Asset Turnover = Sale / Avg. Total Sales

Sales generated from each dollar invested in assets

19
Q

Describe FL

A

FL = Avg. Total Assets / Avg. Shareholders’ Equity

Measures relative use of debt vs equity to finance company assets

20
Q

Explain PPE Turnover

A

PPE Turnover = Sales / Avg. PPE

21
Q

Describe the Operating Focus on ROE Analysis

A

Focuses on the operating activities (assets) to generate returns

Compares RNOA to ROE on a relative basis to determine if Profit is retained mostly w/ operating or non-operating activities

RNOA = NOPAT / Avg. NOA

22
Q

Explain NOA

A

Net Operating Assets = Operating Assets - Operating Liablities

23
Q

Components of Operating Assets

A
  • A/R
  • Inv’t
  • Prepaid expenses/supplies
  • PPE & ROU
  • Intangibles & goodwill
  • DTA

No Cash or Equity Method Investments

24
Q

Components of Operating Liabilities

A
  • A/P
  • Accrued Expenses
  • Deferred revenue
  • Income taxes payable
  • DTA

No Debt

25
Q

Explain NOPAT

A

Net Operating Profit After Tax = NOPBT - Tax on Operating Profit

26
Q

Explain NOPBT

A

Net Operating Profit Before Tax = EBIT (Sales - Operating Expenses)

27
Q

Explain Tax on Operating Profit

A

Tax on Operating Profit = Tax Expense + (Pretax net non-operating expenses x Statutory tax rate)

The second component is a tax shield

28
Q

What is Credit Analysis & its purpose?

A

Definition: to evaluate the ability & willingness of a borrower to meet financial obligations

Purpose: to determine (quantify) the likelihood that a borrower will repay their debt on time & in full (potential credit loss)

29
Q

What is Credit Risk?

A

Risk that a borrower will fail to meet financial obligations as come due, leading to a loss for lenders/investors

30
Q

Explain Expected Credit Loss

A

Expected Credit Loss = Chance of Default x Loss Given Default

Chance of Default: debtor’s ability to repay debt

Loss Given Default: size of loss if debtor defaults

31
Q

Explain Distance to Default (DD)

A

DD = (Market Value of Firm’s Asset - Default Point) / Volatility of firm’s asset value

32
Q

What are some credit terms used by lenders?

A
  • Credit limits (max a creditor will allow a customer to owe at any point in time)
  • Collateral (property pledged by borrower to guarantee repayment, most often real estate)
  • Repayment terms (term of loan - longer = risker)
  • Covenants
33
Q

Describe Covenants

A

Loan terms & conditions designed to limit the loss given default

3 common types of covenants
- Positive/Affirmative: Require the borrower to take certain actions (submitting FS to lender)
- Negative/Restrictive: Restrict the borrower from taking certain actions (prevent mergers or other major investments)
- Financial: Require the borrower to maintain specific financial conditions (certain ratios & minimum equity)

34
Q

Explain the Z-Score Interpretation

A

> 3.00: company is healthy
2.99 - 1.8: grey area > some risk
< 1.8: financial distress

95% accuracy in Year 1
72% accuracy in Year 2

35
Q

When is revenue for gift card recognized?

A

Gift card revenue is recognized when something is purchased using that gift card

36
Q

What are the 3 Inventory Costing Methods?

A
  1. First-In, First-Out (FIFO) - transfer costs from inventory in the order initially recorded
  2. Last-In, First-Out (LIFO) - transfers the most recent inventory costs from BS to COGS
  3. Average Cost - Average cost to purchase or manufacture inventory available for sale during period & applies average to determine COGS & ending inv’t
37
Q

Why is LIFO prohibited under IFRS?

A
  • Lack of representational faithfulness
  • Distortion of financial results
    LIFO can lead to lower reporting earnings than real financial performance, esp. during period of inflation
  • Inconsistent w/ economic reality
  • Non-comparability
38
Q

Describe adjusting LIFO to FIFO Inventory

A

FIFO Inventory = LIFO Inventory + LIFO Reserve

39
Q

Describe adjusting LIFO to FIFO COGS

A

FIFO COGS = LIFO COGS - Increase in LIFO Reserve (or + Decrease)

40
Q

Describe the Cash Conversion Cycle

A

CCC = DIO + DSO - DPO

DIO = 365 x (Avg. Inv’t / COGS)
DSO = 365 x (Avg. A/R / Sales)
DPO = 365 x (Avg. A/P / COGS)

41
Q

What are the depreciation methods on Land, Building, & Machinery?

A

Land → Not depreciable
Building → SL
Machinery → Accelerating

AFM212 (7 decks)

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