Definitions

Question 1

Risk

Answer 1

Cash flows that are more uncertain and that are more likely to not materialize when you need income are riskier

Question 2

what markets does the firm operate in (g, r, ROE)

Answer 2

g and r

Question 3

what is the firm’s business model, how does the firm try to make money in these markets (g, r, ROE)

Answer 3

ROE

Question 4

what is the firm’s strategy for securing sustained high profitability, what are the competitive advantages/disadvantages (g, r, ROE)

Answer 4

ROE and r and g

Question 5

how successful is the firm with that strategy (g, r, ROE)

Answer 5

ROE and r and g

Question 6

how operationally efficient is the firm (g, r, ROE)

Answer 6

ROE

Question 7

Competitive advantages Supply

Answer 7

cost advantages (difficult to sustain)

Question 8

Competitive advantages Demand

Answer 8

access to market demand that competitors cannot match. This is about customer captivity (easier to defend often)

Question 9

Competitive advantages Economies of scale

Answer 9

Decreasing costs per unit as volumes decline (vulnerable to big players)

Question 10

Best combination competitive advantages

Answer 10

Demand and Economies of scale

Question 11

Operating assets

Answer 11

Assets that we believe are employed in the operations of the company

Question 11

Conservative accounting

Answer 11

account for the project by expensing all market costs in the period that they are incurred (in cases where future benefits are either not easy to estimate or uncertain)

Question 11

Financial liabilities

Answer 11

reflect external financing from external parties other than equity holders

Question 11

Financial assets

Answer 11

Financial resources ‘parked on the balance sheet’ and that do not really contribute to operations at the moment

Question 12

Operating liabilities

Answer 12

type of ‘internal funding’ due to the nature of business operations

Question 12

Old plant trap

Answer 12

ROE is too high because straight-line depreciation is too conservative, leading to significant understatement of investment and overstatement of ROE with old plant

Question 13

Matches or neutral accounting

Answer 13

Amount for the project by capitalizing marketing costs and then amortizing them in proportion to the benefits received

Question 14

Aggressive accounting

Answer 14

Account for the project by capitalizing marketing costs and then expensing all of these costs in the first period in which no benefits are received from the project

Question 15

Reasons high profitability

Answer 15

1) efficient use of operating assets 2) pricing power and cost advantages 3) leverage effects

Question 16

RNOA (measure of)

Answer 16

profitability of operations

Question 17

NOA turnover (measure of)

Answer 17

operating efficiency

Question 18

common measures driving the margin-turnover trade-off

Answer 18

1) Industry-wide production technology that requires significant capital investment 2) Product differentiation vs cost leadership strategy 3) Vertical integration vs outsourcing strategy

Question 19

plug usually items

Answer 19

cash, debt or equity

Question 20

Terminal period

Answer 20

how long it takes the firm to reach a steady state in which growth has tapered down to the average growth of the economy and profitability has reverted to its long-run value (ROE = r)

Question 21

systematic risk

Answer 21

cash flows are correlated with the market

Question 21

Key to high P/E ratio

Answer 21

Growth in residual income

Question 22

Low PEG ratio indications (2)

Answer 22

Market is underpricing future earnings growth and short-term growth rate is higher than long-term growth rate