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Financial Statement Analysis > Final > Flashcards

Final Flashcards

1
Q

Free Cash Flows Approximation

A

FCF= EBIT (1 – t) + Depreciation – Inv. in WC – Inv. in l.t.. assets

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2
Q

Two methods for valuation as an independant firm:

A

Discounted cash flows

Multiples

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3
Q

Valuation of independent firm

A 
Liquidation value (LV) : 
Value of the firm in the case of liquidation (sale of all assets)
	Operating value (OV) : 
Value of the firm if operations continue
Note: usually, if LV > OV, firm is liquidated. But, sometimes, managers and important shareholders refuse to give up. 
Market value (MV) :  Price paid for company by rational investor, having all information.   Max (LV, OV)
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4
Q

Determine the value of the firm as an independant entity:

A

Without considering the synergy effects if acquisition
Without considering the change of control
With present management and strategies
Value of ‘minority interests

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5
Q

Free Cash Flows = ?

A

CF available to shareholders and creditors after the investment in assets (current and l.t.) necessary to maintain production level.

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6
Q

To value the firm we….?

A 
We determine the discount rate (WACC)
We determine the ‘predictable period’
We determine the yearly FCF for the predictable period
We determine the residual value
We discount all CF to 0
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7
Q

The residual value:

A

Firm’s value at the end of predictable period

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8
Q

How to determine the residual Value

A
  1. Liquidation value
  2. Price / Earning multiple:
    We determine EPS at end of predictable period
    We multiply by relevant P/E ratio
    We add debt to value firm
  3. Discounting of a perpetuity
    FCF at end of predictable period + 1
    Divided by r or (r-g)
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9
Q

Ratios to use when analysing multiples

A

Price/Earnings ratio
Firm MV / EBITDA
Price / Sales
Equity MV/ Equity book value

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10
Q

Control premium

A

Increase of value after change in control
New firm’s value – value as independent firm
Empirically = 30 %
Maximum premium to pay to gain control:
If premium paid = maximum premium:
Like NPV= 0
Those who benefit = targeted firm’s shareholders
If premium paid < maximum premium:
Like NPV > 0
Those who benefit = targeted firm’s shareholders and buying firm’s shareholders

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11
Q

Valuation of liquidity premium

A 
Value of a publically traded firm > Value of a private firm
 Liquidity premium:
Penalty if private firm
Discount: 25 – 30 %
 Necessary if:
Firm valued is a private firm
Discounted CF or Multiple methods
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12
Q

Do acquisitions create value ?

Do they create value for the targeted firm’s shareholders ?

A

Do acquisitions create value ?
The answer is yes.
Do they create value for the targeted firm’s shareholders ?
Prices are by 30-35% 5 days after acquisition.

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13
Q

Small businesses’ particularities

A

Managers: Limited financial knowledge
Unclear distinction between owner and company
No board of administrators

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14
Q

3 things needing special attention from the banker when analysin small companies:

A

Financial statements not audited
Debt towards a shareholder : Liabilities for company
Shareholder loans money to company
Excluded from liabilities, included in equity

Loan to a shareholder : Asset for the company
Company loans money to a shareholder
Excluded from assets, included in dividends

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15
Q

Financial Distress, Defenition and solution

A 
Incapacity to meet financial obligations
Insolvency
Can we maintain such a state ?   (((NNOOO))
Solutions:
Liquidation
Operational or financial restructuring
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16
Q

Ratios for financial distres:

A 
Quick and current ratios
CFO / Capital
A/P days outstanding
Other ratios (indirect indicators):
Debt level
Operating profit margin
17
Q

Problems with ratios for financial distress:

A

Interpretation problems:
Negative CFO
Quick and current ratios

Contradictory information:
High debt level
CFO / capital > 1
Quick and current ratios too low

Past and not future:
Observation
Not forecast

18
Q

Prediction models for financial distress

A

Definition:
Mathematical models predicting whether a firm will be in financial distress in the future (usually 1 or 2 years)

Examples:
Z-Score (or Altman score)Den enda som kommer på fialen(?)
CA-Score
Recursive partitioning
Neural network
Genetic algorithm
19
Q

Causes and solution for Financial Distress:

A 
Cause 1: Operational problem:
Insufficient sales
Cost poorly managed
Delays poorly managed
Solution:
Operational or organizational restructuring
Managed by marketing or operations departments, not finance. 
 Cause 2: Debt poorly managed:
Debt level too high
Bad mix between current and l.t.
Solution: 
Financial restructuring
Decrease of debt, increase of equity
Decrease of current debt, increase of l.t. debt
Viable only if. 
Kasst att man måste ta in folk utanför företaget för att få in nya peningar.
20
Q

Guarantees for Long term loans and Credit line respectively.

A 
Long term: 
Max 80% of the equipment
 Max 75% of the fixed assets
 Credit line:
Max 75% of accounts receivable
 Max 50% of the inventories
21
Q

What are the 5Cs?

A 
Character
Conditions
Capital
Capacity
Collateral
22
Q

Character:

A

Project analysis:
Extending the current activities (less risky)
Complimentary activities-pizzeria säljer frusen pizza
New activities (riskier)- pizzeria säljer tröjor

Management analysis:
Profiles
Seriousness
Management capacity

23
Q

Points of judgment: Character

A

Points of judgement
Potential for the project
Management’s capacity at executing the project.

Profiles: Asking for resumes
Experience
Relevant education

Seriousness:
Wheter or not the managers owns stocks in the company. Makes the managers work harder as they lose money if the company does.

24
Q

Conditions:

A 
Exploitation risk high or low?
Number of product
Number of clients
Competition
Market shares
Economic context
All other elements already reviewed (diversification, importance of the company in its market, etc.)
 KEY: COMMERCIAL RISK SHOULD BE A SLOW AS POSSIBLE. IF ONE HAS HIGH COMMERCIAL RISK ONE SHOULDN'T HAVE HIGH FINANCIAL RISK AS WELL
25
Q

Capital:

A

Debt level analysis:
Evolution Sector Short term vs. Long term

26
Q

Items possibly needing adjustments in capital analysis:

A

Future tax liabilities
Definition
Liabilities or Equity ?
If firm growing…

Commitments:
Example: Operating leases
To be included in liabilities

Contingencies:
To be included if high probability

27
Q

Capacity:

A 
Ability to repay l.t. liabilities:
CFO / capital > 1
Problem: CF plan does not provide CFO
Solution ??
Debt / EBITDA
Interpretation
 
Make sure the company is able to repay its debt in the long term and in the short term.
 CFO / payment of capital on long term debt.
 EBIT /(int + (cap/1-t))
 
b) Ability for short term reimbursment
Quick and current ratios
CFO / Current liabilities(Slightly better according to prof)
28
Q

(Capacity) Comments about Current and Quick ratios:

A

Current Ratio = Current Assets/Current Liabilities
Quick Ratio = (Current Assets-Inventories)/Current Liabilities

Caracteristics:
Static measure of the available resources at a specific time to honour the short term engagements.
If we didn’t have incoming funds, would sold short term assets be sufficiant to reimburse the short term liabilities.
The management policies on A/R and inventory are based on a efficient use and not on «covering» the short term liabilities.
Problems:
Ratios don’t take into account the future CF
The short term assets sales values vs. book value
Certain requirements on a short term basis are not considered ( lease payments, pension plan contributions, etc.)

29
Q

Interpretation mistakes regarding Current and Quick Ratios!

A

Ex.1:In a recession period, the A/R and inventories might increase.
Ex. 2: For a company that experiences a lot of success, the «Income taxes to be paid» can substantially increase.

Possible manipulations:
At year end, a company can decide to shorten the collection period to pay more of its accounts payables.

30
Q

Collateral:

A

Warranty analysis:
What are the available assets (not associated to other loans) ?
What are the assets linked to a new project to be used as warranty ?
Liquidation value (in %)

Calculs:
Identify the assets used for warranty.
Determine and justify the % of sale liquidation
Check if the assets taken under warranty are sufficient.

Financial Statement Analysis (1 decks)

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