Financial statement analysis and Discounted cash flow valuation

Question 1

What does an annual report contain?

Answer 1

• The statement of financial positions (balance sheet)
• The income statement
• The statement of cash flows

Question 2

What are three important considerations of the balance sheet?

Answer 2

Liquidity
Debt-vs equity
Value vs cost

Question 3

What are total assets equal to?

Answer 3

TA = Total liabilities + shareholder equity

Question 4

What is the object of an income statement?

Answer 4

To summarise performance over a specific period

Question 5

What are non-cash items?

Answer 5

Expenses charged against revenues that DO NOT directly affect cash flow (eg depreciation)

Question 6

How can you calculate income?

Answer 6

Revenue - expenses

Question 7

What is total cash flow composed of?

Answer 7

• CF from operating activities
• CF from investing activities
• CF from financing activities

Question 8

What is free cash flow?

Answer 8

Cash flow available after all taxes have been paid and after all positive net present value projects have been financed

Question 9

What is the market value?

Answer 9

The value determined by the stock market, the market value can be found from the stock exchange

Question 10

What is the book value?

Answer 10

The value of assets

Question 11

What should you do with the ratios that you find?

Answer 11

Find a benchmark by either using
Time trend analysis or
Peer group analysis

Question 12

What is time trend analysis?

Answer 12

Look at the same ratio over years

Question 13

What is peer group analysis?

Answer 13

• Compare ratio with smaller firms
• Companies in the same industry

Question 14

What is compound interest?

Answer 14

Interest earned on both the initial principal and the interest reinvested from prior periods

Question 15

What is simple interest?

Answer 15

Interest earned only on the original principal

Question 16

How do you calculate present value over multiple periods?

Answer 16

PV can be calculated by discounting back one period at a time

Question 17

What does the net present value measure?

Answer 17

How much an investment is worth throughout its lifetime, discounted to today’s value

Question 18

What are compounding periods?

Answer 18

Different times that interest is charged throughout the year

Question 19

What does semi-annually mean?

Answer 19

2 times a year

Question 20

What does quarterly mean?

Answer 20

4 times a year

Question 21

What does perpetuity mean?

Answer 21

A constant stream of cash flows that never ends

Question 22

What does growing perpetuity mean?

Answer 22

A stream of cash flows that grow at a constant rate indefinitely

Question 23

What is annuity?

Answer 23

A constant stream of cash flows that last for a fixed number of periods

Question 24

What is growing annuity?

Answer 24

A stream of cash flows that grow at a constant rate for a fixed number of periods