week 1 - chaptr 2

Question 1

what is the market capitalization?

Answer 1

the value of the shares on the stock market

Question 2

what is the value of the shares based on?

Answer 2

The value of the shares is based on the performance of the company in the future not the past.

Question 3

what is leverage (gearing)?

Answer 3

ratio of long term debt to equity (or also other ratios)

Question 4

what is window dressing?

Answer 4

We have noted that the balance sheet can appear to be very different at different times
of the year, particularly if business is seasonal. Differences can be manipulated. Suppose that a balance sheet showed a very high level of debt. A suitable proportion of the debt could be sold to a factor the day before the balance sheet date for cash and bought back the day after. At the balance sheet date the current assets would report lower debts and higher cash and appear to be healthy.

Question 5

define the practice of capitalizing the expenses

Answer 5

Expenditure on items that still have value at the end of the year is placed on the balance sheet and importantly is not charged to the income statement.

Question 6

define asset stripping

Answer 6

take over the company with no intention to keep it as a going concern but only to sell its assets, hence the term asset stripping.

Question 7

define adjusting provisions

Answer 7

An increase in a bad debt provision means that more has to be deducted from profits, a decrease
in a provision means that previous deductions can, as it were, be returned to the profit and loss account thereby increasing the profits for the year.

Question 8

how is FCF calculated?

Answer 8

“after tax operating profit plus (+) depreciation minus (-) the amount of new investment in working capital and fixed assets necessary to sustain the business”

Question 9

what are the main differencies between the market valuation and the balance sheet val.?

Answer 9

The stock market reacted immediately to the global recession in 2008, but balance sheet valuation of equity did not react. Markets react to expectations and are in this sense efficient. The historic cost, makes it difficult for the balance sheet to reflect changes in expectations. Currently, balance sheet valuations serve as a reference point in valuing shares in the stock market. They indicate the size of the difference between a conservative valuation and the freer stock market valuation.