Week 1 - Financial Analysis and Valuation Framework

Question 1

Financial Statement Analysis

Answer 1

the process of extracting
information from financial statements to better understand
a company’s current and future performance and financial
condition

Question 2

Financial Statement Objectives serves who?

Answer 2

• management
• investors and analysts
• creditors, lenders, and rating agencies
• regulatory agencies

Question 3

Costs to disclose

Answer 3

Compliance and audit costs
monitoring costs
proprietary costs
litigation costs
others

Question 4

benefits of financial disclosures

Answer 4

access to capital
good reputation
valuation and analysis
risk assessment
others

Question 5

What is Form 10-K

Answer 5

the Audited Annual Report
- four financial statements
- explanatory notes
- managements discussion and analysis

Question 6

what is Form 10-Q

Answer 6

Unaudited quarterly report
- summary versions of the four financial statements
- limited additional disclosures

Question 7

Information beyond financial statements

Answer 7

• footnotes
• management discussion and analysis
• independent auditor report
• regulatory filings
• prospectus
• analyst research reports

Question 8

Different assurance of financial reports: Notice to Reader (Compilation)

Answer 8

Assurance level = none
cost = low
complexity = simple
scope = organizing information from management without verification
use = internal use or small companies

Question 9

Different assurance of financial reports: Review Engagement

Answer 9

assurance level = limited
cost = moderate
complexity = intermediate
scope = inquiry and analytical procedure to provide limited assurance
use = small companies seeking loans or private companies with external investors

Question 10

Different assurance of financial reports: Audit Engagement

Answer 10

Assurance level = reasonable
cost = high
complexity = complex
scope = inquiry and analytical procedure to provide limited assurance
use = public companies, large private companies using bonds or requiring loans

Question 11

Framework for Analysis and Valuation: Industry Analysis

Answer 11

porter’s 5 forces
economic cycle

Question 12

Framework for Analysis and Valuation: Business Analysis

Answer 12

Business Model
competitive advantage
business cycle

Question 13

Framework for Analysis and Valuation: financial statement analysis

Answer 13

ratio analysis
common size statement analysis

Question 14

Framework for Analysis and Valuation: forecasting and Valuation/Credit Analysis

Answer 14

Financial modeling
DCF/Multiple
Collateral

Question 15

What is an industry

Answer 15

An industry is a group of companies and organizations that
produce similar products or provide similar services.
Industries are classified based on the primary business
activities of the companies within them. Example of FF 12
Industry

Question 16

What is NAICS

Answer 16

(North American Industry Classification System): Used primarily
in the United States, Canada, and Mexico to classify business establishments by
type of economic activity.

Question 17

What is SIC

Answer 17

(Standard Industrial Classification): An older system that is still in use
in some contexts, particularly for historical data comparison and some specific
industries

Question 18

What is GICS

Answer 18

(Global Industry Classification Standard): Developed by MSCI and
Standard & Poor’s for use by the global financial community, particularly for
investment research and portfolio management.

Question 19

What are Porter’s 5 Forces

Answer 19

• Buyers
• Suppliers
• Entrants
• Substitutes
• Competition

Question 20

What are barriers to entry

Answer 20

Unique industry characteristics reduce the rate of entry of competitors, therefore
maintaining profit level of existing companies in the industry

Ex: economies of scale, patents, regulatory / governments, asset specificity

Question 21

Competition Concerns

Answer 21

Number of companies - more companies means more competition

Slow industry growth - slow growth makes companies compete for increased market share

Low Switching Costs - buyers can easily switch to competitors products

High fixed costs - makes it difficult to attain lower cost per unit

high exit barrier - have to stay in competition even though they don’t earn as much returns

Question 22

Entry is easy/difficult when

Answer 22

easy:
- low scale threshold
- access to distribution channels
- common accessible technology
- low switching costs

difficult:
- high scale threshold
- restriction distribution channels
- patented knowledge
- high brand switching costs

Question 23

exit is easy/difficult when

Answer 23

easy:
- marketable assets
- low exit costs
- independent business

difficult
- specialized assets
- high exit costs
- interrelated business

Question 24

Threat of substitutes

Answer 24

Competition is high when:
- Buyers have no brand loyalties and/or there is no established brands
- Changing to another product saves money without sacrificing features or performance
- Simple and inexpensive to change to another product
- The producers of substitute products have very high margins and can easily attract buyers through
price reductions.

Question 25

Bargaining power of buyers

Answer 25

Buyers are powerful if:
- They purchase large volumes relative to supplier sales
- Product is standard or undifferentiated
- They can produce the product themselves
- Supplier have high fixed costs
- The product is not of strategic importance to the buyers.

Question 26

Bargaining power of suppliers

Answer 26

suppliers are powerful if:
- The supply market is dominated by a few companies
- The buyers are neither large nor concentrated
- They do not have to contend with substitute products
- Their products are differentiated or the suppliers have build up switching costs
- They poses a credible threat of forward integration.

Question 27

What is the economic cycle:

Answer 27

Expansion -> peak -> recession -> depression -> tough -> recovery

Question 28

product/business life cycle:

Answer 28

introduction -> growth -> maturity -> saturation -> decline

Question 29

External Factors that affect industries

Answer 29

economic environment: recession, interest rate, taxes

international: local economic and labor conditions, political instability, tax laws, local and national government regulation

political environment: regulations, president election, trade agreement, any government policies affecting supply and demand

Social environment: customs and conventions, cultural, fashion trend, ethic/issues

technology: new process, new products