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Unformatted text preview: End of Chapter 2 Questions, Problems and Solutions CORPORATE FINANCE Professor Megginson Spring Semester 2003 Questions 2.1) What information (explicit and implicit) can be derived from financial statement analysis? Does the standardization required by GAAP add greater validity to comparisons of financial data between companies and industries? Are there possible shortcomings to relying solely on financial statement analysis to value companies? 2-2) Distinguish between the types of financial information contained in the various financial statements. Which statements provide information on a companys performance over a reporting period and which present data on a companys current position? What sort of valuable information may be found in the notes of financial statements? Describe a situation in which the information contained in the notes would be essential to making an informed decision about the value of a corporation. 2.3) If you were a commercial credit analyst charged with the responsibility of making an accept/reject decision on a companys loan request, with which financial statement would you be most concerned? Which financial statement is most likely to provide pertinent information about a companys ability to service its debt? 2.4) What is cash flow from operations? How is it calculated? What benefit does the firm receive from the presence of noncash charges? 2.5) What is operating cash flow (OCF) ? How is it calculated? Why do financial managers prefer this measure of operating flows over the accountants use of cash flow from operations? 2.6) What is free cash flow (FCF) ? How is it calculated from operating cash flow (OCF)? Why do financial managers focus attention on the value of FCF? 2.7) Describe the common definitions of inflows of cash and outflows of cash used by analysts to classify certain balance sheet changes and income statement values. What three categories of cash flow are used in the statement of cash flows? To what value should the net value in the statement of cash flows reconcile? 2.8) What precautions must one take when using ratio analysis to make financial decisions? Which ratios would be more useful for a financial managers internal financial analysis? How about an analyst trying to decide on which stocks are most attractive within an industry? 2.9) How do analysts use ratios to analyze a firms leverage? Which ratios convey more important information to a credit analystthose revolving around the levels of indebtedness or those measuring the ability to service debt? What is the relationship between a firms level of indebtedness and risk? What must happen in order for an increase in leverage to be successful?...
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