Ch 6(e) - Equity Valuation and Analysis with eVal Chapter 6...

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Equity Valuation and Analysis with eVal Chapter 6 Cash Flow Analysis
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Framework for Business Analysis and Valuation STEP 1 Understanding the Past 1. Information Collection 2. Understanding the Business 3. Accounting Analysis 4. Financial Ratio Analysis 5. Cash Flow Analysis STEP 2 Forecasting the Future 1. Structured Forecasting 2. Income Statement Forecasts 3. Balance Sheet  Forecasts 4. Cash Flow Forecasts   STEP 3 Valuation 1. Cost of Capital   2. Valuation Models Residual Income-Based Valuation Cash Flow-Based Valuation 3. Valuation Ratios 4. Complications Negative Values Value Creation and Destruction though Financing Transactions
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Cash Flow Analysis Evaluate the cash flow implications of the firm’s operating, investing and financing activities are net operating and investing cash flows negative? - if so, how is the cash shortfall to be financed? are net operating and investing cash flows positive? - if so, what does management propose to do with the free cash flow? what are the cash flow commitments associated with the firm’s financing policy? - how does management propose to meet these commitments? what are management’s capital expenditure plans and how will these be financed? This type of analysis is required in the ‘Liquidity and Capital Resources’ section of the MD&A
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3 Stages of Cash Flow Analysis Stage 1: How eVal creates pro forma statements of cash flows based on eVal’s standard income statements and balance sheets. Stage 2: How eVal employs the standardized financial statements to compute the inputs into discounted cash flow valuation models. Stage 3: How we can study difference between earnings and cash flows to evaluate the quality of earnings.
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The Statement of Cash Flows Assets=Liabilities+Equity ΔCash= -Δnoncash Assets+ Δliabilities+Δequity- →Decompose Cash into 3 activities ΔCash = - Δnoncash Assets + Δliabilities+ Δequity Operating= - Receivables ↑ Payables ↑ +Net Income↑ Investing= - PPE ↑ Financing +Debt ↑ - Dividends↑
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3 Steps in Preparing Statement of Cash Flow (SCF)-Indirect Method Step 1: Operating Activities DETERMINE NET CASHPROVIDED/USED by OPERATING ACTIVITIES BYCONVERTING NET INCOME FROM AN ACCRUAL BASIS TO A CASH BASIS
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Step 1:Operating Activities: Adjustments(1) Add back non-cash expenses Depreciation Amortization Depletions (+ )
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Step 1:Operating Activities: Adjustments(2) Deduct gains and add losses that resulted from investing and financing activities Gain on Sale of Equipment Loss on Sale of Equipment
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Step 1:Operating Activities: Adjustments(3) Deduct positive changes in current assets Increase in Accounts Receivable Increase in Inventories Increase in Other Current Assets
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Step 1:Operating Activities: Adjustments(4) Add positive changes in liabilities except for accounts related to bonds and debts Increase (+) Increase in Accounts Payable (+) Increase in Income Tax Payable (+) Increase in Other Current Liabilities (+) Increase in Deferred Taxes (+) Increase in Other Liabilities
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Step 1:Operating Activities: Adjustments(5) Others (+) Minority Interest in Earnings (+) Preferred Dividends
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