Answers_to_Questions.Chapter_9 - Answers to Questions 1...

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Answers to Questions 1. Investors can diversify their risk by including shares of foreign companies in their investment portfolio. Correlations in the returns (increases and decreases in stock prices) earned across stock markets are relatively low. The high degree of independence across capital markets affords investors diversification opportunities. 2. Ford might want to include the following companies in a benchmarking study: U.S. – General Motors Japan – Honda, Toyota, Subaru Germany – Daimler-Chrysler, BMW, Volkswagen, Audi Korea – Hyundai, Kia France – Renault Note: Due to the consolidation in the automobile industry, several companies are now divisions of other companies. For example, Ford owns Mazda (Japan), Volvo (Sweden), and Jaguar (U.K.). BMW owns Land Rover (U.K.), and Renault owns Nissan (Japan). Of course the largest consolidation occurred when Daimler-Benz (Germany) acquired Chrysler (U.S.). 3. Commercial databases tend not to include notes to financial statements, which are an important source of information about a company. They also tend to force different country formats for financial statements into a common format and thereby run the risk of misclassification and loss of information. Data entry errors are also a potential problem. 4. The first (easiest) place to look for the most recent annual report is on the company’s internet website. Several internet resources can help in locating a company’s financial statements including Hoover’s, EDGAR, and CAROL. 5. Much financial statement analysis is conducted using ratios or percentage changes (comparing one year with another). Ratios and percentages are not expressed in currency amounts. In fact, in analyzing year-to-year percentage changes, analysts must be careful in translating from a foreign currency to their own currency as changes in exchange rates can distort underlying relationships. 6. If an analyst is unable to read a company’s annual report, they will be less likely to feel that they have sufficient information to make an informed investment decision. This would be analogous to making an internet purchase of an electronic product manufactured by a company with which you are unfamiliar and the only description of the product is in a language you do not read. 7. Unless one is familiar with German accounting, it is possible only to make an educated guess as to what the item “revenue reserves” represents. Because it is a positive amount reported in stockholders’ equity, it is likely to be an appropriation of retained earnings.
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8. Disclosures in the notes to financial statements can provide additional detail related to specific line items that allows the analyst to reformat the financial statements to a format preferred by the analyst (e.g., that can be compared with other companies). Disclosures related to items such as provisions can allow analysts to assess the
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Answers_to_Questions.Chapter_9 - Answers to Questions 1...

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