Ch14_Kim_BKM_INV_7th - Bodie Kane Marcus Essentials of...

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Essentials of Investments Bodie • Kane • Marcus Chapter 14 Financial Statement Analysis
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Essentials of Investments Bodie • Kane • Marcus Overview Purpose How investors can use financial data (accounting data) as inputs into stock valuation analysis. Tools Used Financial Statements Ratio Analysis Limitations Differences in firms’ accounting procedures Inflation-induced distortion in accounting numbers
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Essentials of Investments Bodie • Kane • Marcus Financial Statements Income Statement A summary of the profitability (revenues and expenses) of the firm over a period of time Balance Sheet A snapshot of the financial condition of the firm at a particular time. Statement of Cash Flows A report of the CF generated by the firm’s operations, investments, and financing activities. Transactions are only recognized in which cash exchanges hands (B/S and I/S: Accrual method).
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Essentials of Investments Bodie • Kane • Marcus Consolidated Statement of Income
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Essentials of Investments Bodie • Kane • Marcus Consolidated Balance Sheet
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Essentials of Investments Bodie • Kane • Marcus Consolidated Statement of Cash Flows
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Essentials of Investments Bodie • Kane • Marcus Accounting Earnings vs. Economic Earnings Economic earnings Real flow of cash that a firm could payout forever in the absence of any change in the firm’s productive capacity. Accounting earnings Earnings of a firm as reported on its I/S. Stock valuation models require a measure of economic earnings. The NI on the firm’s I/S does convey considerable information concerning the firm’s products Positive reaction of stock price to the announcement of a positive unexpected earnings.
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Essentials of Investments Bodie • Kane • Marcus Return on Equity (ROE) Importance of ROE One of the two basic factors in determining the firm’s earnings growth rate ( g = ROE × b ) A high ROE in the past does not necessarily imply a firm’s future ROE will be high. Financial Leverage and ROE ROE = (1–T)[ROA+(ROA–Interest rate)(Debt/Equity)] Increased debt will make the positive contribution to a firm’s ROE only if the firm’s ROA exceeds the interest rate on debt. The higher the financial leverage, the greater the financial risk and the higher the investor’s required rate of return High- levered firm’s equity value does not necessarily higher than low-levered firm’s, if two firms have equal business risk.
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Essentials of Investments Bodie • Kane • Marcus Ratio Analysis Purpose of Ratio Analysis Financial statement analysis helps investors and managers predict the firm’s future prospects. Ratio analysis is designed to help one evaluate a F/S.
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Ch14_Kim_BKM_INV_7th - Bodie Kane Marcus Essentials of...

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