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Summary Financial Statement Analysis (FSA) All rules, tips and helpfull answers from previous exams

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Course
Financial Statement Analysis (323059)

Institution
Tilburg University (UVT)

Book
Financial Statement Analysis and Security Valuation

Have processed all the tricky multiple choice questions from previous exams of the past 10 years in a file. All rules regarding items etc. of the reformulated statements have also been incorporated. And understandable answers to a number of difficult old exam questions.

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Uploaded on January 20, 2019
Number of pages 6
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Type Summary

fsa
finance
master finance
tilburg
tilburg university
university
tilburg university
tisem
323059
financial statement analysis
msc finance

Book Title:Financial Statement Analysis and Security Valuation

Author(s):Stephen H. Penman

Edition:juni 2012
ISBN:9780071326407
Edition:1

Presentation
Annual report; interpretation & Analysis PPP

Institution
Tilburg University (UVT)
Education
Finance
Course
Financial Statement Analysis (323059)

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FSA regels
Vraag 1
 Enterprise value = mv of equity + mv of debt(= often bv)

 DDM not good because dividends irrlevancy and dividends are a redistribution of the firm
capital funds

 DCF not good, I perceived as value destroying, C-I is excess cash, connection to value is
weak, management discretion

 Earnings/(1+r).. not good: double counting, discounting assumes e1 is reinvested at r, with no
div e1 contributes to e2 (e2=(1+r)er). Disc. Implicitely assumes e1 = 50 is reinvested at 5%
discount rate. E2 explicitelty takes into account reinvestment of e1.

  Correct for earnings that we would expect Re(t) = e(t) -r*bv(t-1)

 Case 1: Re =0, cv=0. Case 2: Re = constant, cv = Re/r, AEG = 0, cv=0. Case 3: Re grows at
rate g, cv =Re/(r-g), AEG grows at rate g, cv = AEG/(r-g)

 Normal forward P/E ratio=1/r. P0/E1 > 1/r, market expects postive future AEG

 Normail trailing P/E ratio = (1+r)/r. Trailing P/E =current mv +div paid/Current
periodEarnings

 Firms comprehensive income is independant on FCF (C-I)

 Normal PEG ratio = (1+r)/r*100%. PEG ratio = (forward p/e)/ 2-year ahead earnings growth.
PEG> normal, market overprices expected growth. In theory lower PEG, the better, paying
less for future earnings growth. Although other explanation for first sentence…

 Why sell put warrants: Compmay believes stock is undervalued, commitment to repurchase
program.

 Without NFE, OI=CI

 Financing activities don’t create value, only operating assets.  influence ROCE

 RE or AEG creats value for common shareholders.

 Financial leverage increases investment risk of common shareholders  affects cost of
capital. Re = rf + Vd/Ve (rf-rd). Re increases with financial leverage

 Unleverd P/B = NOA mv/NOA bv

 Levered P/B = CSE mv/CSE bv

---------------

 Enterprise price = equity price + NFO

 Rf on firms OA does not depend on the degree of financial leverage

,  Alle Hidden Dirty Surpluses uit equity statement gaan ook Income Statement in, CI van de 2
moet hetzelfde zijn

 Differences between P and E and P and B reflects future expectations of the market, the higher
the difference, the higher the expectations.  But growth in future earnings doesnt have tob e
high necessarily

 Comparebles not a good valuation model, also not in effecient markets

 Effect of FINLEV depends whether spread is positive or negative

 HDS can involve cash payments

 The difference between dirty and Hidden dirty surplus: dirty surpus flows are reported in the
financial statements

 SF2 forecast assumes reinvestments do not create value, ?SF3 does?

 Normal P/E ratio decreases with financial leverage

 Not the granting but exersizing of stock options results in HDS

 AEG model assumes earnings for each period are persistent

 Use re when doing P/E, not rf

 Required rate of return rf on the firms net operating does not depend on the degree of financial
leverage.

 Screening results in a trading strategy

 Timing of future pay outs is only value irrelevant when reinvestments earns the required rate
of return

 Pv of ReOI is not the same as PV of AOIG

 In Re model, g cant be greater than r, in cv??

 The normal P/E ratio is equal to 1/r . Since r increases with the degree of Fnancial leverage,
the normal P/E ratio decreases with the degree of financial leverage.

 A simple forecast type SF3 assumes that residual operating income and net operating assets
grow at the same rate.

 The forward P/E ratio doesnt have to be lower than the trailing P/E ratio.

 For a high tech firm with many intangible assets, the abnormal earnings growth model is
prefered over the residual income model.

 Information gained from a pro_t and growth analysis is not used in a simple type SF2 forecast.

 A simple forecast type SF3 depends on the _rm's future investments in net operating assets.

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