Business Analysis and Valuation Exam Notes

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Topic 7:
NOA1=NOA0+OIt – (C1-I1)
NFO1=NFO0+NFE1 – (C1-I1)+d1
NFA1=NFA0+NFI1 - (C1-I1)-d1
CSE1=CSE0+OI1 – NFE1 – d1
NI1=OI1 - NFE1
(C1-I1) = d1+F1
d1=div+ share buyback – share issues
F=net purchases of FAs – interest on FAs – net issue of debt + Interest on debt d=C-I+NFI-NFA
FCF=OI-NOA (Method 1)
FCF=NFA-NFI+d (Method 2)
Net Operating Accruals
= OI1 – C1 or NOA – I1
If C-I-i > d: lend or buy down debt.
If C-I-i < d: borrow or reduce lending.
The rate of return from investing in a firms’ stock is its holding period return. [(div+P1)/P0]. Topic 8:
Reformulated CSE Statement
+Net transactions with s/holders
+Share issues
- Share buy backs
- Dividends
+Comprehensive Income
+NI reported
+/- securities avail. For sale
+/- currency translations
+/- hedging
+/- prior earnings restatements
Table 8.1 of Dirty Surplus Items:
OI Items
Changes in accting for contingencies
Additional minimum pension liability
Tax benefits of loss carry-forwards acquires
Tax benefits of dividends paid to ESOPs
Unrealized gains and losses on equity securities avail. For sale Some adjustments of deferred tax valuation allowances
funding status of pension plans
Financing inc (or exp) items
Preferred dividends
Unrealized gains on losses on debt securities avail. For sale Operating or Financing inc items
F.C. translation gains (losses)
Gains(losses) on derivative instruments for hedging purposes Restatement of prior years’ income due to accting principles. Bal/sheet items to be reclassified
Credits to s/holders’ equity for stock compensation exp.
Dividends payable.
Topic 9:
Effective tax rate for operations
Tax on OIOI before tax
ReOI1=OI1 - ( - 1) NOA0
Operating PM from sales
OI from Sales (after tax)Sales
Net CI Margin = CI/Sales
ROCE = Earn (CI)/Ave. CSE
Capitalization Ratio = NOA/CSE
Reformulated Bal/sheet
Cash equivalents
S/T investments
S/T notes receivable*
L/T debt investments
S/T borrowings
Current maturities on L/T debt
S/T note payable*
L/T borrowings
Lease obligations
Preferred stock
OAs & OLs:
All else
Minority Interest
*notes are FA/Ls if they bear the mkt rate of interest.
L/T equity investments are usually OAs if they are a >20% holding, recorded at mkt value if avail. for sale or, at cost if held to maturity. S/T equity/marketable investments are OAs if part of a trading portfolio. If used mop up excess cash = FA. Minority interest is a separate line item. And

NOA – NFO = CSE + Minority Int.
Reformulated Income Statement
Net sales
-Expenses to generate sales
=OI from sales (before tax)
-Tax on OI from sales
+Tax as reported
+Tax benefit from NFE
- Tax allocated to other OI
=OI from sales (after tax)
Other OI (exp) requiring tax alloc.
Restructuring charges and asset impair.
Merger exps
Gains/Losses on asset sales
Gains/Losses on security transactions
-Tax on other OI
After-tax operating items
Equity share in subsidiary income
Operating items in extraordinary inc
Dirty surplus op. items in Table 8.1
Hidden dirty surplus op. items
OI (after tax)
-NFE (after tax)
+Interest exp
-Interest inc.
Realized gains/losses on FAs
=NFE before tax
-Tax benefit from NFE
=NFE after tax
Gains/loss on debt retirement
+unrealized holding loss
D-S items in Table 8.1 (incl. Pref. dividends)
Hidden d-s financing items
-Minority Interest
=Comp. Income to common
Topic 10:
Reformulated CF Statement
CF from operations
+Reported cash from op.
Net cash interest payments after tax
- CF from investing
+Reported cash from inv.
+Liquidation of assets
+Sale of assets
+Maturities of assets
- Purchases of Assets
Working Cash
=FCF from op. activities
Net Dividends
+Share buy back
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