Monday, January 9, 2012

Chapter 15: Suggestions for Case Analysis


1. According to Howard Schilit of the Center for Financial Research & Analysis, red flags on a company's financial statements include all of following items except
Answer:
Accounts receivable should grow faster than sales.

According to Schilit, unusually high goodwill gains related to recent acquisitions is a red flag, suggesting an underlying problem.

2. The _____ provides the opportunity to move from a narrow, specialized view that emphasizes functional techniques to a broader, less precise analysis of the overall corporation.
Answer:
case method

 Cases present actual business situations and enable you to examine both successful and unsuccessful corporations.

3. _____ is the calculation of ratios from data in the financial statements.
Answer:
Ratio analysis

 Ratio analysis is done to identify possible financial strengths or weaknesses.

4. One of the profitability ratios measuring potential earnings is
Answer:
Gross profit margin.

 Gross profit margin indicates the total margin available to cover other expenses beyond cost of goods sold, and still yield a profit.

5. An example of an activity ratio reflecting management's use of assets is
Answer:
Asset turnover.

Asset turnover ratio indicates the utilization of all the company's assets.

6. Income statements and balance sheets in which the dollar figures have been converted into percentages are called
 Answer:
Common-size statements.

 Common-size statements are used to identify trends in each of the categories, such as cost of goods sold as a percentage of sales.

7. The _____ is useful to learn if a company embarking on a growth strategy will need to take on debt to fund this growth.
Answer:
index of sustainable growth

The index of sustainable growth indicates how much of the growth rate of sales can be sustained by internally generated funds.


8. Dollars adjusted for inflation to make them comparable over various years are called
Answer:
 Constant dollars.

One way to adjust for inflation in the U.S. is to use the Consumer Price Index (CPI).

9. The rate of interest banks charge on their lowest risk loans is called the
Answer:
 Prime interest rate.

For better assessments of strategic decisions, it can be useful to note the level of the prime interest rate at the time of the case.

10. _____ is used worldwide and measures the total output of goods and services within a country's borders.
Answer:
Gross domestic product

The amount of change in GDP from one year to the next indicates how much that country's economy is growing.
"True/False"
1. According to the Yankelovich Partners survey firm, eight out of 10 portfolio managers and 75 percent of security analysts use annual report when making decisions.
Answer:
True

Annual reports contain not only the usual income statements and balance sheets, but also cash flow statements and notes to the financial statements indicating why certain actions were taken.

2. the most important financial ratios are liquidity ratios, profitability ratios, activity rations, and bankruptcy ratios.
Answer:
False

Ratio analysis is a valuable part of SWOT analysis.

3. Competitive analysis is the calculation of ratios from data in financial statements.
Answer:
False

Ratio analysis is the calculation of ratios based on financial data.

4. A typical financial analysis of a firm would include a study of the operating statements for five years or so.
Answer:
True

A typical financial analysis of a firm includes a trend analysis of sales, profits, earnings per share, debt to equity ration, return on investment, and so on.


5. The quick ratio is how much of current assets are available to cover each dollar of current liabilities.
Answer:
False

The quick ratio measures the ability to pay off a firm's short-term obligations from current assets, excluding inventories.

6. One step in handling financial statements is to determine the financial changes as a decimal.
Answer:
False

Determining changes in financial data is expressed as a percentage as well as an absolute amount.

7. The P-value formula combines five ratios by weighting them according to their importance to a corporation's financial strength.
Answer:
False

If the corporation being studied appears to be in poor financial condition, Altman's Bankruptcy Formula is used to calculate its Z-value.

8. One of the variables in the index of sustainable growth formula is net profit before tax.
Answer:
True

The index also includes variables such as target dividends, profit after tax, and total liabilities.

9. One way to adjust for inflation in the U.S. is to use the Consumer Price Index.
Answer:
True

Dividing sales and net income by the CPI factor for that year will change the figures to 1982-1984 constant dollars.

10. There is only one best way to analyze or present a case report.
Answer:
False

There is no one best way to analyze or present a case report.



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