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INTERPRETATION
MODULE 4
CHAPMAN UNIVERSITY
Argyros School of Business and Economics
Questions
Course Roadmap
Module Topic
1
11
12
13
14
15
Focus
Exam
ANALYSIS:
Understanding and Evaluating
Financial Statements:
MID-TERM #1
Helps us answer:
1. Where does the firm
operate?
2. Where is the firm currently?
VALUATION:
Building Forecasting Models and
Determining Value:
Helps us answer:
1. Where is the firm going?
2. What is the firm worth?
MID-TERM #2
FINAL EXAM
Composed of
Supply of Credit
There are many
sources of credit to
meet companies
demand which
include:
Trade Credit
Bank Loans
Term loans
Letters of credit
Available on demand
Floating interest rate
Lines of credit
Mortgages
Lease Financing
Typical items
Machinery
Computer equipment
Vehicles
Leasing firm structures lease
Considers collateral
Credit risk of the lessee
Commercial paper
Short term borrowing facility under SEC
regulations which cannot exceed 270 days
Bonds or debentures
Public borrowings for longer durations regulated
by the SEC
Principal borrowed is paid back on a fixed term
with semi-annual or annual interest payments
Industry competition
Buyer power
A factor if suppliers have strong bargaining power and can demand higher prices
and early payments
Threat of substitution
Can be a credit risk if customers have the ability to have stronger price concessions
Supplier power
Involves the companys competitive position and the effect on its financial results
Occurs when a company has limitations on products such as to inhibit price increases
or pass costs to customers
Threat of entry
Tax
expense
Interest expense
plus other
non-operating
expenses
Statutory
tax rate
Coverage Analysis
Coverage Analysis
Times Interest Earned Ratio
Times interest
=
earned
Coverage Analysis
EBITDA Coverage Ratio
EBITDA coverage =
Earnings before tax + Interest expense, net + Depreciation + Amortization
Interest expense
Coverage Analysis
Cash from Operations to Total Debt
Measures a companys ability to generate additional
cash to cover debt payments as they come due.
Cash from
operations to
total debt
Coverage Analysis
Free Operating Cash Flow to Total Debt
Considers excess operating cash flow after cash is
spent on capital expenditures
Free operating
cash flow to
total debt
Current Ratio
Current assets are those assets that a company
expects to convert into cash within the next
operating cycle, which is typically a year.
Current liabilities are those liabilities that come due
within the next year.
An excess of current assets over current liabilities
(Current assets Current liabilities), is known as net
working capital or simply working capital.
Quick Ratio
Solvency Ratios
Solvency refers to a companys ability to meet
its debt obligations.
Solvency is crucial since an insolvent company
is a failed company.
Two common solvency ratios:
Solvency Analysis
Solvency Analysis
Total liabilities
Liabilities-to-equity ratio=
Stockholders equity
Solvency Analysis
Total debt-to-equity =
Long-term debt including current portion + Short-term debt
Stockholders equity
limits
Collateral
Repayment terms
Covenants
Value is known
Liquidation is straight-forward
Longer
Terms
Greater
Chance of
Default
Greater
= Credit Risk =
Higher Cost
of Debt
Financing
Macroeconomic statistics
Industry data
Monitored by economists
Through frameworks such as Porters Five Forces and SWOT
analysis
Problems