Business Analysis and Valuation_ Using Financial Statements, Text and Cases

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Business Analysis and Valuation_ Using

Financial Statements, Text and Cases

c h a p t e r 1-1 A Framework for Business Analysis an

d Valuation Using Financial Statements T h

e purpose o

f this chapter is to outline a comprehensive frameworkfor fi nancial statement analysis. Because fi nancial statements provide the most widelyavailable data on public corporations economic activities, investors and other stake-holders rely on fi nancial reports to assess the plans and performance of fi rms and corpo-rate managers.A variety of questions can be addressed by business analysis usin

g fi nancial state-ments, as shown in the following examples: A security analyst may be interested in asking: How well is the firm I am follow-ing performing? Did the firm meet my performance expectations? If not, why not?What is the value of the firms stock given my assessment of the firms current andfuture performance? A loan officer may need to ask: What is the credit risk involved in lending a certainamount of money to this firm? How well is the firm managing its liquidity and sol-vency? What is the firms business risk? What is the additional risk created by thefirms financing and dividend policies? A management consultant might ask: What is the

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structure of the industry in whichthe firm is operating? What are the strategies pursued by various players in the in-dustry? What is the relative performance of different firms in the industry? A corporate manager may ask: Is my firm properly valued by investors? Is our in-vestor communication program adequate to facilitate this process? A corporate manager could ask: Is this firm a potential takeover target? How muchvalue can be added if we acquire this firm? How can we finance the acquisition? An independent auditor would want to ask: Are the accounting policies and accru-al estimates in this companys financial statements consistent with my understand-ing of this business and its recent performance? Do these financial reportscommunicate the current status and significant risks of the business?Financial statement analysis ...