Essay About Net Income And Absolute Measure

Fundamentals of Financial Accounting & Analysis
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Notes[pic 1]Class NotesforChapter FourofFundamentals of Financial Accounting & Analysis [pic 2]NotesContentsFinancial Statement Analysis        1Basic and Diluted EPS        7Analysts’ Consensus EPS        8Pro forma EPS        9Financial Statement AnalysisBelow are 5 general steps for analyzing a firm:Choose a purpose for the analysis and relevant decision criteria.  Loan money to?  Invest in?  Sell to?  Buy from?  Work for? Compete against?  Etc.Gather data. Sources include 10-K, 10-Q, press releases, news articles, spying(!?), etc. Perform quantitative and qualitative assessments of data. Ratios, “SWOT,” “5 Forces,” etc.Predict the relevant future, based upon the above steps. For instance, build a pro forma financial model that goes out 1, 2, 3, 5, 10 years.Conduct a sensitivity test on the model in 4 and make a decision. For instance, change assumptions, e.g. sales growth, margins, etc., and then decide whether to invest in, lend to, sell to, buy from, work for the firm.All purposes (identified in Step 1) require quantitative and qualitative assessments of data (Step 3).  Quantitative analysis involves ratio analysis.  Ratios are simply divisions of numbers.  When we blindly calculate them without thinking, we run into trouble.  Name some of the warnings about ratios identified in FFAA Chapter 4:Give the formulas for the following ratios or amounts:Gross Profit (Gross Margin) (absolute measure)Gross Margin Ratio (relative measure)EBIT (absolute measure)EBIT Margin Ratio (relative measure)Current RatioDays sales in inventoryDays sales outstanding Days payables outstandingDebt to capitalGive the formula of the ratio that would be appropriate to answer each of the following questions:How long does it take a firm to pay its bills (on average)?How long does it take a firm to sell its inventory (on average)?How long does it take a firm to collect cash from its receivables (on average)?What is the firms capital structure?How well did the firms assets perform in generating net income?How much of the firms net income was paid as dividends to the owners?What does the stock market estimate the value of the firm to be?What is the approximate cost of the firms debt on a pretax basis?What is the approximate cost of the firms equity?What is the firms effective tax rate?Below are data for calculating the ratios shown in FFAA, Chapter 4.Income Statement Data ItemsYear 4Sales800COGS500SG&A Expense120Depreciation Expense80Operating Income (EBIT)100Interest Expense14Pre Tax Income86Tax Expense30Net Income56Dividends per Share0.06Balance Sheet Data ItemsYear 4Cash and Cash Equivalents20Short term Investments 10Accounts Receivable70Inventory180Total Current Assets280Total Assets900Accounts Payable80Total Current Liabilities80Interest Bearing Debt300Owners Equity520Number of Shares Outstanding (#)100Cash Flow Data Items Operating Cash Flow40Capital Expenditures-15Net Change in Interest Bearing Debt8Dividends paid-6Share repurchases (in $)-20Other Items Beta 1Year End Stock Price (FYE Year 4) $15.00 Year End Stock Price (FYE Year 3) $12.00Calculate the below ratios and show the calculations in the space provided.