Study Guide - University of Phoenix

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Week 2 Study Guide: Financial Statement Analysis

Readings and Key Terms

• Ch. 4 of Fundamentals of Corporate Finance

o Financial statement analysis

o Trend analysis

o Benchmark

o Common-size financial statements

o Financial ratio

o Insolvency

o Financial leverage

o Default risk

o Standard Industrial Classification (SIC) System

o North American Industry Classifcation System (NAICS)

• Ch. 18

o Replacement cost

o Book value

o Enterprise value

o Nonoperating assests (NOA)

o Terminal value

o Cash flow

o Free cash flows

o Break-even

o Dividend discount model (DDM)

Content Overview

• Financial ratios

o Understand components of financial ratios.

• Calculate key ratio equations

o Liquidity

• Current ratio

• Quick ratio

• Cash ratio

o Efficiency

• Inventory turnover

• Day’s sales in inventory

• Accounts receivable turnover

• Day’s sales outstanding

• Total asset turnover

• Fixed asset turnover

o Leverage

• Total debt ratio

• Debt-to-equity ratio

• Equity multiplier

• Times interest earned

• Cash coverage

o Profitability

• Gross profit margin

• Operating profit margin

• Net profit margin

• EBIT return on assets

• Return on assets (ROA)

• Return on equity (ROE)

o Market value indicator

• Earnings per share

• Price-earnings ratio

o DuPont equation

• ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier

• ROE = (Net Income / Net Sales) x (Net Sales / Total Assets) x (Total Assets / Total Equity)

o Interpret financial ratio results

• Interpret financial ratio results against historical company data.

• Interpret financial ratio results against industry benchmarks.

o Business valuation

• Explain why the choice of organizational form is important.

• Describe why cash flow and break-even are important in business.

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