Questions Related to Financial Statement Analysis Analysis

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1. The average stock return for Corporation A was 12% during the three-year period from 2011 to 2013. Here the corporation saw mixed results as the stock price increased 16% in 2011 as compared to just 8.2% in 2012. Here, the stock price may not be a reflection of actual corporate performance during this period. From 2011 to 2012 the company recognized a near doubling of its net income during the period. In addition the company was able to keep expenses associate with interest and salaries down during the period. The lower stock price appreciation may indicate that the market was already anticipating a large increase in Net Income, or the company may have fallen out of favor with investors.2. The standardbred deviation between each period is roughly 4% with is around 30% of the average return for the stock. This is fair considering the short time horizon being examined. As only three years are being analyzed, it is quite possible that market turbulence may have influenced stock performance irrespective of the overall business performance. This can occur as macro-economic factors heavily overwhelm the decisions making processes of the investing public. Instead of reviewing the underlying business fundamentals, investors during this three-year period may have been overweight on macroeconomic factors. This could have adversely impacted the stock price contributing to much higher standard deviation. If the standard deviation occurred over a longer time horizon of 10 to 20 years, the overall magnitude would have been much lower.3. The Coefficient of variance is calculated as the population standard deviation divided by the population mean4. To begin, the figures in the example are not indicative of economic reality. The ten-year treasury for example just crossed 2% after nearly a decade of 1.5 to 1.8% yields. This is extraordinary considering that investors are willing to lend money out for a decade at a rate less than the overall fed mandate for inflation. Here, the fed mandated inflation criteria, which is publicly available is 2%. However investors around the world are lending money to governments for less that the inflation. On real basis, investors are essentially guaranteed to lose money over their investing time horizon. The recent federal reserve minutes have noted a much faster pace of increases, but impacts on the CAPM are still unknown.When revieing the CAPM equation, most of the variable are known. The risk free, according to the case is 8%, which would be a dream in today’s environment. The beta is 1.5 indicating an above average “risk” as compared to the market. In reality Beta has nothing to do with risk, but instead measures volatility, which are two very distinct elements in investing. On many occasions professors, academicians and institution investors often loss sight of this fact. Beta, although sophisticated is not very useful in measuring the risk of an investment, in my opinion. The real risk of an investment is the propensity for permanent capital loss. This notion is very opaque and therefore doesn’t lend itself to typical corporate finance.

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Instead, professors result to Beta, which does nothing to measure the overall “risk” for investors.With that being said, for the purposes of CAPM, the equity risk premium will be defined as the overall equity return of an index above the overall risk-free rate. In this case, the risk-free rate is defined as 8%. The overall market return over this 3-year period is around 15%. As such the equity risk premium will be calculated as roughly 5%. Using these values to populate the CAPM formula of:Rf + Beta (Equity Risk Premium)We arrive at a figure of roughly 15.5%. I…

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…Disagreementa. As noted above, the managers requesting a suspension of the share repurchase are correct. The company is earning an extraordinary 30% on equity, and has done so for many years. Here, it makes sense to continually invest in the business. This allows the business to continue to take market share while earning higher profits for shareholders. It also allows the company to create a sustainable competitive advantage that allows the business to sustain its higher profitability and margins for a longer period of time. As such I believe the board director is correct. I would take it a step further and suspend all dividend payments as well. It doesn’t make sense to pay a dividend which is tax inefficient for shareholders, when the company can simply retain the earnings and continue to grow the business at rapid rates of return.11. Treasury Stock Repurchasea. No, this is not a good use of capital in my opinion. At $62 a share, the stock price seems to be dramatically overvalued in comparison to its underlying business operations. Likewise, spending that capital on share repurchases has a very large opportunity cost for the business. This cost is that loss of value that could have been obtained by reinvesting in the business.b. Creditors should be indifferent here. There debt service coverage ratio is more than adequate to service the existing debt. Likewise the growth of the company has far outpaced the growth in leverage, indicating a strong business model. In addition, in the event of serve economic decline, the company cash position itself is more than adequate to service debt.Account NameDebitsCreditsCash$63,000.00 Treasury Stock $63,000.00c.12. The transaction raises cash on the balance sheet, raising shareholders equity on the balance sheet, no effect on the income statement, and increases cash from investing activities on the balance sheet.....

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