...Instructor’s Manual Fundamentals of Financial Management twelfth edition James C. Van Horne John M. Wachowicz JR. ISBN 0 273 68514 7 Pearson Education Limited 2005 Lecturers adopting the main text are permitted to photocopy the book as required. © Pearson Education Limited 2005 Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk Previous editions published under the Prentice-Hall imprint Twelfth edition published under the Financial Times Prentice Hall imprint 2005 © 2001, 1998 by Prentice-Hall, Inc. © Pearson Education Limited 2005 The rights of James C. Van Horne and John M. Wachowicz JR. to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patent Act 1988. ISBN: 0 273 68514 7 All rights reserved. Permission is hereby given for the material in this publication to be reproduced for OHP transparencies and student handouts, without express permission of the Publishers, for educational purposes only. In all other cases, no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road...
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...Instructor’s Manual Fundamentals of Financial Management twelfth edition James C. Van Horne John M. Wachowicz JR. ISBN 0 273 68514 7 Pearson Education Limited 2005 Lecturers adopting the main text are permitted to photocopy the book as required. © Pearson Education Limited 2005 Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk Previous editions published under the Prentice-Hall imprint Twelfth edition published under the Financial Times Prentice Hall imprint 2005 © 2001, 1998 by Prentice-Hall, Inc. © Pearson Education Limited 2005 The rights of James C. Van Horne and John M. Wachowicz JR. to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patent Act 1988. ISBN: 0 273 68514 7 All rights reserved. Permission is hereby given for the material in this publication to be reproduced for OHP transparencies and student handouts, without express permission of the Publishers, for educational purposes only. In all other cases, no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road...
Words: 80242 - Pages: 321
...Instructor’s Manual Fundamentals of Financial Management twelfth edition James C. Van Horne John M. Wachowicz JR. ISBN 0 273 68514 7 Pearson Education Limited 2005 Lecturers adopting the main text are permitted to photocopy the book as required. © Pearson Education Limited 2005 Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk Previous editions published under the Prentice-Hall imprint Twelfth edition published under the Financial Times Prentice Hall imprint 2005 © 2001, 1998 by Prentice-Hall, Inc. © Pearson Education Limited 2005 The rights of James C. Van Horne and John M. Wachowicz JR. to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patent Act 1988. ISBN: 0 273 68514 7 All rights reserved. Permission is hereby given for the material in this publication to be reproduced for OHP transparencies and student handouts, without express permission of the Publishers, for educational purposes only. In all other cases, no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road...
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...lists available at ScienceDirect Journal of Accounting and Economics journal homepage: www.elsevier.com/locate/jae Understanding earnings quality: A review of the proxies, their determinants and their consequences$ Patricia Dechow a, Weili Ge b, Catherine Schrand c,n a b c University of California, Berkeley, CA 94720, United States University of Washington, Seattle, WA 98195, United States University of Pennsylvania, Philadelphia, PA 19104, United States a r t i c l e i n f o abstract Available online 4 November 2010 Researchers have used various measures as indications of ‘‘earnings quality’’ including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because ‘‘quality’’ is contingent on the decision context. We also point out that the ‘‘quality’’ of earnings is a function of the firm’s fundamental performance. The contribution of a firm’s fundamental performance to its earnings quality is suggested as one area for future work. & 2010 Elsevier B.V. All rights reserved. JEL classification: G31 M40 M41 Keywords: Earnings quality Earnings management Review Survey 1. Introduction Statement of Financial Accounting Concepts No. 1 (SFAC No. 1) states that ‘‘Financial reporting should...
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...Introduction to Earnings: Earnings are the fundamental indicator of a company’s value. Also referred to as ‘the bottom line’ and the ‘net income’, a company’s earnings is seen as the most important figure in a company’s financial statement as it is the summary measure of a company’s performance using the accrual basis of accounting. The theoretical value of a company’s stock is the present value of future earnings, or its ability to generate profit in the future (Lev, B. (1989). Earnings have a corresponding relationship with the projected value of a company with increased earnings representing an increase in company value which is inversely so for companies with lower earnings. Part A: Earnings Quality Although it is very common for investors to look at earnings in terms of quantity, the amount that the company has earned, developing an understanding of the quality of those earnings is vital to forecasting the quantity and credibility of future earnings of the company (smith). As reported earnings are a predominant driver of success, the reporting of earnings is a crucial business area that requires focus and direction. As so much of a businesses future and value is reflected in its earnings, it is very important that investors are provided with information that is free from mistakes and manipulation in order to get a true illustration of that company’s performance. The extent to which the financial performance is free from these errors and manipulations refers to the...
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...Earning management is good or not? Introdcution This essay is to examine whether earning management is it good or bad. Though there is so many debate about whether it should be accepted to be good rather than bad, however, this essay will explain the both side of earnings management. Earnings management reduces the quality of financial reporting, it can interfere with the resource allocation in the economy and can bring adverse consequences to the financial market. This essay analyses both, causes and motives of earnings management as well as possible remedies. Therefore, it is not surprising that market participants, legislators, regulators, and academics are concerned with the need to control financial reporting abuses. The following paper will demonstrate how the effect to the good side and the bad side of it and outline the reason for the impact to appreciate the good and the bad of earnings management. Identify what is key driver of motivation either an earning management is good or bad. This will enable us to analyse the good and bad side nature of the earning management. BODY Good Side of Earning Management There is definitely a good side of earning management if it is properly practice for the benefits of the companies prior to achieving the key performance objective of the companies. Good earnings management means ―reasonable and proper practices. ―Accounting Subjectivity and Earnings Management: A Preparer Perspective‖ referred by Parfet (2000) contends:...
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...eurojournals.com/finance.htm Fundamental Analysis Strategy and the Prediction of Stock Returns Jaouida Elleuch* Faculty of Economics and management sciences (FSEG), University of Sfax, Tunisia E-mail: Elleuchj@yahoo.fr Abstract This paper examines whether a simple fundamental analysis strategy based on historical accounting information can predict stock returns. The paper’s goal is to show that simple screens based on historical financial signals can shift the distribution of returns earned by an investor by separating eventual winners stocks from losers. Results show that historical accounting signals can be used to improve the entire distribution of future returns earned by an investor. In fact, despite the overall down activity of the market over the sample period chosen, results reveal that fundamental accounting signals can be used to discriminate from an overall sample generating future negative returns of -0,116 a winner portfolio that provide positive future return of 0,019 from a loser one generating a negative return of -0,229. The over-performance of the winner portfolio seems to be attributable to the ability of the fundamental signals to predict future earnings. In fact, results show that fundamental signals have a positive and significant correlation with future earnings performance and that the winner portfolio have a future earning’s realisation (0,100) that outperforms that of the loser portfolio (-0,012). Keywords: Fundamental Analysis, Market Efficiency, Stock...
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...Nijmegen Center for Economics (NiCE) Institute for Management Research Radboud University Nijmegen P.O. Box 9108, 6500 HK Nijmegen, The Netherlands http://www.ru.nl/nice/workingpapers 1 Abstract We construct a compound measurement tool to comprehensively assess the quality of financial reporting in terms of the underlying fundamental qualitative characteristics (i.e. relevance and faithful representation) and the enhancing qualitative characteristics (i.e. understandability, comparability, verifiability and timeliness) as defined in ‘An improved Conceptual Framework for Financial Reporting’ of the FASB and the IASB (2008). The operationalization of these qualitative characteristics results in a 21-item index. Using 231 annual reports from companies listed at US, UK, and Dutch stock markets in 2005 and 2007, we test our compound measurement tool on internal validity, inter-rater reliability (Krippendorff’s alpha) and internal consistency (Cronbach’s alpha). Our findings suggest that the measurement tool used in this study is a valid and reliable approach to assess the quality of financial reports. The measurement tool contributes to improving the quality assessment of financial reporting information, fulfilling a request from both the FASB and the IASB (2008) to make the qualitative characteristics operationally measurable. Direct correspondence to Geert Braam, Department of Economics, Nijmegen School of Management, Radboud University Nijmegen, P.O. Box 9108, 6500 HK...
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...■ Fundamental Analysis: Fundamental analysis is a technique that attempts to determine a security’s value by focusing on underlying factors that affect a company's actual business and its future prospects. On a broader scope, you can perform fundamental analysis on industries or the economy as a whole. The term simply refers to the analysis of the economic well-being of a financial entity as opposed to only its price movements Fundamental analysis serves to answer questions, such as: • Is the company’s revenue growing? • Is it actually making a profit? • Is it in a strong-enough position to beat out its competitors in the future? • Is it able to repay its debts? • Is management trying to "cook the books"? The term fundamental analysis is used most often in the context of stocks, but we can perform fundamental analysis on any security, from a bond to a derivative. As long as we look at the economic fundamentals, we are doing fundamental analysis. For the purpose of this tutorial, fundamental analysis always is referred to in the context of stocks. Intrinsic Value of Fundamental Analysis: Intrinsic value is one of the primary assumptions of fundamental analysis is that the price on the stock market does not fully reflect a stock’s “real” value. In financial jargon, this true value is known as the intrinsic value. For example, let’s say that a company’s stock was trading at $20. After doing extensive homework on the company, we determine...
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...Q. No 6 . What are the different types of ratios you would use while analyzing the financial statements of a company? Give examples of each of these types. Answer 1: The different types of financial ratios used in the analyzing financial statements of a company are: 1. Liquidity Ratios 2. Leverage Ratios 3. Turnover Ratio 4. Profitability Ratio 5. Valuation Ratio Let us consider the Profit and Loss A/c and Balance Sheet of OM Enterprises Limited to illustrate the calculation of these ratios Profit and Loss Account of OM Enterprises Limited for the year ending on March 31, 2006 |PARTICULARS |AMOUNT (Millions) |AMOUNT (Millions) | |Net Sales | |350 | |Cost of goods sold | |245 | |i) Stock |175 | | |ii) Wages and salaries |30 | | |iii)Other manufacturing expenses |40 | | |Grofit profit | |105 | |Operating Expenses...
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...Analysis Session #1: Fundamental Analysis and Valuation March 2015 In-Mu Haw (许 仁茂) 1 Create value through acquisition to build brands (over 100) 2 Lenovo vs. HP Stock Price Lenovo created value through acquisitions Poor acquisition (overpaid: $8.8B) $18 million in 2013 3 Deloitte Report Chet Wood, Managing Partner of Deloitte LLP, Merger & Acquisition Services: • • About 70 percent of all health plan M&As fail to create meaningful shareholder value. CFOs and management can take a stronger role in M&A deal evaluation, especially on revenue growth. 4 Use of Financial Statements for Valuation “I am considering to buy a small packing company. They offered me RMB 15 million and gave me their last 2 years’ Income Statements and Balance Sheets. I think it’s overpriced. How much do you think I should pay?” How will you use I/S and B/S to assess the target firm’s fair value? 5 Warren Buffet Emphasized importance of looking at a firm’s Competitive advantage of products Long-term growth potential… for good investment 6 Sound Fundamental Analysis One does not buy a stock, one buys a business. When buying a business, know the business. Good firms can be bad buys (if overpriced). Price is what you pay, value is what you get. Value of firm = Value of Debt + Value of Equity TA = L + SE (BV) on B/S 7 TA – L = SE SE (BV) vs. Market value of equity 8 Stock Price What is intrinsic value? Is the price overvalued? P/E=41: What earnings growth rate investors...
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... 2006). This paper reflects how stock price is determined by considering the effect of different factors and outlines whether the internal, external and economic factors have impact on stock pricing. This study is about to know whether Dividends, paid up capital, market capital, corporate social responsibility, lawsuits, Retained Earnings, AGM, EGM, Earning Per Share, Rumors, Margin Loan, Net Income, Face Value, Return on Investment, Goodwill of the firm, Company News, Analysts Report, Sentiment, Rumors, etc. depends on stock price or merely some special factors like stock dividend, P/E ratio, government policy, macroeconomics fundamental, investors sentiment, analyst report, Goodwill, AGM, EPS, to determine the share price. Whether the investors consider these determinants before investment decision or not or increase or decrease the stock price in accordance to change the agents advice, company news, etc. or merely in accordance with the change of Dividends and Earnings. The researchers endeavor to find out the most fundamental determinant...
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...David Rossi & Dhiraj Thakker Investments – Professor Flaherty Stock- Trak Portfolio Report The stock trak game was a great opportunity to gain first-hand experience with making trades in the stock market. The experience we gained through the game gave us the ability to manage large sums of money, giving us the opportunity to recognize the importance of preparing and utilizing portfolios in the career development process, to be aware of the component parts that make your portfolio effective, and to understand how to compile and present your portfolio in a professional manner. The initial round of investments to our portfolio was comprised of seven domestic stocks. The main goal was to acquire stable, well-known companies that would pose low risk. These stocks were selected with minimal analysis due to their market capitalizations and the associated company’s reputations. We selected several Blue chip stocks, because they appeared to match our goals of stability and minimizing risk. Since these companies are very large, well established corporations, we understood that the possibility of significant growth in equity is unlikely due to the established maturity of the companies. For this reason, we did not expect to earn our largest return in this area of our portfolio, but instead we were hoping for small growth, while collecting dividends. The first stock purchased was Microsoft (MSFT). Microsoft is a large cap computer software...
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...will be marked as zero. Marks will not be awarded for explanations. Note: 2 marks each a. Which of the following statements applies to the efficient contracting version of positive accounting theory? 1) Earnings management is not necessarily unethical. 2) Firms should design managerial compensation contracts with a high proportion of compensation based on net income. 3) Debt contracts typically contain covenants based on accounting variables. 4) Financial reporting should not be conservative. b. Which of the following statements best captures the meaning of the decision usefulness approach to financial reporting? 1) 2) 3) 4) c. The decision usefulness approach helps standard setters design successful accounting standards. The decision usefulness approach ensures that accountants and auditors behave ethically. The decision usefulness approach encourages the supply of useful information to investors. The decision usefulness approach supports principles-based accounting standards. Which of the following statements about the fundamental value of a share is correct? 1) The fundamental value of a share is the share’s price on an efficient market. 2) The fundamental value of a share is the share’s price on an efficient market with no inside information. 3) The fundamental value of a share is the share’s price if investors are...
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...Biovail’s estimate that their 3rd quarter revenue would be impacted by $10 to $20 million due to the recent trucking accident. My conclusion is that Management has made serious mistakes in this estimate and it is not clear if this is due to incompetence or an intention to deceive investors. While my high level estimates show that a truck could hold upwards of $53.46 million worth of Wellbutrin® XL if completely full (and therefore the truck would only need to be ~19% full to contain $10 million worth) the bill of lading obtained by the state trooper clearly showed that the total weight of the freight on board was only 11,690 pounds. Even if you assume the entire weight of the freight was product and exclude the weight of the pallets, drums and packaging (for which weight estimates were not provided in the research materials) the maximum value of the Wellbutrin® XL on board would have to be less than $7.41 million. This indicates that Management’s estimate of the lost revenue is overstated by at least $2.59 million to $12.59 million or 35% to 170% and likely much more than those figures would suggest. Furthermore for the losses to even reach these high estimates, one would have to assume the product was a complete loss which is highly unlikely that such an accident would ruin the entire shipment of drugs. Given that Management indicated that the manufacturing cost of the shipment had been fully insured the economic loss (if any) to Biovail would be significantly mitigated...
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