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A312 Week 2 Notes

by: Victoria Carr

A312 Week 2 Notes BUS-A312

Victoria Carr
GPA 3.2
Intermediate Accounting II
Salman Arif

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Intermediate Accounting II
Salman Arif
Class Notes
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This 4 page Class Notes was uploaded by Victoria Carr on Friday January 23, 2015. The Class Notes belongs to BUS-A312 at Indiana University taught by Salman Arif in Winter2015. Since its upload, it has received 199 views. For similar materials see Intermediate Accounting II in Accounting at Indiana University.


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Date Created: 01/23/15
k 30 CWSS EmWPXQg Scmam A 1200 39Cf 7 J RUE 5amp2 Ctr loaf 0 t 42 049 mu 7 J59 395 51900 i L390 EQW V 2 V O Mai8 X e 0010 8 3r 3 A mm W m l 1 I z zkm39ilD I im t 940 HA2 H H lt 1 L Jr V quot w 452 Jaga k V r 7 9 A312 an 21 Notes Investors Perspective Ratio Analysis allows you to compare varying companies on a level playing field Profitability Measure 0 Return on Assets Slide 4 Net Income Interest Expense 1 tax rate Average Total Assets I Interest Expense makes the equation independent of financing I 1 tax rate accounts for the tax shield 0 Breaking down ROA Slide 5 0 Asset Turnover ATO ability to sell assets 0 Profit Margin PM ability to make profit I Using these 2 allow you to compare companies and using judgment know which would have a higher PM and which would have a higher ATO I Ex Macys higher PM WalMart higher ATO 0 Return on Common Equity ROE Slide 6 Net Income Preferred Dividends Average Common Equity 0 Relationship between ROE and ROA Slide 7 0 Debt Equity measure leverage debt 0 Cost of debt is bigger than ROA 9 ROE gt ROA 0 Cost of debt less than ROA 9 Equity Holders love debt I There is fine balance with debt because the more you take out and the market takes out the higher the cost of debt will go 0 Slide 8 0 Without calculating you can look at Scenario A amp B to know around what ROE will be 0 A ROE will be bigger than 12 because cost of debt is below ROA o B ROE lower than 5 because cost of debt is bigger than ROA 0 Slide 11 o ROA amp ROE can be used to value stocks 0 Dividend Discount Model Slide 13 0 Not commonly used because not every company pays dividends I Ex Google O dividends but very high stock price 0 Discounted Cash Flows Model Slide 14 0 Same idea as DDM but you make a lot of assumptions about free cash ows 0 Residual Income Model Slide 16 0 Model that hedge funds use 0 DDM Scenario A Slide 23 A312 Ian 21 Notes 0 Calculations shown attached 0 Issue with DDM model is that it places the most value on the last year which is a very large assumption vs RIM where most value is coming from the book value which you know TODAY 0 Slide 24 0 Required Income BV Cost of Capital 0 Slide 25 0 Year 3 Beginning BV 112 Year 2 Beg BV 15 Income 2 Dividends 125 0 Slide 26 o Firm value above book value because firm plus cost of capital so it is selling at a premium 0 Slide 32 o Firm value below BV because firm less cost of capital so sells at a discount 0 If the firm is returning below the cost of capital it discounts


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