Financial Analysis and Valuation Flashcards

A company's price-to-book (P/B) ratio of 0.8 suggests the market values the company at:

Answer: 80% of its stated net asset value

A P/B ratio below 1.0 means investors are willing to pay only $0.80 for each $1.00 of the company's net book value, possibly indicating distress or undervaluation.

Which financial statement links the income statement to the balance sheet by explaining changes in equity?

Answer: Statement of changes in stockholders' equity

The statement of changes in stockholders' equity reconciles beginning and ending equity balances by incorporating net income, dividends, share issuances, and other comprehensive income.

Operating leverage refers to the degree to which a firm's:

Answer: Fixed operating costs amplify the impact of revenue changes on operating income

High operating leverage means a large proportion of fixed costs, so a given percentage change in revenue produces a larger percentage change in operating income (EBIT).

The weighted average cost of capital (WACC) is used in DCF analysis as the:

Answer: Discount rate that reflects the blended cost of all capital sources

WACC weights the after-tax cost of debt and cost of equity by their proportions in the capital structure, serving as the appropriate discount rate for free cash flows to the firm.

Which accounting principle requires recognizing revenue only when it is earned and expenses when incurred, regardless of cash timing?

Answer: Accrual accounting

Accrual accounting matches revenues and expenses to the periods they are earned or incurred, providing a more accurate picture of financial performance than cash basis.

Goodwill on a balance sheet arises when:

Answer: A company acquires another for more than the fair value of its identifiable net assets

Goodwill is recorded as the excess of acquisition price over the fair value of identifiable assets minus liabilities, representing intangible value like brand, customer relationships, and synergies.