Question

400-500 Words

1. What is the rational explanation of the phenomenon of an investment increasing in value while generating losses? (b) Explain the fine line that financial analysts must walk.

2. a) Why would it seem paranoid for a novice analyst to consider every company’s income statement with suspicion? (b) What are telltale danger signals, and then, explain the analogy that “corporate budget systems are designed to reward lies and punish truth.”

3. a) Explain the essential idea of leveraged buyout? (b) Explain how the riddle of a franchiser’s profits and franchisee’s losses can be resolved?

4. a) As an analyst, explain why a careful reading of the Notes to Financial Statements will disclose if a company is exaggerating revenues. (b) Explain how a low P/E multiple company can accelerate its earnings growth and thus become perceived as a high-growth stock.

5. a) How does the use of common form income statements for a peer group allow the analyst to uncover capitalization abuses? (b) What is “restructuring,” and what is the dangerous trap that users of financial statements must avoid?

Answer 1

1)-- (a):- the rational explanation of the phenomenon of an investment increasing in value while generating losses are :--

• As explained by the tax code, the rate at which the tax code allows owners to write off property overstates actual wear and tear.

o Remember there are no salvage values in tax reporting vs financial reporting

o For real estate investors, cash on cash profit is a better measure.

MACRS with different asset classes.

(B) :--the fine line that financial analysts must walk :-

On one hand, they must to lose touch with economic reality by hewing to accounting orthodoxy; however, they must not accept the version of reality that seekers of cheap capital would like them to accept on them. Analysts should be skeptical of claims that a business's alleged costs are mere accounting conventions.

Although companies can show earnins that are perfectly in line with Gaap they can still mess with the rate of return.

2)-- ( A) --: it seem paranoid for a novice analyst to consider every company’s income statement with suspicion Because they have never been blind sided and they show too much sympathy.

PERANOID::--Paranoia involves intense anxious or fearful feelings and thoughts often related to persecution, threat, or conspiracy. Paranoia occurs in many mental disorders, but is most often present in psychotic disorders. Paranoia can become delusions, when irrational thoughts and beliefs become so fixed that nothing (including contrary evidence) can convince a person that what they think or feel is not true. When a person has paranoia or delusions, but no other symptoms (like hearing or seeing things that aren't there), they might have what is called a delusional disorder. Because only thoughts are impacted, a person with delusional disorder can usually work and function in everyday life, however, their lives may be limited and isolated.

3) (A):-- A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

==>> LBOs are conducted for three main reasons. The first is to take a public company private; the second is to spin-off a portion of an existing business by selling it; and the third is to transfer private property, as is the case with a change in small business ownership. However, it is usually a requirement that the acquired company or entity, in each scenario, is profitable and growing.

(B):--• the riddle of a franchiser’s profits and franchisee’s losses can be resolved by Cutting through the form of the transactions to the substance; it's clear that SMI's wealth has not increased