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PAMELA PETERSON DRAKE, PhD, CFA, is the J. Gray Ferguson Professor of Finance and Head of the Department of Finance and Business Law in the College of Business at James Madison University. Prior to joining James Madison, she was an associate dean and professor of finance at Florida Atlantic University and, previous to that, a professor at Florida State University. She has published articles in numerous journals and collaborated with Frank Fabozzi on the previous edition of this book as well as Foundations and Applications of the Time Value of Money, Capital Budgeting, and Financial Management and Analysis, all published by Wiley. She received a BS in accountancy from Miami University and her PhD in finance from The University of North Carolina at Chapel Hill.
FRANK J. FABOZZI, PhD, CFA, CPA, is Professor of Finance at EDHEC Business School and a member of the EDHEC-Risk Institute. Prior to joining EDHEC in August 2011, he held various professorial positions in finance at Yale University's School of Management from 1994 to 2011 and was a visiting professor of finance and accounting at MIT's Sloan School of Management from 1986 to 1992. He is also editor of the Journal of Portfolio Management.
About the Authors xiii
PART ONE
The Basics 1
CHAPTER 1
Introduction 3
What Is Financial Analysis? 4
Where Do We Find the Financial Information? 8
Who Gets What Type of Information and When? 10
What Does Sarbanes-Oxley Mean to Companies and Investors? 28
What Does the Dodd-Frank Act Mean for Companies and Investors? 32
Summary 34
Review 35
CHAPTER 2
Financial Statements 37
Accounting Principles: What Are They? 37
What Do the Basic Financial Statements Tell Us? 39
Accounting Flexibility 56
How Does Accounting in the United States Differ from Accounting Outside of the United States? 58
Summary 59
Review 60
CHAPTER 3
The Quality of Financial Information 63
It’s All in the Timing 65
Too Many Choices? 76
So What’s Their Business? 86
Restatements and Financial Analysis 87
Tell-Tale Signs 90
Summary 92
Review 95
PART TWO
Analysis of Financial Statements 99
CHAPTER 4
Financial Analysis 101
What Are Financial Ratios and How Do We Use Them? 102
What Are the Different Types of Financial Ratios? 105
Analysis of Return-on-Investment Ratios 122
How Can We Use Common-Size Analysis to Analyze Financial Statements? 127
Integrated Ratio Analysis 130
What Are the Pitfalls and Pratfalls of Financial Ratio Analysis? 137
Summary 143
Review 144
CHAPTER 5
Equity Analysis 147
Earnings 147
Price-Earnings Ratio 158
Dividends 161
Other Fundamentals 173
Book-to-Market Ratio 175
Summary 178
Review 179
CHAPTER 6
Cash Flow Analysis 181
Measures of Cash Flow 181
Cash Flows and the Statement of Cash Flows 184
Free Cash Flow 189
The Usefulness of Cash Flows in Financial Analysis 196
Summary 202
Review 203
PART THREE
Applying Financial Analysis 205
CHAPTER 7
Measuring Company Performance 207
Traditional Performance Measures 210
Measures of Value Added 212
Summary 237
Review 238
CHAPTER 8
Corporate Credit Analysis 241
Types of Credit Risk 241
Factors to Consider in Corporate Credit Analysis 252
Summary 263
Review 264
CHAPTER 9
Analysis of Equity Risk Using Fundamentals Factor Models 267
Measuring Risk 267
Asset Pricing Model 271
Factor Models 275
Fundamental Factor Models 276
Summary 280
Review 281
CHAPTER 10
The Lessons We Learn 283
The Lessons 288
The Future of Financial Analysis in the Post-Crisis Era 298
Review 299
Answers to End-of-Chapter Questions 301
Index 305
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