· Read the article and summarize. · Discuss your reaction to the article · Generate 2-3 recommendations for an organization needing to create a more "thriving" environment. · Your recommendations should be written as if you were an OB Consultant and were trying to convince top leadership the value of a "thriving" environment. Be sure to utilize your breadth of knowledge about OB. You will be graded on your ability to use the concepts from our course to strengthen your argument. For example: performance management, motivation, leadership, and/or job design would likely relate to the article but I am sure other concepts would also fit. **Please write 2 pages. Please provide high quality. Aswath Damodaran! 1! Financial Statement Analysis! “The raw data for investing” Aswath Damodaran! 2! Questions we would like answered…! Assets Liabilities Assets in Place Debt Equity What is the value of the debt? How risky is the debt? What is the value of the equity? How risky is the equity? Growth Assets What are the assets in place? How valuable are these assets? How risky are these assets? What are the growth assets? How valuable are these assets? Aswath Damodaran! 3! Basic Financial Statements!   The balance sheet, which summarizes what a firm owns and owes at a point in time.   The income statement, which reports on how much a firm earned in the period of analysis   The statement of cash flows, which reports on cash inflows and outflows to the firm during the period of analysis Aswath Damodaran! 4! The Accounting Balance Sheet! Assets Liabilities Fixed Assets Debt Equity Short-term liabilities of the firm Intangible Assets Long Lived Real Assets Assets which are not physical, like patents & trademarks Current Assets Financial InvestmentsInvestments in securities & assets of other firms Short-lived Assets Equity investment in firm Debt obligations of firm Current Liabilties Other Liabilities Other long-term obligations Figure 4.1: The Balance Sheet Aswath Damodaran! 5! Principles underlying accounting balance sheets!   An Abiding Belief in Book Value as the Best Estimate of Value: Unless a substantial reason is given to do otherwise, accountants view the historical cost as the best estimate of the value of an asset.   A Distrust of Market or Estimated Value: The market price of an asset is often viewed as both much too volatile and too easily manipulated to be used as an estimate of value for an asset. This suspicion runs even deeper when values are is estimated for an asset based upon expected future cash flows.   A Preference for under estimating value rather than over estimating it: When there is more than one approach to valuing an asset, accounting convention takes the view that the more conservative (lower) estimate of value should be used rather than the less conservative (higher) estimate of value. Aswath Damodaran! 6! Measuring asset value! .

1. · Read the article and summarize.
· Discuss your reaction to the article
· Generate 2-3 recommendations for an organization needing to
create a more "thriving" environment.
· Your recommendations should be written as if you were an OB
Consultant and were trying to convince top leadership the value
of a "thriving" environment.
Be sure to utilize your breadth of knowledge about OB. You
will be graded on your ability to use the concepts from our
course to strengthen your argument. For example: performance
management, motivation, leadership, and/or job design would
likely relate to the article but I am sure other concepts would
also fit.
**Please write 2 pages. Please provide high quality.
Aswath Damodaran! 1!
Financial Statement Analysis!
“The raw data for investing”
Aswath Damodaran! 2!
Questions we would like answered…!

2. Assets Liabilities
Assets in Place Debt
Equity
What is the value of the debt?
How risky is the debt?
What is the value of the equity?
How risky is the equity?
Growth Assets
What are the assets in place?
How valuable are these assets?
How risky are these assets?
What are the growth assets?
How valuable are these assets?
Aswath Damodaran! 3!
Basic Financial Statements!
firm owns and
owes at a
point in time.
earned in
the period of analysis

3. and
outflows to the firm during the period of analysis
Aswath Damodaran! 4!
The Accounting Balance Sheet!
Assets Liabilities
Fixed Assets
Debt
Equity
Short-term liabilities of the firm
Intangible Assets
Long Lived Real Assets
Assets which are not physical,
like patents & trademarks
Current Assets
Financial InvestmentsInvestments in securities &
assets of other firms

4. Short-lived Assets
Equity investment in firm
Debt obligations of firm
Current
Liabilties
Other
Liabilities Other long-term obligations
Figure 4.1: The Balance Sheet
Aswath Damodaran! 5!
Principles underlying accounting balance
sheets!
Value: Unless
a substantial reason is given to do otherwise, accountants view
the
historical cost as the best estimate of the value of an asset.
of an asset
is often viewed as both much too volatile and too easily
manipulated
to be used as an estimate of value for an asset. This suspicion
runs

5. even deeper when values are is estimated for an asset based
upon
expected future cash flows.
estimating it:
When there is more than one approach to valuing an asset,
accounting
convention takes the view that the more conservative (lower)
estimate
of value should be used rather than the less conservative
(higher)
estimate of value.
Aswath Damodaran! 6!
Measuring asset value!
begin with the
historical cost at which assets were acquired and financing
raised, they
are no designed to measure the current value of assets.
at most
companies today, are current assets. There are a handful of
sectors

6. (such as banks) where assets are marked up to market.
from an
accounting statement are not measures of the current values of
either.
ng, a trend in both US and international
accounting,
aims to bring asset values in accounting balance sheets closer to
their
current market values.
Aswath Damodaran! 7!
A Financial Balance Sheet!
Assets Liabilities
Assets in Place Debt
Equity
Fixed Claim on cash flows
Little or No role in management
Fixed Maturity
Tax Deductible

7. Residual Claim on cash flows
Significant Role in management
Perpetual Lives
Growth Assets
Existing Investments
Generate cashflows today
Includes long lived (fixed) and
short-lived(working
capital) assets
Expected Value that will be
created by future investments
Aswath Damodaran! 8!
The Income Statement!
Figure 4.2: Income Statement
Revenues
Gross revenues from sale
of products or services
- Operating Expenses
Expenses associates with
generating revenues
= Operating IncomeOperating income for the
period
- Financial ExpensesExpenses associated with

8. borrowing and other financing
- TaxesTaxes due on taxable income
= Net Income before extraordinary items
Earnings to Common &
Preferred Equity for
Current Period
- (+) Extraordinary Losses (Profits)Profits and Losses not
associated with operations
- Income Changes Associated with Accounting ChangesProfits
or losses associated
with changes in accounting
rules
- Preferred DividendsDividends paid to preferred
stockholders
= Net Income to Common Stockholders
Aswath Damodaran! 9!
Principles underlying accounting income
statements!
selling a
good or service is recognized in the period in which the good is
sold or
the service is performed (in whole or substantially). A
corresponding
effort is made on the expense side to match expenses to

9. revenues.
financing and
capital
expenses.
• Operating expenses are expenses that, at least in theory,
provide benefits
only for the current period; the cost of labor and materials
expended to
create products that are sold in the current period is a good
example.
• Financing expenses are expenses arising from the non-equity
financing
used to raise capital for the business; the most common example
is interest
expenses.
• Capital expenses are expenses that are expected to generate
benefits over
multiple periods; for instance, the cost of buying land and
buildings is
treated as a capital expense.

10. Aswath Damodaran! 10!
Measuring accounting profitability!
invested
in an asset or business, you get accounting returns. It can take
these
forms:
• Return on equity = Net Income/ Book Value of Equity
• Pre-tax Return on (invested) capital = Operating Income/
(Book Value of
Equity + Book Value of Debt – Cash)
t, relative to revenues: By scaling profits to revenues,
you can
arrive at profit margins. Again, it can take two forms:
• Net Margin = Net Profit/ Revenues
• Operating Margin = Operating Income/ Revenues
ng margin can also be
computed in

11. after-tax terms, by multiplying each by (1- tax rate)
Aswath Damodaran! 11!
Measuring financial leverage!
business can be
scaled to either the equity in the business or the total capital
(debt plus
equity).
• Debt/ Equity Ratio = Debt/ Equity
• Debt/Capital Ratio = Debt/ (Debt + Equity
Both ratios can be computed in book value or market value
terms.
ws and earnings: The
financial
leverage burden can also be stated in terms of total debt or debt
payments each period:
• Debt/EBITDA = Debt/ EBITDA

12. • Interest coverage ratio = Operating Income/ Interest Expenses
Aswath Damodaran! 12!
Accounting inconsistencies…!
miscategorized in
financial statements.In particular,
• Operating leases are considered as operating expenses by
accountants but
they are really financial expenses
• R &D expenses are considered as operating expenses by
accountants but
they are really capital expenses.
recognition and
extraordinary items is used to manage earnings and provide
misleading
pictures of profitability.

13. Aswath Damodaran! 13!
Dealing with Operating Lease Expenses!
Expenses at
the pre-tax cost of debt
- the value of which is equal to the
debt
value of operating leases. This asset now has to be depreciated
over
time.
these
changes:
• Adjusted Operating Earnings = Operating Earnings +
Operating Lease
Expense - Depreciation on the leased asset
• If we assume that depreciation = principal payment on the
debt value of

14. operating leases, we can use a short cut:
Adjusted Operating Earnings = Operating Earnings + Debt value
of
Operating leases * Cost of debt
Aswath Damodaran! 14!
The Effects of Capitalizing Operating Leases!
used in the
cost of capital and levered beta calculation
s will
now be
before the imputed interest on the operating lease expense
operating and
financial expenses anyway

15. in
operating income will be proportionately lower than the
increase in
book capital invested
Aswath Damodaran! 15!
R&D Expenses: Operating or Capital Expenses!
operating
expense even though it is designed to generate future growth. It
is
more logical to treat it as capital expenditures.
• Specify an amortizable life for R&D (2 - 10 years)
• Collect past R&D expenses for as long as the amortizable life
• Sum up the unamortized R&D over the period. (Thus, if the
amortizable
life is 5 years, the research asset can be obtained by adding up
1/5th of the

16. R&D expense from five years ago, 2/5th of the R&D expense
from four
years ago...:
Aswath Damodaran! 16!
The Effect of Capitalizing R&D!
upon
whether R&D is growing or not. If it is flat, there will be no
effect
since the amortization will offset the R&D added back. The
faster
R&D is growing the more operating income will be affected.
upon how
fast R&D is growing
capitalized
Research asset
ll increase by the amount of R&D;
Depreciation will increase by the amortization of the research

17. asset;
For all firms, the net cap ex will increase by the same amount as
the
after-tax operating income.
Aswath Damodaran! 17!
The Statement of Cash Flows!
Cash Flows From Operations
+ Cash Flows From Investing
+ Cash Flows from Financing
Net cash flow from operations,
after taxes and interest expenses
Includes divestiture and acquisition
of real assets (capital expenditures)
and disposal and purchase of
financial assets. Also includes
acquisitions of other firms.
Net cash flow from the issue and
repurchase of equity, from the
issue and repayment of debt and after
dividend payments
= Net Change in Cash Balance
Figure 4.3: Statement of Cash Flows

18. Aswath Damodaran! 18!
Valuation cash flows!
free cash
flows to equity or free cash flows to all capital investors.
• The free cash flow to equity is the cash left over, after you
have made
interest expenses, paid taxes and met reinvestment needs. It is
also after
the net cash flow from issuing debt (positive) and repaying
debt
(negative)
• The free cash flow to the firm is a pre-debt cash flow, but it is
after taxes
(a hypothetical tax that you would have paid if you had no debt)
and
reinvestment needs.
makes it
closer to a cash flow to equity) but it also incorporates cash
flows from
new equity issues and to equity investors (dividends and stock

19. buybacks).
Apex Printing
Balance Sheets
As of December 31, 2013 and 2012
000$ 000$
Assets 2013 2012
Cash 6,000 5,700
Accounts Receivable 2,350 2,300
Inventory 12,100 6,500
Total Current Assets 20,450 14,500
Land 25,000 20,000
Building & Equipment 300,000 300,000
Less: Accumulated Depreciation - Building & Equipment
(187,850) (160,000)
Total Long Term Assets 137,150 160,000
Total Assets 157,600 174,500
Liabilities and Stockholders' Equity

20. Accounts Payable 4,600 3,500
Salaries Payable 0 2,100
Interest Payable 1,500 0
Short Term Notes Payable 12,000 0
Taxes Payable 0 5,600
Total Current Liabilities 18,100 11,200
Mortgate Payable 54,950 100,000
Total Long Term Liabilities 54,950 100,000
Common Stock 60,000 60,000
Retained Earnings 24,550 3,300
Total Stockholders' Equity 84,550 63,300
Total Liabilities and Stockholders' Equity 157,600 174,500
Apex Printing
Income Statements
For the Periods Ended December 31, 2013 and 2012 000$ 000$
2013 2012
Revenue: 450,000 475,000

21. Less: Cost of Goods Sold (324,300) (374,500)
Less: Depreciation Expense (27,850) (26,000)
Gross Margin 97,850 74,500
Selling, General & Administrative Expenses (29,100) (32,000)
Income Before Interest & Taxes 68,750 42,500
Interest Expense (7,500) (6,000)
Income Before Taxes 61,250 36,500
Income Taxes (35,000) (30,000)
Net Income 26,250 6,500
Apex Printing
Statement of Cash Flows
For the Period Ended December 31, 2013
000$
Cash Flows from Operating Activities:
Net Income 26,250

22. Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation Expense 27,850
Increase in accounts receivable (50)
Increase in inventory (5,600)
Decrease in salaries payable (2,100)
Increase in interest payable 1,500
Decrease in taxes payable (5,600)
Increase in Short Term notes Payable 12,000
Increase in accounts payable 1,100
Net Cash Flow from Operating Activities
55,350
Cash Flows from Investing Activities:
Cash paid to purchase land (5,000)
Net Cash Flow from Investing Activities
(5,000)
Cash Flows From Financing Activities:
Cash paid for mortgage (45,050)
Cash paid for dividends (5,000)
Net Cash Flow from Financing Activities
(50,050)
Net Increase in Cash

23. 300
Plus: Cash Balance at December 31, 2012
5,700
Cash Balance at December 31, 2013
6,000