Corporate Finance

Financial Statements and Firm Value 
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• The sign and magnitude of the unexpected earnings change is positively correlated with the sign and mag-
  nitude of security returns in the two trading days immediately surrounding the earnings announcements.


• Significant positive association exists between magnitude of forecast deviation and magnitude of abnormal
  returns in the period immediately around forecast disclosure date.


• Firms that increase dividends or announce special or extra dividends or initiate dividend payments for the
  first time experience positive abnormal returns.

IN CONCLUSION

This chapter was designed to introduce you to the use of ratio analysis, preparation of cash flow and funds

flow statements. These tools find extensive application in appraising credit risk, capital structure planning

and financial planning. The funds flow statement is a country cousin of the cash flow statement. The follow-

ing format is prescribed for preparation of cash flow statement:

Net income

Add: Depreciation

Less: Capital expenditure

Less: Increase in non-cash working capital

Add: Decrease in non-cash working capital

Less: Principal (loan) repayments

Add: New borrowings

Add: Increase in short-term debt and notes payable

Net change in cash

Add: Beginning balance

Closing balance

APPENDIX 1: KEY FINANCIAL RATIOS FOR SELECT

COMPANIES IN 2000

HLL Wipro Ltd RIL TISCO TELCO
R.M. turnover 7.16 9.21 36.34 9.49 22.15
F.G. turnover 13.62 23.67 23.03 9.88 15.28
Debtors turnover 51.46 6.22 24.39 5.62 7.14
Creditors turnover 4.30 9.16 5.24 4.0 4.33
Net sales/ 2.12 1.90 0.68 0.61 0.83
total assets
Quick ratio 0.47 0.82 0.90 0.42 0.29
Current ratio 1.12 1.27 1.65 0.98 0.82
D/E 0.08 0.09 1.03 1.69 1.01
W.C./sales 3.26 6.81 14.53 0 0
(percent)
Table contd.