Chapter 1
Risks of funding business ideas:
1. Information asymmetry between savers and entrepreneurs
2. Potentially conflicting interest (credibility problems)
3. Expertise asymmetry
Financial intermediaries is when you have savings so you look for a business
idea.
Information intermediaries is when you have a business idea so you look for
savings.
Financial statements summarizes the economic consequences of its business
activities.
1. Income statement (describes its operating performance during a period)
2. Balance sheet (states the firm’s assets and how they are financed)
3. Cash flow statement (summarizes the cash flows of the firm)
4. Statement of other comprehensive income (sources of changes in equity,
not in the income statement)
5. Statement of changes in equity (summarizes all changes in equity)
Accounting principles:
1. Accrual accounting: taking cost as they are expected to come (so not when
they are actually made).
2. Accounting conventions and standards: help that managers make
accounting decisions at their best knowledge of the firm’s business
activities.
3. Managers’ reporting strategy: The management can choose how to
implement reporting strategies like how much information they put in the
financial reports.
4. Auditing, legal liability and public enforcement: External audition, legal
liabilities for misjudged information and public enforcement can influences
the quality of financial statements.
Alternative ways to communicate with investors:
1. Analyst meeting:
a. Managers will field questions about the firm’s current financial
performance.
b. There are rules for this kind of meetings like giving all the investors
the chance to hear the new information.
2. Voluntary disclosure:
a. Can be articulating the company’s long-term strategy,
b. Non-financial leading indicators,
c. Explanation of the relationships between leading indicators and
future profits.
d. This will be in the annual report of the firm.
e. This can also be bad for the competitive position
f. And can lead to possible misleading information.
1
, 3. Non-financial reporting:
a. Reporting such as environmental, social and governance (ESG)
disclosure.
Key steps in business intermediaries:
1. Business strategy analysis: identify key profit drivers and business risks.
2. Accounting analysis: Evaluate the degree of a firm’s accounting that
captures the underlying business reality. (so where is er accounting
flexibility)
3. Financial analysis: Use financial data to evaluate a firm’s current and past
performance to assess its sustainability.
4. Prospective analysis: Forecasting a firm’s future.
Chapter 2
Strategy analysis allows the analyst to probe the economics of a firm at a
qualitative level.
Strategy analysis:
- Industry analysis
- Competitive strategy analysis
- Corporate strategy analysis
The five forces influencing the average profitability of an industry:
1. Rivalry among existing firms,
2. Threat of new entrants,
3. Threat of substitute products,
4. Bargaining power of buyers,
5. Bargaining power of suppliers.
Factors that determine the competition intensity between companies:
1. Industry growth rate
2. Concentration and balance of competitors
3. Excess capacity and exit barriers
4. Degree of differentiation and switching costs
5. Scale/ learning economies and the ratio of fixed to variable costs
Factors that determine the threat of new entrants:
1. Scale
2. First mover advantage
3. Access to channels of distribution and relationships
4. Legal barriers
Factors of bargaining power:
1. Price sensitivity
2. Relative bargaining power
Competitive strategy:
2
Risks of funding business ideas:
1. Information asymmetry between savers and entrepreneurs
2. Potentially conflicting interest (credibility problems)
3. Expertise asymmetry
Financial intermediaries is when you have savings so you look for a business
idea.
Information intermediaries is when you have a business idea so you look for
savings.
Financial statements summarizes the economic consequences of its business
activities.
1. Income statement (describes its operating performance during a period)
2. Balance sheet (states the firm’s assets and how they are financed)
3. Cash flow statement (summarizes the cash flows of the firm)
4. Statement of other comprehensive income (sources of changes in equity,
not in the income statement)
5. Statement of changes in equity (summarizes all changes in equity)
Accounting principles:
1. Accrual accounting: taking cost as they are expected to come (so not when
they are actually made).
2. Accounting conventions and standards: help that managers make
accounting decisions at their best knowledge of the firm’s business
activities.
3. Managers’ reporting strategy: The management can choose how to
implement reporting strategies like how much information they put in the
financial reports.
4. Auditing, legal liability and public enforcement: External audition, legal
liabilities for misjudged information and public enforcement can influences
the quality of financial statements.
Alternative ways to communicate with investors:
1. Analyst meeting:
a. Managers will field questions about the firm’s current financial
performance.
b. There are rules for this kind of meetings like giving all the investors
the chance to hear the new information.
2. Voluntary disclosure:
a. Can be articulating the company’s long-term strategy,
b. Non-financial leading indicators,
c. Explanation of the relationships between leading indicators and
future profits.
d. This will be in the annual report of the firm.
e. This can also be bad for the competitive position
f. And can lead to possible misleading information.
1
, 3. Non-financial reporting:
a. Reporting such as environmental, social and governance (ESG)
disclosure.
Key steps in business intermediaries:
1. Business strategy analysis: identify key profit drivers and business risks.
2. Accounting analysis: Evaluate the degree of a firm’s accounting that
captures the underlying business reality. (so where is er accounting
flexibility)
3. Financial analysis: Use financial data to evaluate a firm’s current and past
performance to assess its sustainability.
4. Prospective analysis: Forecasting a firm’s future.
Chapter 2
Strategy analysis allows the analyst to probe the economics of a firm at a
qualitative level.
Strategy analysis:
- Industry analysis
- Competitive strategy analysis
- Corporate strategy analysis
The five forces influencing the average profitability of an industry:
1. Rivalry among existing firms,
2. Threat of new entrants,
3. Threat of substitute products,
4. Bargaining power of buyers,
5. Bargaining power of suppliers.
Factors that determine the competition intensity between companies:
1. Industry growth rate
2. Concentration and balance of competitors
3. Excess capacity and exit barriers
4. Degree of differentiation and switching costs
5. Scale/ learning economies and the ratio of fixed to variable costs
Factors that determine the threat of new entrants:
1. Scale
2. First mover advantage
3. Access to channels of distribution and relationships
4. Legal barriers
Factors of bargaining power:
1. Price sensitivity
2. Relative bargaining power
Competitive strategy:
2
