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Running head: CHAPTER ANALYSIS
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Chapter Analysis
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CHAPTER ANALYSIS
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Chapter 10
1. Why might individual investors wish to include foreign companies in their investment
portfolio?
Individual investors include foreign investors in their investment portfolio so that they can
reduce portfolio risks. If individuals invest on their own in a domestic country, then risks will not
diversify, but with the inclusion of foreign investors, specific risks would be reduced due to
diversification (Keleş, 2015). Therefore, the addition of foreign investors enhances
diversification of risks and reduction of foreign exchange risk.
2. Which companies might Ford Motor Company include in a benchmarking study of the
automobile industry, and in which countries are those companies located?
Form Motors can include General Motors which is based in the U.S, Honda, and Toyota from
Japan and Hyundai from Korea. Further, it might choose Renault from France as well as
BMW and Volkswagen from Germany.
3. What are potential problems in using commercial databases as the source of financial
statement information for foreign companies?
Commercial databases contain less financial information, and thus, companies face risks of
mismanagement as a result of suitable financial statements. In commercial databases, data
errors also form among the most significant challenges that affect obtaining financial
information. Additionally, commercial databases force foreign countries to comply with the
standardized format, and as such, too much information is lost while other data is
misclassified in the process of converting to the standardized format.
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4. How might an analyst obtain the most recent financial statements for a foreign company
in which he or she is interested?
If an analyst wants to obtain information from a foreign company, then they will have to look
at the company's website. Other internet websites which can help provide financial
information about an international company include Hoover and CAROL (Hand & Green,
2011).
5. Why should the fact that a foreign company presents its financial statements in a foreign
currency present no significant problems in analyzing those statements?
While analyzing financial statements, percentages, as well as ratios, form the dominant form
of comparing different currency amounts and thus, foreign monetary currencies do not pose
any challenge to analysts. However, while translating foreign currency to their money,
attention must be paid to exchange rates as they can lead to distortion of fundamental
relationships.
6. A foreign company prepares its financial statements in a foreign language and does not
provide any convenience translations. How might this affect an analyst's decision to
invest in this company?
Lack of information caused by lack of reading annual reports makes analysts fail to obtain
purposeful information that leads to making investments decisions. Description of products
in a language that an analyst does not understand leads to uninformed decisions by analysts.
7. How can more disclosure in the notes to the financial statements facilitate the analysis of
foreign financial statements?
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According to Keleş (2015), analysis of financial statements is facilitated by disclosure of
information because it provides additional details related to specific line items which allow
analysts to format the report to a required format. Further, disclosure enhances an
understanding of the impacts of information provided to income.
8. In what ways does the timeliness of the publication of financial information differ across
countries?
Publication of financial information across countries differ in different countries; such
information depends on certain factors such as stock. In some countries, financial
information is published quarterly, while other publish after six months. Determinants of
financial information predict the formation of such statements, and thus, different countries
produce them at their convenience.
9. What are the advantages and disadvantages of using measures such as operating income
before depreciation (OIBD) or earnings before interest, taxes, depreciation, and
amortization (EBITDA) rather than net income in comparing profitability across foreign
companies?
EBITDA is advantageous because differences in accounting for interest taxes, depreciation,
and authorization across countries do not impact a company's profitability. The disadvantage
of using this method is that expenses might be vital in examining cost-effectiveness and it
fails to determine the value of a firm.
10. What are the different features of financial statements that a foreign company might
"translate" in a convenience translation?
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EBITDA is advantageous because differences in accounting for interest taxes, depreciation,
and authorization across countries do not impact a company's profitability (Hand & Green,
2011). The disadvantage of using this method is that expenses might be vital in examining
cost-effectiveness and it fails to determine the value of a firm.
11. Why should analysts be careful in comparing financial ratios across companies in
different countries?
The most important features of a foreign financial statement that must be translated include
language, GAAP and currency. Language translation is the most vital feature because it will
lead to an understanding of all the other elements.
12. How might differences in the extent to which countries apply the accounting concept of
conservatism (some countries are more conservative than others) affect profit margins, debt-toequity ratios, and returns on equity?
Analysts should be cautious while comparing financial ratios across different countries because
environmental factors can cause distortion of crucial information. Information concerning the
basis for taxation and income in different countries should be analyzed thoroughly before they
are compared against each other. Conservatism in organizations denotes overstating expenses
and liabilities as well as understanding assets and revenues. Conservatism affects return on
equity because both the denominator and numerator in the ratios are understated. Profit margin is
impacted by moderation because an overstatement of expenses and profit margins will be
smaller. Overstatement of liabilities and understatement of retained income results to an
increased debt-to-equity ratio.
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12. How might differences across countries in the extent to which debt versus equity is the
major source of financing affect profit margins, debt-to-equity ratios, and return on
equity?
Debt financing affects liabilities, and a larger amount of interests impacts a country
positively. Debt-equity rations are usually larger when profits margins are smaller and thus,
factors which affect profit margins act as determinants of this scenario. Tax relations between
countries affect the return on equity and hence, the higher the tax, the lower the interest rate
and return on investment decreases.
14. A foreign company did not capitalize any interest in the current or past years, although such
capitalization is required under U.S. GAAP. Why does an adjustment to re...