Econ

The success of a business entity depends on its ability to properly create, understand and analyze the financial statements. Financial statement analysis is important for understanding profitability and a firm's financial condition. These documents help a firm in many ways, such as in making better financial decision and creating a clearer picture to attract creditors and investors. In highlighting the financial numbers for CPI for the last 7 years, I will address the company's value. Earnings or net income have increased steadily over the past seven years from 21 million dollars in 1999 to 62 million dollars in 2006. Retained earnings are a measure of profitability of the business to date, less all dividends declared on all classes of stock. Success will be reflected in an increased stock price.

Some important concepts to understand is that dividends are the cash flows actually paid to stockholders. Free cash flows are the cash flows available for distribution. Free cash flow to equity (FCFE) is the cash flow available to the firm's common equity holders after all operating expenses, interest and principal payments have been paid, and necessary investments in working and fixed capital have been made. Free Cash Flow to Equity for the Year of 2006 for CPI is $64.3 million. It is important to note that the FCFE has steadily increased over the years and it is currently at it's highest. This speaks a great deal about CPI. Dividends paid to shareholders increased from $0.50 to $0.77 from 2005 to 206. This is a sign of rational management. The company is returning money to shareholders that they cannot invest at above-average rates of return.

DDM is a valuation model that values firms on a per share basis based on the dividend the firm pays with assumptions about future growth in dividend payments. The premise is that firms are worth only as much as the business can pay in dividends. The DDM for CPI was 22.52. CPI has been committed to high dividend payouts, with payout ratio being in the range of 0.50 - 0.77 from 2005 to 2006. The large amount of dividends paid out, along with the absence of long-term debt, the cost of equity would be the most suitable discount rate of 10%, and as a consequence gave rise to a stable and appropriate DDM, and which in turn keeps the stock prices steadily increasing also - thirty five dollars per stock in 2006. The FCFE of $64.3 million dollars stated also confirms that value of the company is high and the $364 million is an appropriate estimated