AEM_220_Prelim_2_Review

AEM_220_Prelim_2_Review - Prelim 2 Review Accounting Assets...

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Unformatted text preview: Prelim 2 Review Accounting Assets = Liabilities + Shareholders' Equity Assets = What you own Liabilities = What you owe Shareholders' Equity = Stock + Retained Earnings Accounting is not an exact science Areas of Accounting 2 major areas of accounting: Managerial Accounting Used for internal purposes Reports are used to pinpoint problems in the firm Prepared for the public Reports used by public to analyze the firm Financial Accounting Ratios 3 major types of ratios: Activity ratios Liquidity ratios Profitability Ratios Liquidity Ratios Used to calculate how fast an asset can be converted to cash Current Ratio: Current Assets/Current Liabilities Quick Ratio (Acidtest ratio) (no inventories!) (Cash+Accounts Receivable+Marketable Securities)/Current Liabilities Debt to Equity Ratio: Total Liabilities/Total Shareholders' Equity Profitability Ratios Used to measure profitability Return on Sales: Net Income/Net Sales Net Income/Owner's Equity Net income/# of Common Shares Return on Equity: Earnings Per Share: Activity Ratios Used to measure the efficiency of a firm Inventory Turnover: COGS/ Avg. Inventory Net Accounts receivables/Net daily credit sales Accounts Receivable Turnover: Ratios Please remember: Industry Matters! A typical Income Statement Revenue Cost of Goods Sold Gross Profit: what is earned from merchandise Operating Expenses (Rent, Utilities, Salaries) Net Profit Before Interest and Taxes Interest Taxes Net Income Practice problem Income Statement (in millions) J Crew Group, Inc Revenue XXXX Cost of Goods Sold 555.1 Gross Profit General expenses Depreciation Operating Income Due interest and taxes Total net income EPS 398.0 269.5 XXXX 79.5 XXXX 3.8 XXXX Balance Sheet (in millions) J Crew Group, Inc Assets Liabilities and Owner's Equity Cash 61.3 Accounts Payable XXXX Net receivables 8.6 Other Current 50.0 Liabilities Inventories 116.2 Long-term debt 782.6 Other current assets 29.1 925.1 Total liabilities Total current assets XXXX 337.3 (587.8) Total assets Total equity Shares outstanding 471,000 Solve for Revenue, Depreciation, Due interest and taxes, EPS, Current Assets, Accounts Payable, Working Capital, Current Ratio, Quick Rato, Debt to Equity Ratio Income Statement (in millions) J Crew Group, Inc Revenue XXXX Cost of Goods Sold 555.1 Gross Profit General expenses Depreciation Operating Income Due interest and taxes Total net income EPS 398.0 269.5 XXXX 79.5 XXXX 3.8 XXXX Balance Sheet (in millions) J Crew Group, Inc Assets Liabilities and Owner's Equity Cash 61.3 Accounts Payable XXXX Net receivables 8.6 Other Current 50.0 Liabilities Inventories 116.2 Long-term debt 782.6 Other current assets 29.1 925.1 Total liabilities Total current assets XXXX 337.3 (587.8) Total assets Total equity Shares outstanding 471,000 Revenue : Gross Profit + COGS = 953.1 Depreciation : Gross Profit General Expenses Operating Income = 49 Due Interest and Taxes : Operating Income Total Net Income = 75.7 EPS : Net Income / Shares outstanding = 8.0679 Current Assets = Cash + Net Rec. + Inv. + Other CA = 215.2 Accounts Payable : Total Liabilities Other Liabilities = 92.5 Working Capital : Current Assets Current Liabilities = 72.7 Current Ratio : Current Assets/Current Liabilities = 1.51 Quick Ratio : (Cash+Net Rec.+Other Current Assets)/Current Liab. = .69 Debt to Equity: Total liabilities/Total equity = -1.57 FINANCIAL MANAGEMENT What Financial Managers Do The main responsibilities of a financial manager are to maintain liquidity through their short termgoals and concisely plan the longterm investment strategy for the firm. Financial Planning Process Budget cash needs Cash budget Estimate of a firm's projected cash inflows and outflows that the firm can use to plan for any cash shortages or surpluses during a given period; Capital budget Firms' spending plans for major asset purchases that often require large amounts of money; Operating (master) budget Summary of a business's proposed financial activities Sources of Funds Short Term Trade Credit Promissory Notes Family/Friends Banks, etc. Secured Loan Unsecured Loan Long Term Debt TermLoan Bonds Secured Unsecured Equity Factoring Commercial Paper Stock Dividend policy? Retained Earnings Debt vs. Equity It is typically cheaper to use debt versus equity Interest is tax deductible! A debenture bond is a form of unsecured debt This comes with more risk Equity owners actually are owners in the company they possess shares in TakeAways Financial management: Matches sources and uses of funds in the business; Helps the CEO decide what is the best use of investment funds; Designs funding structures to minimize cost of capital. Stock Long term debt Retained earnings Sources of funds STOCKS AND BONDS Types of Investments Traditional HighRisk Stocks/Bonds Government Securities Certificates of Deposit Money Market or Mutual Funds Real Estate Stock on Margin Commodities Junk Bonds Derivatives Investment Strategies Valuing Stocks Returns Growth Risk Longterm horizon 711% historical returns Weighted portfolios Diversified investments Be contrarian! Do not follow speculative bubbles BREAK EVEN POINT, PAYBACK PERIOD AND NET PRESENT VALUE Formulas for finding the breakeven point Breakeven point in units Total fixed costs / (Price Variable cost) (Price Variable cost) is called contribution margin Breakeven point in dollars Total fixed cost / (1 (Variable cost / Price) ) Multiproduct case Total fixed cost / (1 (Variable cost (i) / Price (i)) * Example The variable costs of the aforementioned harvester (not counting the operator's labor) increase to $15 per hour because of fuel price increases. Fixed costs are $21,270. The farmer can harvest 5 acres per hour. The custom harvester now charges $24.00 per acre (to offset fuel price increases). How many acres must be harvested per year to breakeven? Fixed costs (F) = $21,270 Savings (S) = $24/A Variable costs (V) = $15/hr / 5 A/hr = $3/A BE = $21,270 / ($24/A $3/A) = $21,270 / $21/A = 1,013 Acres Payback Period Cost of the Investment Periodic Cash Inflows = PP You have a project that will cost $190,000. You will have cash inflows of $40,000 annually. How long is your payback period? 190,000/40,000= 5 years Very easy to compute and understand Net Present Value If... It means... Then... the project may be accepted the investment NPV would add value to >0 the firm the investment NPV would subtract value the project should be rejected <0 from the firm We should be indifferent in the decision whether to accept the investment or reject the project. This project adds no monetary value. NPV would neither gain Decision should be based on other criteria, e.g. strategic = 0 nor lose value for the positioning or other factors not explicitly included in the firm calculation. Example X corporation must decide whether to introduce a new product line. The new product will have startup costs, operational costs, and incoming cash flows over six years. This project will have an immediate (t=0) cash outflow of $100,000 (which might include machinery, and employee training costs). Other cash outflows for years 16 are expected to be $5,000 per year. Cash inflows are expected to be $30,000 per year for years 16. All cash flows are aftertax, and there are no cash flows expected after year 6. The required rate of return is 10%. The present value (PV) can be calculated for each year: T=0 $100,000/ 1.100 = $100,000 PV. T=1 ($30,000 $5,000) / 1.10^1 = $22,727 PV. T=2 ($30,000 $5,000) / 1.10^2 = $20,661 PV. T=3 ($30,000 $5,000) / 1.10^3 = $18,783 PV. T=4 ($30,000 $5,000) / 1.10^4 = $17,075 PV. T=5 ($30,000 $5,000) / 1.10^5 = $15,523 PV. T=6 ($30,000 $5,000) / 1.10^6 = $14,112 PV. The sum of all these present values is the net present value, which equals $8,881. Since the NPV is greater than zero, the corporation should invest in the project. BCG Matrix Stars Dogs Cash Cows Question Marks SWOT Internal Factors External Factors Favorable Factors Strengths Opportunities Unfavorable Factors Weaknesses Threats Corporate Growth Merger/Acquisition Horizontal Vertical Congolmerate Leveraged Buyout Why or why not? Factors for a successful merger Types of Organizational Control Market Based Bureaucracy Based Clan Based Corporate Culture The moral, social, and behavioral norms of an organization based on the beliefs, attitudes, and priorities of its members. Communication is critical Stories Heroes Enactments Risk Types of risk Pure Reputational Speculative Uninsurable risks Insurable risks Types of insurance Types of insurance companies Strategy Guest lecturer Cheryl Francis Value = Sum of all future cash flows discounted to today's dollars Creating Economic Value 5 WAYS TO CREATE ECONOMIC VALUE: return of current operations 2. $ invested in high return projects and $ invested in low return projects 1. Speed up receipt of cash 1. # years of high expected returns 5. Cost of capital 1. ...
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This note was uploaded on 03/30/2008 for the course AEM 2200 taught by Professor Perez,p.d. during the Spring '07 term at Cornell.

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