AEM1200-1001ToPost (1) - AEM1200 Introduction to Business...

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Unformatted text preview: AEM1200 Introduction to Business Management AEM1200 Friday 10/1 Financial Analysis Basic financial analysis techniques Case studies The Fundamental Problem of Financial Management Financial Creating long term value through Creating investment and profits while meeting short term obligations short Likely Outcomes of Financial Analysis Likely The company is sound, no need for further financing; The company needs short term funds to deal with The variations in seasonal patterns or one time events; variations The company needs long term funds to help with growth The or with significant one-time outlays; or The company needs additional equity investment to The engage in promising (but risky) business opportunities or to allow it to overcome a serious competitive setback; to The company needs resources to allow for an orderly The sale or dissolution, in the face of obsolescence or of bankruptcy. bankruptcy. Financial Analysis Techniques Financial Ratio analysis Sources and uses analysis Projection Ratio Analysis Ratio Solvency ratios Current ratio: Current assets / Current liabilities Current Current Acid ratio: (Current assets – inventory) / Current liabilities (Current Acid Debt to equity (also leverage): (Total debt + equity) / equity Return to equity Return to sales Earnings per share Inventory turnover : COGS / Inventory COGS Inventory Accounts receivable turnover : Accounts Accounts receivable / Daily sales Accounts Profitability ratios Efficiency ratios Accounts payable turnover: Accounts payable / Daily CGS Current Ratio- Walmart Current $48,331 $55,561 = 0.870 Quick(Acid-Test) Ratio Quick(Acid-Test) $12,051 $55,561 = 0.217 Debt to Equity Ratio Debt $170,706 = $72,929 2.34 Profitability Ratios Profitability Return on Sales $ 14,335 = 3.54% $405,046 Return on Equity $14,335 = 19.7% $72,929 Earnings per Share $ 14,335 = $3.70 3,877 Activity Ratios Activity Inventory Turnover $304,657 = 9.19 $33,160 Comparison: WalMart and Target Comparison: Wal-Mart Wal-Mart Target Wal-Mart Wal-Mart Target (2009) (2009) (2008) (2009) (2009) (2008) Current ratio Acid-test ratio 0.87 0.22 0.88 0.26 2.50 3.34% 20.5% 3.39$ 8.88 1.63 0.67 2.91 3.8% 16.2% 3.3$ 6.35 Debt-to-equity ratio 2.34 Return on sales Return on equity 3.54% 19.7% Earnings per share 3.70$ Inventory turnover 9.19 Sources and Uses Analysis: Rules Rules Increases in assets represent uses of funds Increases uses Reductions in assets represent sources of Reductions funds funds Increases in liabilities and owner’s equity Increases represent sources of funds sources Reductions in liabilities and owner’s equity Reductions represent uses of funds uses Assets Cash Net Receivables Inventories Other Current Assets Total Current Assets Net Fixed Assets Other Noncurrent Assets Total Assets Liabilities and Shareholder's Equity 7,907.0 4,144.0 33,160.0 3,120.0 48,331.0 99,544.0 22,831.0 170,706.0 Jan 10 7,275.0 3,905.0 34,511.0 3,258.0 48,949.0 95,653.0 18,827.0 163,429.0 Jan 10 Jan 09 5,569.0 3,654.0 35,180.0 3,182.0 47,585.0 97,017.0 18,912.0 163,514.0 Jan 09 Jan 08 Jan 08 Liabilities Accounts Payable Short-Term Debt Other Current Liabilities Total Current Liabilities Long-Term Debt Other Noncurrent Liabilities Total Liabilities 30,451.0 4,919.0 20,191.0 55,561.0 33,231.0 8,985.0 97,777.0 28,849.0 7,669.0 18,872.0 55,390.0 34,549.0 8,205.0 98,144.0 30,370.0 6,229.0 21,855.0 58,454.0 33,402.0 7,050.0 98,906.0 Shareholder's Equity Preferred Stock Equity Common Stock Equity Total Equity Shares Outstanding (mil.) 0.0 72,929.0 72,929.0 3,877.0 0.0 65,285.0 65,285.0 3,856.8 0.0 64,608.0 64,608.0 3,856.8 The Most Conservative Position Position Increases in assets = Retained earnings Retained Projection Projection With two years $(t+1) = $(t) + ($(t) - $(t-1)) Geometric projection Average / regression projection “Graphic” projection Fit assumption into one of the previous models ie. fixed sales, no interest payments, no dividend distribution… Remember to check for consistency (aka balance!) With more than two years With assumptions Assets Cash Net Receivables Inventories Other Current Assets Total Current Assets Net Fixed Assets Other Noncurrent Assets Total Assets Liabilities and Shareholder's Equity 7,907.0 4,144.0 33,160.0 3,120.0 48,331.0 99,544.0 22,831.0 170,706.0 Jan 10 7,275.0 3,905.0 34,511.0 3,258.0 48,949.0 95,653.0 18,827.0 163,429.0 Jan 10 Jan 09 5,569.0 3,654.0 35,180.0 3,182.0 47,585.0 97,017.0 18,912.0 163,514.0 Jan 09 Jan 08 Jan 08 Liabilities Accounts Payable Short-Term Debt Other Current Liabilities Total Current Liabilities Long-Term Debt Other Noncurrent Liabilities Total Liabilities 30,451.0 4,919.0 20,191.0 55,561.0 33,231.0 8,985.0 97,777.0 28,849.0 7,669.0 18,872.0 55,390.0 34,549.0 8,205.0 98,144.0 30,370.0 6,229.0 21,855.0 58,454.0 33,402.0 7,050.0 98,906.0 Shareholder's Equity Preferred Stock Equity Common Stock Equity Total Equity Shares Outstanding (mil.) 0.0 72,929.0 72,929.0 3,877.0 0.0 65,285.0 65,285.0 3,856.8 0.0 64,608.0 64,608.0 3,856.8 Some Advice Some If you can and know how, use Excel! Look at liquidity and efficiency ratios: is the firm in short Look term trouble (low liquidity ratios)? Is it leveraged? Does it have assets or future income streams to borrow against? have Look at the sources and uses … What is the company Look investing in? Whose money has it been investing? investing Look at the projections. What problems can be Look anticipated? anticipated? Dynashears, Inc. Dynashears, Questions to Consider Why was Dynashears unable to repay its Why bank loan by March 31st, 1991, as originally forecast? forecast? Should Mr. Winthrop extend the Dynashears’ Should loan, and indeed increase it? loan, Which of the following options is best for Mr. Which Winthrop? Winthrop? Extend and increase the loan; Extend and increase the loan, but ask for security; Refuse the loan. Butler Lumber Company Butler Questions to Consider Why does Mr. Butler have to borrow so much Why money to support this profitable company? money Do you agree with his estimate of the Do company's loan requirements? How much will he need to borrow to finance his expected expansion in sales (assume 1991 sales of $3.6 million)? sales Should Mr. Dodge approve the loan? If yes, Should under what conditions? under ...
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This note was uploaded on 10/24/2010 for the course AEM 1200 at Cornell University (Engineering School).

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