W13_lecture_present_slides

W13_lecture_present_slides - Week 13: Financing policies...

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1 Week 13: Financing policies Text: Ch.14 (LO 1-8) Lecture Exercises: n/a Self-Study Exercises: n/a Announcements: Group assignment deadline : 5pm, 4 June 2010 . Submit only one copy per group both electronically and in hard copy (read the submission instructions carefully) During the break you will be asked to fill-in a UoS evaluation form and have an open forum with your student representatives During the workshop we will discuss the format of the final exam Outline Ratio interrelationships (from Week 2) Financial and management accounting Net working capital – Cash, a/cs receivables, inventory – Types of short-term finance Long-term financing – Long-term debt, hybrid finance, and equity
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2 Ratio Interrelationships (week 12) Like the financial statements, the financial ratios are also connected through identities. For instance: ROA = AT × PM EBIT Average Asset = Sales Revenue Average Assets × EBIT Sales Revenue PM = GPM ER Net Profit Sales Revenue = Gross Profit Sales Revnue Expenses Sales Revenue ROE = (ROA Interest and Tax over assets) × Leverage Net Profit Average Equity = EBIT Interest and Tax Average Assets Λ Ν Μ Μ Ξ Π Ο Ο × Average Assets Average Equity Limitations of ratio analysis (week 12) Last week we explained that it is difficult to interpret ratios with zero denominators or ratios that are negative or ratios that have undefined bounds. These are the technical limitations of ratio analysis Ratio analysis has also weaknesses in the way it can be applied in real economic situations Is the information provided by financial statements indeed ‘ true and fair ’? Do these numbers reflect economic reality? Are these numbers subject to earnings management? Also ratio analysis relies only on the use of financial statements, but there is so much other information that is relevant: market, industrial, economic, legal, environmental, technological etc
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3 Limitations of per share ratios (week 12) The shares of ABC Ltd are traded on the ASX for $2.25 each (i.e. this is the market value of equity per share), but its balance sheet shows equity $150,000 and 100,000 issued shares, giving a book value of equity per share of $1.50. Why BVE does not reflect the entity value as measured by the MVE? It is not unusual that MVE BVE. One reason for this discrepancy is that BVE measures net assets at historical cost (i.e. no regard to inflation or updated current values of assets), or a combination of historical cost and fair values MVE may take into consideration assets or liabilities that do not appear on the balance (e.g. internally generated intangibles like brand, employees, contingent liabilities) MVE tends to reflect market expectations for future prospects of earnings, growth, and expected dividends MVE may reflect other factors (market sentiment, economic shocks) Financial & management Accounting In this closing lecture we cross over to management
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W13_lecture_present_slides - Week 13: Financing policies...

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