MNF2023Group_Discussion_Class_2008

MNF2023Group_Discussion_Class_2008 - MNF2023 GROUP...

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Unformatted text preview: MNF2023 GROUP DISCUSSION Lecturer: Mr C Chipeta Tel: (012) 429 3757 Email: chipec@unisa.ac.za Topics To Be Discussed • Ratio analysis • Time value of money • Risk and return • Bond and share valuation • Working capital management • Examinations Ratio Analysis •R atio analysis -involves methods of calculating and interpreting financial ratios to assess a firm’s financial condition and performance. •Interested parties - shareholders , creditors , and the firm’s own management . Types Of Ratio Comparisons •Trend or time-series analysis - evaluate firm’s performance over time •Cross-sectional analysis - compare similar ratios for firms within similar industries (benchmarking) •Combined analysis - combination of both time series & cross-sectional analysis Categories Of Financial Ratios •Liquidity ratios- ability to satisfy short- term obligations, e.g. CR & QR (AT) •Activity ratios- speed to convert accounts into sales or cash, e.g. Inv. Turn, ACP, APP & TAT •Debt ratios- measures proportion of assets financed by creditors, e.g. DR, TIER, FPCR. FINANCIAL RATIOS (cont.) •Profitability ratios- evaluate firm’s profits, e.g. GPM, OPM, NPM, EPS. ROA/ROI & ROE •Market ratios- firm’s market value as measured by its current share price, e .g. P/E & M/B •DuPont System of Analysis- multiply firm’s net profit margin by its total asset turnover FINANCIAL RATIOS (cont.) Which ONE of the following ratios may indicate poor collections procedures or a lax credit policy? 1. Average payment period 2. Inventory turnover 3. Quick ratio 4. Average collection period A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might … 1. improve its collection procedures, thereby increasing cash and increasing its current and quick ratios 2. improve its collection practices and pay accounts payable, thereby decreasing current liabilities and increasing the current and quick ratios 3. decrease current liabilities by utilising more long term debt, thereby increasing the current and quick ratios 4. increase inventory, thereby increasing current assets and the current and quick ratios Solutions •The Average Collection Period indicates poor collection procedures (See Page 60 of the prescribed text book) •Option 3 is the best because if you reduce your current liabilities by utilising more long term debt, you will increase the current ratio. Note that option 1 is not the best because improving collection procedures reduces debtors and increases cash at the same time. The following information is available for JJ Holdings. Use this information to answer questions 1 to 7: Sales R3 850 000 Cost of Goods sold R3 250 000 Inventory Turnover 3.89 Total assets turnover 0.75 Earnings available for ordinary shareholders R900 000 Ordinary shares equity R2 500 000 Book value of shares R6 Number of days in a year 365 1. Suppose the average age of inventory (AAI) for a rival company is 80 days. The AAI for JJ Holdings indicates that it …...
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MNF2023Group_Discussion_Class_2008 - MNF2023 GROUP...

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