Day 2-Part 3

Day 2-Part 3 - BusinessManagement301 Day2:Part3...

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Business Management 301 Day 2: Part 3 Chapter 3: Ratio Analysis June 23, 2011
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Ratio Analysis When analyzing two companies you must  answer questions such as: Which is healthier? Which is the better investment? Major Tool:  RATIO ANALYSIS
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Why Ratio Analysis? 1) Standardization Scales Co relative to own operations and size Allows comparison to self despite change in size Example: Mortgage candidates 1) Flexibility Adapt ratio to situation or need Which ratio? How many years?  No bounds: You can invent your own Example: Prominent Economist
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Why Ratio Analysis? Indicates something is changing but does  not   answer Why? What? or How? it is changing.  Example: Current Ratio increasing       Current Ratio  =  Current Assets  Current Liabilities 3) Lead us to Look in Right Places Misconception Corrected:  Ratios do  not  answer the questions about the company;  ratios tell you what questions to ask.
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Why Ratio Analysis? 4) Evaluation of Achieving Goals Business Process for Public Companies:              Elect BOD Shareholders Hire Management Team         Responsible for         Running Company Ultimate Goal:   Maximize Shareholder Wealth! Seasonal and High-Growth Firms Principal-Agent Problem Example: G. Shepherd
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Ultimate Goal of the Firm Maximizing shareholder wealth! Financial statement analysis can help  you evaluate whether management is  truly  maximizing shareholder wealth.
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Financial Ratio Analysis 1)  Trend Analysis We can  compare a firm’s financial ratios  with its ratios in previous years. 2) Cross-Section Analysis : We can  compare a firm’s financial ratios  with those of its industry. 3) Goal Achievement
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This note was uploaded on 11/17/2011 for the course BUS M 301 taught by Professor Jimbrau during the Summer '11 term at BYU.

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Day 2-Part 3 - BusinessManagement301 Day2:Part3...

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