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A Manager's Guide to Financial Analysis

Book Description

Financial analysis is the key to smarter business decisions. It helps companies chart the best course of action—whether identifying operational improvements, evaluating investment choices, or preparing for an acquisition. Covering in-depth financial statement analysis, ratio analysis, asset management, capital structure, and more, this comprehensive course gives students the tools they need to crunch the numbers, focusing on prediction rather than reporting. Students will learn how to: • Connect a company’s past experience to future expectations • Apply the right analytical techniques to problems or decisions • Identify and explain deviations from anticipated results • Make needed adjustments to financial statements, taking into account current values, off-balance-sheet financing, and unrecognized items • Use financial ratios to analyze trends, identify issues, and compare results to the competition and the industry as a whole • Evaluate capital investments using net present value, internal rate of return, profitability index, and other methods • Manage current assets including cash, credit and collections, and inventory • Build a robust financial forecast • Determine a company's optimal capital structure and debt policy • Measure the financial impact of a merger or acquisition Now completely revised, the sixth edition of A Manager’s Guide to Financial Analysis includes a chapter on forecasting and valuation; sections on alternative asset management, liability and equity; guidance on analyzing return on equity (ROE) using DuPont Analysis; coverage of total asset turnover; updated information on stock repurchases; a glossary of key terms; as well as exercises and review questions throughout to help increase comprehension and reinforce new skills.

Table of Contents

  1. Cover
  2. Title
  3. Copyright
  4. Contents
  5. About This Course
  6. How to Take This Course
  7. Pre-Test
  8. Introduction
  9. 1 Financial Decision Making and the Techniques Used in Financial Analysis
    1. Financial Analysis
    2. The Role of the Financial Analyst
      1. Definition of the Analyst’s Job
      2. Typical Assignments
      3. The Analyst’s Position in the Corporate Structure
    3. Financial Management and Financial Analysis
    4. Activities and Financial Statements
    5. Business Strategy
    6. Competitive Environment
    7. The Application of Analytical Techniques for Specific Problems
      1. Investment Decisions
      2. Financing Decisions
      3. Dividend Policy
    8. Primary Goal of Financial Analysis
    9. Long-Range versus Short-Range Goals
    10. The Balanced Scorecard
    11. Techniques Presented in This Course
    12. Recap
    13. Review Questions
  10. 2 Financial Statement Analysis
    1. Differing Viewpoints
    2. The Basic Structure of Financial Statements
      1. The Balance Sheet
      2. The Income Statement
      3. The Statement of Stockholders’ Equity
      4. The Statement of Cash Flows
    3. Financial Statement Analysis
      1. Limitations of Financial Statement Analysis
      2. Horizontal Analysis
      3. Vertical Analysis
    4. Recap
    5. Review Questions
  11. 3 Ratio Analysis for Financial Statements
    1. Ratio Analysis
    2. Profitability Ratios
      1. Net Profit Margin
      2. Operating Profit Margin
      3. Return on Assets(ROA)
      4. Return on Equity (ROE)
      5. Analyzing Return on Equity (ROE) Using the DuPont Analysis
      6. Earnings per Share (EPS)
      7. Price Earnings Ratio (P/E)
      8. Dividend Yield and Payout
      9. Economic Value Added (EVA)
    3. Liquidity Ratios
      1. Current Ratio
      2. Quick Ratio
      3. Net Liquid Balance
    4. Activity Ratios
      1. Average Collection Period
      2. Inventory Turnover
      3. Total Asset Turnover
      4. Operating Cycle Working Capital Requirements
      5. Free Cash Flow
    5. Debt and Equity Ratios
      1. Leverage
      2. Debt-to-Equity Ratio
      3. Times-Interest-Earned Ratio (TIE)
      4. Book Value per Share of Common Stock
    6. Using Financial Ratios
      1. Intracompany Analysis
      2. Trend Analysis
      3. Industry Comparison
      4. Predicting Financial Problems
    7. Using Financial Ratios in Analysis
      1. An Example of Intracompany Analysis
      2. An Example of Industry Comparison
      3. Other Commonly Used Analytical Ratios
    8. Important Considerations Concerning Financial Statement Information
    9. Alternative Asset Management Treatments
      1. Cash and Marketable Securities
      2. Accounts Receivable
      3. Inventory
      4. Fixed Assets
      5. Goodwill and Intangible Assets
    10. Alternative Liability and Equity Treatments
      1. Current Liabilities
      2. Leasing Assets Rather Than Buying Them
      3. Pensions and Other Post-Retirement Benefits
      4. Stockholders’ Equity
    11. Recap
    12. Review Questions
  12. 4 Analyzing Current Asset Management
    1. Cash Management
      1. Motives for Holding Cash
      2. Collection and Disbursement Techniques
      3. Other Aspects of Cash Management
    2. Accounts Receivable: Credit and Collection Policies
      1. Credit Quality Standards
      2. Credit Terms
      3. Collection Efforts
    3. Inventory Management Considerations
      1. Raw Material
      2. Work in Process
      3. Finished Goods
    4. Recap
    5. Review Questions
  13. 5 Evaluating Capital Investment Proposals
    1. The Capital Budgeting Process
    2. Determining the Cost of Capital or Discount Rate
    3. The Cash Flow from an Investment
    4. Risk and Capital Investments
      1. Types of Risk
      2. The Cost of Capital
      3. Risk Measurement and Cash Flow Uncertainty
      4. Alternative Ways to Measure Risk and Cash Flow Uncertainty
      5. The Level of Risk and the Project’s Discount Rate
    5. Evaluating Capital Investments
      1. Evaluation Methods Excluding the Time Value of Money
      2. Evaluation Methods Recognizing the Time Value of Money
    6. The Post-Audit
    7. Recap
    8. Review Questions
  14. 6 Forecasting and Valuation
    1. Forecasting the Future
      1. The Financial Forecast
      2. Calculating the Forecast
    2. Constructing a Valuation Model
      1. Defining the Valuation Theory
    3. Recap
    4. Review Questions
  15. 7 Capital Structure and Dividend Policy
    1. Issues in Capital Structure and Dividend Policy
    2. Business and Financial Risk
      1. Business Risk
      2. Financial Risk
    3. Optimal Capital Structure
    4. Dividend Policy
      1. Preferences of Stockholders
      2. Factors Affecting Dividend Policy
      3. Stock Dividends and Stock Splits
      4. Stock Repurchases
    5. Recap
    6. Review Questions
  16. 8 Mergers and Acquisitions
    1. Motives for Mergers
    2. Search and Screening
      1. Screening Criteria
      2. Qualitative Criteria
      3. Risk Assessment
      4. Price Assessment
      5. Management Defenses
    3. Measuring the Financial Impact of an Acquisition
      1. The Exchange Ratio
      2. Purchase with Cash
      3. Purchase with Acquiring Company’s Stock
      4. An Analysis of the Bargaining Position of Both Companies
    4. The Impact on Earnings per Share
      1. The Level of Earnings per Share
      2. The Growth in Earnings per Share
    5. The Impact on the Price-Earnings Ratio
    6. Valid and Invalid Motives for Merging
    7. Expected Return from an Acquisition or Merger
      1. Establishing a Valuation from the Acquiree’s Perspective
    8. Recap
    9. Review Questions
  17. Answers to Quick Quiz Questions
  18. Bibliography
  19. Additional Resources
  20. Glossary
  21. Post-Test
  22. Index