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24 views7 pages

Essay

Uploaded by

kumarsoodsuresh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Part 2 Strategic Financial Management

Section A Financial Statement Analysis


Section A.1 Basic Financial Statement Analysis

a. Common size statement = line items on income statement


and statement of cash flows
presented as a percent of sales; line items on balance sheet
presented as a percent of
total assets

b. Common base year statements = (new line item amount


/base year line item amount)x 100

c. Annual growth rate of line items = (new line item amount /


old line item amount) – 1

Section A.2 Financial Ratios

Unless otherwise indicated, end of year data is used for balance


sheet items; full year data is used for
income statement and statement of cash flow items.

Liquidity

a(1) Current ratio = current assets / current liabilities

a(2) Quick ratio or acid test ratio = (cash + marketable securities


+ accounts receivable) /current liabilities
a(3) Cash ratio = (cash + marketable securities) / current
liabilities

a(4) Cash flow ratio = operating cash flow / current liabilities

a(5) Net working capital ratio = net working capital / total


assets

Leverage

f(1) Degree of financial leverage = % change in net income / %


change in EBIT,
or
= EBIT / EBT

f(2) Degree of operating leverage = % change in EBIT / % change


in sales,
or
= contribution margin / EBIT

h. Financial leverage ratio = assets / equity

i(1) Debt to equity ratio = total debt / equity

i(2) Long-term debt to equity ratio = (total debt – current


liabilities) / equity

i(3) Debt to total assets ratio = total debt / total assets


j(1) Fixed charge coverage = earnings before fixed charges and
taxes / fixed charges
fixed charges include interest, required principal repayment,
and leases

j(2) Interest coverage (times interest earned) = EBIT / interest


expense

j(3) Cash flow to fixed charges = (cash from operations + fixed


charges + tax payments) /fixed charges.

Note: cash from operations is after-tax.

Activity

l(1) Accounts receivable turnover = credit sales / average gross


accounts receivables

l(2) Inventory turnover = cost of goods sold / average inventory

l(3) Accounts payable turnover = credit purchases / average


accounts payable

m(1) Days sales in receivables = average accounts receivable /


(credit sales / 365),
or
= 365 / accounts receivable turnover
m(2) Days sales in inventory = average inventory / (cost of sales
/ 365),
or
= 365 / inventory turnover

m(3) Days purchases in payables = average payables /


(purchase / 365),
or
= 365 / payables turnover

n(1) Operating cycle = days sales in receivables + days sales in


inventory

n(2) Cash cycle = Operating cycle – days purchases in payables

o(1) Total asset turnover = sales / average total assets

o(2) Fixed asset turnover = sales / average net plant, property


and equipment

Profitability

p(1) Gross profit margin percentage = gross profit / sales

p(2) Operating profit margin percentage = operating income /


sales

p(3) Net profit margin percentage = net income / sales


p(4) EBITDA margin = EBITDA / sales

q(1) ROA = net income / average total assets

q(2) ROE = net income / average equity

Market

r(1) Market-to-book ratio = current stock price / book value per


share

r(2) Price earnings ratio = market price per share / EPS

s. Book value per share = (total stockholders’ equity – preferred


equity) /number of common shares outstanding

u(1) Basic EPS = (net income – preferred dividends) / weighted


average common shares outstanding

(Number of shares outstanding is weighted by the number of


months shares are
outstanding)

u(2) Diluted EPS = (net income – preferred dividends) / diluted


weighted average common shares outstanding
(Diluted EPS adjusts common shares by adding shares that
may be issued for
convertible securities and options)
v(1) Earnings yield = EPS / current market price per common
share

v(2) Dividend yield = annual dividends per share / market price


per share

v(3) Dividend payout ratio = common dividend / earnings


available to common shareholders

v(4) Shareholder return = (ending stock price – beginning stock


price + annual dividends per share) / beginning stock price

Section A.3 Profitability Analysis

a(1) ROA = Net profit margin x total asset turnover;

(net income / sales) x (sales / averagetotal assets) = net


income / average total assets

a(2) ROE = ROA x financial leverage;


(net income / average total assets) x (average total assets /
average equity )= net income / average equity

h(1) Operating profit margin percentage = operating income /


sales

h(2) Net profit margin percentage = net income / sales

j. Sustainable growth rate = (1- dividend payout ratio) x ROE


Section B Corporate Finance
Section B.4 Working capital management

b. Net working capital = current assets – current liabilities

Section C Decision Analysis


Section C.1 Cost/volume/profit analysis

f(1) Breakeven point in units = fixed costs / unit contribution


margin

f(2) Breakeven point in dollars = fixed costs / (unit contribution


margin / selling price)

i(1) Margin of safety = planned sales – breakeven sales

i(2) Margin of safety ratio = margin of safety / planned sales

Section C.3 Pricing

n. Elasticity is calculated using the midpoint formula. For price


elasticity of demand
E = [change in quantity / (average of quantities)] / [change
in price / (average of
prices)]

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