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BUS 1220E / 1299E
FINANCIAL MANAGEMENT
STUDY SHEET
I. EVALUATING PAST PERFORMANCE
1. Analyzing the Statement of Cash Flows
a. Was cash generated from operations?
c. What are the sources and uses from operations?
b. Was net income a source of cash?
d. What are the remaining sources and uses?
e. Recommendations for the future.
2. Analyzing Financial Ratios
PROFITABILITY RATIOS
Vertical Analysis = Statement of Earnings Item ÷ Sales
Return on Average Equity = Earnings ÷ Average Equity
LIQUIDITY RATIOS
Current Ratio [CR] = Current Assets ÷ Current Liabilities
Acid Test Ratio [ATR] = (Cash + Marketable Securities + Accounts Receivable) ÷ Current Liabilities
STABILITY RATIOS EFFICIENCY RATIOS
Net Worth to Total Assets = Equity ÷ Assets Age of Receivables = Accounts Receivable ÷ (Sales/365)
Interest Coverage [IC] = EBIT ÷ Interest Expense Age of Payables = Accounts Payable ÷ (Purchases/365)
Age of Inventory = Inventory ÷ (COGS/365)
GROWTH RATIOS
Growth = (Year 2 - Year 1) ÷ (Year 1)
II. PROJECTING FUTURE PERFORMANCE
3. Projecting Financial Statements
Use management estimates and reasonable assumptions to project Statements of Earnings, Statements of Retained Earnings, and Balance Sheets. Discuss your findings.
III. POST-PROJECTION ANALYSIS
4. Interpreting the Plug
What does the plug figure mean? Perform a sensitivity analysis on the plug.
Will seasonality affect the plug? How will these affect your decision?
SEASONALITY
Plug
+ Additional seasonal working capital required
= Total annual working capital requirement
SENSITIVITY ANALYSIS
Number of Days Assumption Account Value Change in Plug New Plug
5. Risk Assessment
CAPACITY TO REPAY
Projected CR, ATR, & IC; treat negative plugs as cash
CONDITIONS
CHARACTER
IV. DECISION
6. Essay
‘‘As ____, I will….’’
Draw on important areas of analysis to support your decision. Make whatever recommendations you deem necessary. Overcome any issues or risks.