...Ch 9 Test – Discounted Cash Flow Analysis • Capital budgeting uses cash flows not accounting profits. • To calculate the value of a capital budgeting project, use incremental cash flows, not total cash flows. • Know what items are considered in cash flow analysis for capital budgeting: ▪ incremental cash flows, ▪ indirect effects, ▪ opportunity costs, ▪ changes in net working capital, ▪ shutdown cash flows,) ▪ beaware of overhead costs. Forget sunk costs. • Know when sunk costs are considered in capital budgeting cash flows (never). • Know importance of using real interest rate to discount real cash flows and nominal interest rate to discount nominal cash flows i.e. Do not mix them together. Know that either method will result in same NPV. (No calculation of real interest rate on test.) • Be able to calculate cash flows from operations. A new project will generate sales of $74 million, cost of $42 million and depreciation of $10 million in the coming year. The firm’s tax rate is 35%. Calculate cash flow for the next year. (Revenue – Cash Expense) x (1-tax rate) + (depreciation x tax rate) {calculator} (74 – 42) x (1 – 0.35) + (10 x 0.35) = $24.3 • Be able to calculate change in net working capital (problem 8 is good example). A house painting business had revenues of $16000 and expenses of $9000. There were no depreciation expenses. However, the business reported the following changes in working capital Beg End A/R ...
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...(Jordan) Analysis of the relationship between working capital policy and operating risk: an empirical study on Jordanian industrial companies Abstract The study analyzes the working capital management practices and their impact on profitability and risk of industrial Jordanian firms for the period of 2004 to 2007. The total sample of the study consists of 59 industrial firms listed on Amman Stock Exchange. The working capital management practices examine the impact of aggressive/conservative working capital investment and financing policy and analyze through cross-sectional regression models the relationship between working capital policies and profitability as well as risk of the firms. Efficient management of working capital is a fundamental part of the overall corporate strategy aiming to create the shareholders’ value. Firms try to keep an optimal level of working capital that maximizes their value. The optimal level of working capital is determined to a large extent by the methods adopted for the management of current assets and liabilities. It requires continuous monitoring to maintain proper level in various components of working capital, i.e. cash receivables, inventory and payables, etc. The result indicates a negative relationship between the profitability measures of firms and degree of aggressiveness of working capital investment and financing policy. The firms yield negative returns if they follow an aggressive working capital policy. Moreover, the present study validates...
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...One definition of social class is the Marxist perspective which states that social class is an economic concept which relates to the way in which society organises its production. Marx said that there are two social classes the upper/ ruling class and the working/subject class, also know as the Bourgeoisie and the Proletariats. The upper class owns means of production such as facotires, machinery and land and also maintain a power due to this, over the working class because the working class only own their labour power. The working class have such thing called a false class consciousness which is where they have a false awareness of the fact that they are being exploited by the ruling class, this exploitation is in the manner of money. Children who are born within a working class family develop their sense of Another definition of social class is in the Neo Marxist view .Bourdieu stated that there are different capitals which could indicate your positon in a social class. The economic capital depends on your weath, financial income and inheritace. Economic capital is usually higher among the upper class because of higher paid jobs. Cultural capital is the cultural awareness one maintains and is also to do with education and is harder to achieve due to defing and quantifiable information. Culutral capital is usually passed on through the generationweiofj • Social capital –relationships and networks with others along with contacts. • More dependant on social capital...
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...Debate 8-3 Capitalization Versus Expense Present arguments for capitalizing all of the above costs. Your arguments should utilize the conceptual framework definitions and concepts. In order to figure out what kind of cost should be capitalizing or expense, we should know about the difference between capitalizing and expense. The word capitalizing means to record the amount of the item in a balance sheet rather in a income statement. However, the expense means the money spent or cost incurred in an organization that contributes to generate revenue, and expenses are summarized and accumulated in the income statement as subtraction from the income before measure income tax. The cost of the asset includes the initial cost and all other costs associated with maintaining the asset in operating condition. Wheter the cost should be capitalized or expense, we need to distinguish which situation should apply the exact one. When an organization “capitalize” an asset, then it need to make sure the asset has potential economic value that will profit the future periods, but if the organization” expense” an asset, it need to prove that the value of the asset has been used up in the current period and is reported on the income statement. There is a choice between capitalizing an expenditure, which means writing it off during the expected period of benefit and expensing the cost, meaning expensing it as incurred. All the cost incurred by Entre Preneur for founding his new site...
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...portion of debt (payable within 12 months) is critical, because it represents a short-term claim to current assets and is often secured by long term assets. Common types of short-term debt are bank loans and lines of credit. An increase in working capital indicates that the business has either increased current assets (that it has increased its receivables, or other current assets) or has decreased current liabilities—for example has paid off some short-term creditors. Implications on M&A: The common commercial definition of working capital for the purpose of a working capital adjustment in an M&A transaction (i.e. for a working capital adjustment mechanism in a sale and purchase agreement) is equal to: Current Assets – Current Liabilities excluding deferred tax assets/liabilities, excess cash, surplus assets and/or deposit balances. Cash balance items often attract a one-for-one, purchase-price adjustment. Working capital management Corporate finance Looking north from the Empire State Building, New York City, 2005 Working capital Cash conversion cycle Return on capital Economic Value Added Just-in-time Economic order quantity Discounts and allowances Factoring Capital budgeting Capital investment decisions The investment decision The financing decision Sections Managerial finance Financial accounting Management accounting Mergers and acquisitions Balance sheet analysis Business...
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...This document provides financial analysis of Competition Bikes Inc. Horizontal Analysis: Horizontal analysis is a financial statement analysis technique that shows changes in the amounts of corresponding financial statement items over a period of time. It is a useful tool to evaluate the trend situations. (Financial Analysis of Financial Statements) The statements for two or more periods are used in horizontal analysis. The earliest period is usually used as the base period and the items on the statements for all later periods are compared with items on the statements of the base period. The changes are generally shown both in dollars and percentage. (Financial Analysis of Financial Statements) Let us analyze strengths and weaknesses of the Horizontal Analysis provided by Competition Bikes Inc. Let us consider Net Sales of Competition Bikes over the Year 6, 7 & 8. In the Year 6, Net Sales of Competition Bikes were $4,485,000 which increased in the subsequent Year 7 by $1,495,000 which is percentage increase of 33.3 as compared to 31.8% of increase in the cost of goods, resulting in 37.5% increase of Gross profit. This can be considered as a strength of the company . On the other side considering Year 8 against Year 6, Net sales are increased to $5,083,000 but they are lowered by $897,000 as compared to Year 7. Year 8 Net sales are behind 15% as compared to Year 7, resulting in $266,600 less Gross profits as compared to $1,638,000 profit of Year 7. Year 8 resulted in 16...
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...Essay Title: Pick two readings of your choice and critically discuss what they have to say about the structure and experience of work in contemporary industrialised societies. (1000 - 1250 Words) Readings Chosen (Bibliography): Grint, K. and Nixon, D. (2015) “Contemporary Work: The Service Sector and the Knowledge Economy” in Grint, K and Nixon, D., The Sociology of Work 4th Edition, Cambridge: Polity. Walby, S. (2011) “Is the Knowledge Society Gendered?”, Gender, Work and Organization, 18(1), 1 – 29. In this short treatise this author will initially discuss the research of Grint and Nixon (2015) followed by Walby (2011). This author will conclude the treatise with a brief evaluation of the theories presented. Grint and Nixon’s (2015) reading investigates the concept of the Post Industrial Society as espoused by Bell (1973) and explores its evolution through the end of the 20th Century and through the first decade of the 21st Century. In doing so it also highlights the decline in the active male workforce and the rise in the active female workforce. Bell’s argument that a post-industrial work environment would be characterised by knowledge-intensive work (the Knowledge Society) is counteracted by Braverman’s (1974) argument that a form of post-industrial Taylorism would serve to de-skill society rather than enhance knowledge. Braverman’s arguments are supported by Kumar (2005) who argues that information technology is more likely to proletarianize than professionalize...
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...Overtrading: Definition, Causes, Consequences and Remedy We have heard the word “Overtrading” used by bankers, credit rating organization and analysts. It’s therefore important to understand what is Overtrading, how it is cause and what serious repercussions will happen and as financial executive what we can do. So what is Overtrading? In simple word, it denotes a condition in which the resources in particular the liquid resources of a business are insufficient to maintain the existing level of trading. This particularly happens during the booms when companies increase revenue without considering it means to finance the increase turnover. In colloquial terms, we can also say that the management has failed to cut their coat according to their cloth. The Causes of Overtrading are as follows: Internal Factors: • By expanding turnover without the correspondingly increase in working capital. For example, assuming the present turnover is $12 million and average debtors of $250,000. If turnover increase by 30% and assuming the same credit terms on the new turnover, its debtors are likely to rise by 30% i.e. $750,000. So this $750,000 needs to be obtain from existing working capital resources or injection of share capital. If management ignores this point by “overstretching”, it will face the “Overtrading situation”, • By increased investment in fixed assets like land and building, machinery, etc and acquiring investments in a subsidiary or associated companies without...
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...Capital Structure “The capital structure is how a firm finances its overall operations and growth by using different sources of funds…When people refer to capital structure they are most likely referring to a firm's debt-to-equity ratio, which provides insight into how risky a company is” (Capital Structure). After evaluating the changes in different capital structures for years nine through thirteen, it is obvious that the best capital structure overall is 50% Preferred and 50% Common Stock. This choice optimizes the returns for shareholders overall. The only option that comes closest is 20% 9% Bonds and Common Stock. The first year, the 20% option yields a higher return on Earnings per Common Stock share. The second year, the two options yield the same return. After this, however, the 50% option yields .001% more the third year, .002% more the fourth year, and .003% more the fifth year. According to this trend, this option will exceed all other capital structure options by a fairly large sum in future years. The other options are not advisable because while all options do show growth, none show more Earnings per Common Stock share than the 50% option shows. This is also the option that shows the most even split between investments. All other capital structures have uneven splits between investments, which may prove a weakness should the larger of the two investors fail. For example, in the 20% option that was the secondary choice, the alternative capital sources were split...
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...Managing Internal Cost and Controlling Finances Pollyette Milligan January 13, 2014 WGU Financial Analysis Evaluation of Company Operational Strengths and Weakness What better way to determine the stability and forecast for a company than to analyze its financial systems. In the financial world this is done through several analysis breakdowns that show not only the year by year changes but the trends that cause the changes as well. In this report a financial analysis of the Competition Bikes, Inc. will be conducted covering; horizontal analysis, which is a comparative study of a balance sheet or income statement for two or more periods, to compute both total and relative variances for each line item (businessdictionary.com, 2014). A vertical analysis or the technique for identifying the relationship between items in the same financial statement by expressing all amounts as the percentage of the total amount taken as 100 (businessdictionary.com, 2014) will also be shown. In a balance sheet, for example, cash and other assets are shown as a percentage of the total assets and, in an income statement, each expense is shown as a percentage of the sales revenue. Financial statements using this technique are called common size financial statements. (businessdictionary.com, 2014) In order to assist the company in determining the possibilities over the next few years, included in this report will be a trend analysis which is a method of time series data (information in...
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...Australia, Russia, the United Kingdom, United States, France, Germany, India and other countries. They meet four times a year at the Bank for International Settlements (BIS) in Basel, Switzerland. The role of the committee is that set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. Additionally, the first contract was the Basel I. It was issued in 1988 and focused on credit risk by creating a bank asset classification system. The system has five risk categories. Some of those are; * 0% - cash, central bank and government debt and any OECD government debt * 0%, 10%, 20% or 50% - public sector debt * 20% - development bank debt, OECD bank debt, OECD securities firm debt, non-OECD bank debt (under one year maturity) and non-OECD public sector debt, cash in collection * 50% - residential mortgages * 100% - private sector debt, non-OECD bank debt (maturity over a year), real estate, plant and equipment, capital instruments issued at other banks. There is a significant point in this system, that the bank must maintain capital equal to at least 8% of its risk-weighted assets. I mean, if a bank has risk-weighted assets of $100 million, it is required to maintain capital of at least $8 million. History of the Basel Committee The Basel Committee first grew out of the "growing globalization of financial intermediation" in the 1960s. Two significant events in the early 1970s directly affect the creation of the Basel...
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...7-9 Definitions of Commonly Used Activity Ratios |Activity Ratios |Numerator |Denominator | |Inventory turnover |Cost of goods sold |Average inventory | |Days of inventory on hand (DOH) |Number of days in period |Inventory turnover | |Receivables turnover |Revenue |Average receivables | |Days of sales outstanding (DSO) |Number of days in period |Receivables turnover | |Payables turnover |Purchases |Average trade payables | |Number of days of payables |Number of days in period |Payables turnover | |Working capital turnover |Revenue |Average working capital | |Fixed asset turnover |Revenue |Average net fixed assets | |Total asset turnover |Revenue |Average total assets | Exhibit 7-10 Definitions of...
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...Accounting Rate of Return | ARR | AAR | ROI Definition Accounting Rate of Return, shortly referred to as ARR, is the percentage of average accounting profit earned from an investment in comparison with the average accounting value of investment over the period. Accounting Rate of Return is also known as the Average Accounting Return (AAR) and Return on Investment (ROI). Topic Contents: 1. Definition 2. Formula 3. Explanation 4. Example 5. Advantages 6. Limitations Formula Accounting Rate of Return | = | Average Profit | % | | | Average Book Value | | Where: Average Profit | = | Total accounting profit over the investment period | | | Years of Investment | Average Book Value | = | Initial investment + Scrap Value + Working Capital | | | 2 | or Average Book Value | = | N.B.V. (year 0) + N.B.V. (year 1) + N.B.V. (year 2) + ... | | | Years of Investment + 1 | Explanation ARR is a measure of accounting profitability of investments. An ARR of 10% for example means that the investment would generate an average of 10% annual accounting profit over the investment period based on the average investment. ARR may be compared with the target return on investment. Investments may be accepted if the ARR exceeds the target return. However, it is preferable to evaluate investments based on theoretically superior appraisal methods such as NPV and IRR due to the limitations of ARR discussed below. The calculation of ARR requires...
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...JET 2 Task 3 Deborah U. Myers The definition of capital structure is a “combination of a company’s long term debt, specific short term debt, common equity, and preferred equity, the capital structure is the firm’s various sources of funds use to finance its overall operations and growth. Debt comes in the form of bond issues or long-term notes payable, whereas equity is classified as common stock, preferred stock, or retained earnings. Short-term debt such as working capital requirements also is considered part to the capital structure (The Free Dictionary, 09).” “A mix or a company’s long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using difference sources of funds (Investopedia).” Basically Capital Structure is that the company should be able to manage the company with growth by using a combination of debt and equity for maintaining its financial status for survival. Debt is bond issues that are long-term notes payable, equity is common or preferred stock or retained earnings. Capital Structure is also known as debt-to-ratio equity ratio which will give a view of the company in terms or risk. Equity capital is moneys that are given and owned by shareholders. There are two types of equity capital: 1. Contributed Capital in which money invested is in exchange for company stock. 2. Retained earnings are the profits from past years that have been collected...
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...Problems of small & medium enterprises: While the small entrepreneurs can set up a unit even with less capital, enjoy quick returns and have the flexibility to handle the vagaries of the market, they have to face many problems like the following: 1. Paucity of Finance: The small entrepreneurs possess a weak financial structure and find it extremely difficult to obtain credit because of lack of collateral security. This acts as a big handicap, especially in the initial stages, in most of their operations like their ability to hire the best workers or to purchase the latest machinery and equipment or to acquire sophisticated technology. 2. Poor availability of power and other infrastructure: Though infrastructural bottlenecks are problems for big businesses too, yet they can overcome these problems to some extent because of their financial strength...
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