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Chapter 3 Study Guide

by: Matthew Maniscalco

Chapter 3 Study Guide 311

Marketplace > Clemson University > Finance > 311 > Chapter 3 Study Guide
Matthew Maniscalco

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Hey, This is a study guide i made of all important material in chapter 3. The class won't go into further detail then what is listed on the guide. It has notes from textbook and in class lecture. :)
Financial Management I
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This 4 page Study Guide was uploaded by Matthew Maniscalco on Tuesday December 8, 2015. The Study Guide belongs to 311 at Clemson University taught by in Fall 2015. Since its upload, it has received 19 views. For similar materials see Financial Management I in Finance at Clemson University.


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Date Created: 12/08/15
Fin 311 Ch3 Study Guide  Who uses financial analysis? o Management for planning/evaluation o Credit managers to estimate risk o Investors o Other managers to identify potential mergers  Describe… the balance sheet? …income statemeny? o Balance sheet  Snapshot of Assets and Liabilties/equities at point in time  Assets in order of liquidity  Liabilities in order of when they mature (short term on top)  Both recorded at historic costs  SE difference between A and L  Remember that retained earnings have already been used for new investment  Its not just money lying around o Income statement  Revenue – expenses = income  Covers a period of time  Expenses listed in order of relatedness to operation?  CGS  Operating Expenses  Interest expense  Texes  Also shows amounts paid to shareholders (dividends) and amount reinvested in company (addition to retained earnings)  What are some further ways/tools to analyze financial statements? o Common size statements  Everything in %  Allows us to compare big firms to small firms  Balance sheet all in % of total assets  Income statement all in % of net sales o Ratio analysis  Allows us to compare firms that are different sizes  Can be warning signs if too low/high   What are the liquidity ratios? o How quickly/easily an asset can be turned to cash o Examines firms ability to generate cash in short run  Can they make payments on short term liabilities (in crisis even?) o Current ratio  months o Quick ratio  Few weeks  Shorter time frame without inventory as asset o Cash ratio  Not on sheet  days  What are the asset management ratios? o How effectively is the company allocating resources o by comparing returns on those investments o aka how well does firm use assets to generate sales o Accounts Receivable Turnover  How many cycles per year  By cycle…each time we allow a customer to buy on credit and they pay us back o Average Collection Period  How long do these cycles take? (in days) o Inventory Turnover  How many inventory cycles per year o Inventory Period  How many days inventory cycles take  Both of the above 2 vary between industries  Ex. Jewelry vs. groceries o Fixed Asset Turnover  If low it means we are overinvested b/c FA > Sales  Don’t calculate period/c too long o Total Asset Turnover  Again low = overinvested  What are the leverage ratios? o How firm has financed their assets o Can they meet there obligations both short and long term o Debt to Equity o Debt o Equity multiplier  Will be different later on but for now above three interchangeable  More debt company is using higher ratios will be o Times Interest Earned  Extent to which current earnings are able to meet current interest payments o Fixed Charge Coverage  Firm using fixed charge financing is “using leverage”  Firms that use more leverage are often riskier but the returns for investors can be greater (higher risk/reward)  Fixed charges are bottom on listed on formula sheet  What are the profitability ratios? (decomp ROA, explain signifigance) o How well firm can extract profits from sales o All about minimizing expenses in regards to sales o Gross Profit Margin  After each dollar of sales how much per is leftover after accounting for expenses o Net Profit Margin  Higher better o Return on Assets  Higher better o Return on Equity o Decomp ROA/ROE  ROA = Net Profit Margin x Total Asset Turnover  ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier  ROE = ROA x Equity Multiplier  We see that these two have multiple factors/ratios go into them  For this reason we realize that one part being high could just be disguising the other is low  We want to be careful when it comes to ROA and ROE and look at the parts to see if uniform  Ex. ROE could be high because finance more with debt than equity, more risk more reward but not necessarily better  What are the market ratios? o Forward looking o Provide sense of what markets future expectation’s of company are  Relates this to the accounting data as well o Market to Book  Higher means market expects higher future growth rate o Price to Earnings  Earnings per share = EAIT/# of shares o Price to Sales  Not on formula sheet  What are the dividend policy ratios? o Provide information about dividend policy o Provides inferences about future growth opportunities  If firm has lots of good future growth opportunity going to reinvest rather than pay dividends o (Dividend) Payout o Dividend Yield  What are the two main ways we can use the ratios for comparison?  Trend analysis  Compare same company from period to period  Can use graphs/tables  Peer analysis  Compare one firm to another in same industry  Usually in table  Think is there room for improvement for lower one  Sources that have average ratios of each industry for baseline to compare  Why must we take into account the accounting methods used? o Can affect these ratios Ex. Whether a company uses FIFO or LIFO o Must be uniform for true comparison or at least take them into account if different  What are some overall takeaways when it comes to financial analysis pertaining to ratios? o Few absolutes  Good ratio for jewelry store could be bad for grocery store o Ratios just flags  Could be more to it, must go in and analyze


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