Table of Contents

Chapter 1 - Overview of Financial Analysis. 1

The Purpose of Financial Analysis. 1

Key Financial Analysis Concepts. 2

Judgment in Financial Analysis. 3

Precision of Financial Analysis. 4

Death by a Thousand Cuts. 4

Monitoring Analysis. 5

Role of the Financial Analyst 5

A Conservative Bias. 6

Chapter 2 - The Financial Statements. 8

The Income Statement 8

Income Statement Overview.. 8

The Single-Step Income Statement 11

The Multi-Step Income Statement 11

The Contribution Margin Income Statement 12

The Multi-Period Income Statement 13

The Balance Sheet 14

Overview of the Balance Sheet 15

The Common Size Balance Sheet 18

The Comparative Balance Sheet 19

The Statement of Cash Flows. 20

Overview of the Statement of Cash Flows. 20

The Direct Method. 20

The Indirect Method. 22

The Statement of Retained Earnings. 23

Overview of the Statement of Retained Earnings. 23

Financial Statement Disclosures. 24

Chapter 3 - Accounting Issues Impacting the Financials. 34

The Basis of Accounting. 34

Accrual Basis of Accounting. 34

Cash Basis of Accounting. 35

Modified Cash Basis of Accounting. 35

Effect of the Fiscal Year. 36

Recordation of Revenue at Gross or Net 36

Bill and Hold Revenue. 37

Negative Cash. 38

Inventory Costing Methods. 38

Depreciation Methods. 39

Current Value Accounting. 40

Illusory Profits. 41

Financial Statement Reporting Issues. 41

Headline Earnings. 41

Pro Forma Earnings. 42

Window Dressing. 42

Auditor Certification. 43

Chapter 4 - Interpretation of Financial Statements. 46

Interpretation of Financial Statements. 46

Horizontal Analysis. 47

Vertical Analysis. 49

Cash Coverage Ratio. 50

Current Ratio. 51

Quick Ratio. 52

Liquidity Index. 53

Accounts Payable Turnover Ratio. 54

Accounts Receivable Turnover Ratio. 54

Inventory Turnover Ratio. 55

Fixed Asset Turnover Ratio. 56

Sales to Working Capital Ratio. 56

Debt to Equity Ratio. 57

Fixed Charge Coverage. 58

Breakeven Point 58

Gross Profit Ratio. 59

Net Profit Ratio. 60

Return on Net Assets. 60

EBITDA.. 61

NOPAT. 62

Limitations of Ratio Analysis. 62

Chapter 5 - Cost-Volume-Profit Analysis. 65

Contribution Margin. 65

Breakeven Point 66

Margin of Safety. 69

Cost-Volume-Profit Analysis. 70

Sales Mix. 72

Chapter 6 - Pricing Decisions. 75

Psychological Pricing. 75

Cost Plus Pricing. 76

Dynamic Pricing. 77

Freemium Pricing. 78

High-Low Pricing. 79

Premium Pricing. 80

Time and Materials Pricing. 81

Value Based Pricing. 83

Other Pricing Strategies. 84

When to Review Pricing. 84

Price Elasticity of Demand. 85

Cross Price Elasticity of Demand. 87

Non-Price Determinants of Demand. 87

Chapter 7 - Cost Object Analysis. 90

Factors in Cost Object Analysis. 90

The Assignability of Costs. 91

The Customer Cost Object 92

Customer Acquisition Costs. 93

Customer Lifetime Value. 94

The Employee Cost Object 95

The Product Cost Object 96

The Product Line Cost Object 98

The Sales Channel Cost Object 99

Cost Object Termination Issues. 99

Which Cost Objects to Track. 100

Chapter 8 - Constraint Analysis. 103

Overview of Constraint Analysis. 103

The Cost of the Bottleneck. 105

Local Optimization. 106

Constraint Analysis Financial Terminology. 107

Constraint Analysis from a Financial Perspective. 107

The Constraint Analysis Model 108

The Decision to Sell at a Lower Price. 110

The Decision to Outsource Production. 111

The Capital Investment Decision. 112

The Decision to Cancel a Product 114

Chapter 9 - Credit Decisions. 118

The Credit Rating. 118

Internal Credit Rating Systems. 118

Third Party Credit Ratings. 121

Evaluating Credit Scores. 122

Use of Credit Ratings. 122

Credit Rating Errors. 122

Indicators of Future Payment Delinquency. 123

Ongoing Credit Monitoring Actions. 124

Requests for Credit Increases. 126

The Riskiest Customers. 127

The Demanding Customer. 128

Effects of Industry Credit Practices. 129

Chapter 10 - Financing Choices. 131

Overview of Debt Funding. 131

The Line of Credit 131

The Borrowing Base. 132

Early Payment Discounting. 133

Invoice Discounting. 134

Factoring. 135

Inventory Financing. 136

Purchase Order Financing. 136

Leases. 136

The Long-Term Loan. 137

Bonds. 137

Agency Financing. 139

Deleveraging. 139

Overview of Equity Funding. 139

Restricted Stock. 140

Unrestricted Stock. 141

Warrants. 141

Angel Investors and Venture Capital 142

Crowdfunding. 142

Private Investment in Public Equity. 143

Debt for Equity Swaps. 143

Chapter 11 - Financial Leverage. 146

The Financial Leverage Concept 146

Issues Impacting Leverage. 149

Leverage Risk. 149

Impact of Compensation on Leverage. 150

Chapter 12 - Capital Structure Analysis. 153

Optimal Capital Structure. 153

Capital Structure Analysis. 154

Line of Credit Issues. 155

Tax Shield Effects. 155

Future Financing Flexibility. 156

Loan Covenant Issues. 156

Maturity Structure of Debt 156

Creditor Position Considerations. 157

Debt Paydown. 157

Cost of Capital Reduction. 158

Planning for a Bond Rating. 158

Capital Structure Measurements. 160

Interest Coverage Ratio. 160

Debt Service Coverage Ratio. 160

Recapitalization. 161

Timing of Changes to the Capital Structure. 161

Chapter 13 - Dividend Analysis. 164

The Investor Viewpoint 164

The Company Viewpoint 165

The Stock Buyback Option. 166

The Stock Dividend. 167

Chapter 14 - Foreign Exchange Risk Analysis. 170

Foreign Exchange Risk Overview.. 170

Foreign Exchange Risk Management 171

Take No Action. 171

Avoid Risk. 172

Shift Risk. 172

Time Compression. 173

Payment Leading and Lagging. 173

Build Reserves. 174

Maintain Local Reserves. 174

Hedging. 174

Types of Foreign Exchange Hedges. 175

Loan Denominated in a Foreign Currency. 175

The Forward Contract 176

The Futures Contract 177

The Currency Option. 177

The Cylinder Option. 178

Swaps. 179

Netting. 179

Chapter 15 - Interest Rate Risk Analysis. 182

Interest Risk Overview.. 182

Interest Rate Risk Management 182

Take No Action. 182

Avoid Risk. 183

Asset and Liability Matching. 183

Hedging. 183

Types of Interest Rate Hedges. 183

The Forward Rate Agreement 183

The Futures Contract 186

The Interest Rate Swap. 187

Interest Rate Options. 188

Interest Rate Swaptions. 191

Chapter 16 - Financial Forecasting. 194

The Differences between a Budget and a Forecast 194

The Run Rate Concept 195

Sensitivity Analysis. 195

Revenue Forecasting. 196

The System of Budgets. 200

The Number of Budget Scenarios. 203

The Rolling Forecast 204

The Cash Forecast 207

The Short-Term Cash Forecast 208

The Medium-Term Cash Forecast 211

The Long-Term Cash Forecast 212

The Use of Averages. 212

The Use of Clearing Dates in a Forecast 213

Chapter 17 - Managing the Rate of Growth. 216

The Funding of Growth. 216

Contribution Margins and Sustainable Growth. 218

Organic Growth. 218

Step Costs and Sales Growth. 219

Other Constraints on Growth. 220

Negative Effects of Excessive Growth. 221

The Ideal Rate of Growth. 222

Chapter 18 - The Cost of Capital 224

Cost of Capital Derivation. 224

Cost of Debt 224

Cost of Preferred Stock. 224

Cost of Common Stock. 225

Weighted Average Cost of Capital 225

Variations in the Cost of Capital 226

Adjustments to the Cost of Capital 228

Cost of Capital as a Threshold Value. 229

Chapter 19 - Discounted Cash Flow Techniques. 232

Time Value of Money. 232

Present and Future Value Tables. 233

Net Present Value. 235

Internal Rate of Return. 236

Incremental Internal Rate of Return. 237

Terminal Value. 238

Inclusions in Cash Flow Analysis. 238

Chapter 20 - Capital Budgeting. 241

Overview of Capital Budgeting. 241

The Capital Request Form.. 242

The Payback Method. 243

Real Options. 245

Capital Budget Proposal Analysis. 246

Complex Systems Analysis. 248

Research and Development Funding Analysis. 248

The Outsourcing Decision. 250

The Post Installation Review.. 250

Chapter 21 - The Lease or Buy Decision. 254

The Lease Arrangement 254

The Lease or Buy Decision. 254

Leasing Concerns. 255

Leasing Advantages. 256

Chapter 22 - Acquisition Valuation. 259

Liquidation Value. 259

Real Estate Value. 259

Relief-from-Royalty Method. 260

Book Value. 260

Enterprise Value. 262

Multiples Analysis. 263

Discounted Cash Flows. 265

Post Five-Year Cash Flows. 266

Negotiation of DCF Contents. 266

Replication Value. 268

Comparison Analysis. 270

The Comparison of Sales Multiples. 270

The Comparison of Cash Flows. 270

The Comparison of Contract Revenues. 270

52-Week High. 271

Influencer Price Point 271

The Initial Public Offering Valuation. 272

The Strategic Purchase. 272

Intellectual Property Valuation. 272

Extraneous Valuation Factors. 273

The Control Premium.. 273

The Earnout 274

Synergy Analysis. 275

The Valuation Floor and Ceiling. 277

Chapter 23 - The Enhancement of Shareholder Value. 280

Return on Equity. 280

Economic Value Added. 282

Cash Flow Analysis. 284

Opportunity Cost of Capital 284

Key Success Factors. 285

Stock Price Enhancement 286

Long-Term and Short-Term Value Considerations. 286

The Industry Setting. 287

Answers to Chapter Questions. 289

Glossary. 321

Index. 326

 

Final Examination………………………………………………………………………………………………….331