Corporate Finance - Financial Management Assignment

1. In a well-written essay, discuss the types of financial information sought by at least three different potential users of financial statements. What difficulties arise when creating a set of accounting statements for multiple users? Do you believe that there is a single set of accounting rules that, once found, will solve all reporting controversies? ANS: A well-written essay will consider potential users of financial statements such as external financial analysts seeking timely information for investment purposes, legal analysts seeking a detailed accounting history of the firm's operations and performance, internal users seeking consistent measurement of past events for management decisions and compensation contracts, and managers seeking information related to comparison firms in the same industry. Unfortunately, it is extremely difficult for a single set of financial statements to provide 'best' information for a wide list of alternative purposes. Perhaps the best we can seek is a set of financial statements that are consistent over time and across firms. This data bank of information can then be used meaningfully and modified for a variety of purposes. Because of the varied viewpoints and concerns of users of financial information, it is unlikely that a single set of accounting rules will solve all reporting controversies. As long as the rules allow firms some flexibility with regard to the reporting of various transactions there will be controversies. The goal should be the minimization of potential controversies. 2. Given the appropriate financial statements, what is required to do a complete ratio analysis and interpretation of the ratio for a given corporation? What other analyses might you do? ANS: Ratio Current ratio Quick ratio Activity ratios: Inventory turnover Average sales per day Average collection period Average purchases per day Average payment period Fixed asset turnover Total asset turnover Debt Ratios: Assets-to-equity Debt-to-equity Times interest earned Profitability ratios: Gross profit margin Operating profit margin Net profit margin Information required Current assets Current liabilities Current assets inventory Current liabilities COGS Inventory Annual sales Accounts receivable Annual purchase Accounts payable Net fixed assets Total assets Total liabilities Total assets Common stock equity Long-term-debt Stockholders' equity EBIT Interest expense Gross profit Sales Operating profit Earnings available for common stockholders EPS ROA ROE Market ratios: P/E ratio Book value per share Market/book ratio Number of shares of common stock outstanding Total assets Common stock equity Market price per share of common stock Earnings per share Common stock equity Number of common stock shares outstanding Other analyses that might be done: 1. Do a trend analysis of the ratios over multiple years. Discuss the upward or downward trend of each ratio. 2. Make a comparison of each ratio in each year to the appropriate industry average. 3. Compare the DuPont system for ROA and ROE over multiple years to the industry ratios. 4. Draw conclusions on the corporation's liquidity, activity, debt, profitability, and market ratios. 5. You could also analyze the statement of retained earning and the statement of cash flows. 3. How do you calculate a firm's free cash flow (FCF)? ANS: First you calculate the firm's operating cash flow (OCF), the cash flow generated from operations. OCF = NOPAT + depreciation = EBIT * (1- T) + depreciation Second, you convert OCF to free cash flow (FCF). This is done by deducting the firm's net investment in fixed (FA) and current assets (CA) from OCF. Only spontaneous current liability changes--changes in accounts payable (A / P) and changes in accrued liabilities ( accruals)--are deducted from current assets to find the net change in short-term investment. FCF = OCF - FA - (CA - A / P -  accruals) 4. What are the basic steps in constructing a statement of cash flows? ANS: You construct the statement of cash flows by using the income statement for a given year, along with the beginning and end-of-year balance sheets. The procedure involves classifying balance sheet changes as inflows or outflows of cash; obtaining income statement data; classifying the relevant values into operating, investment, and financing cash flows; and presenting them in the proper format. By adding up the items in each category--operating, investment, and financing activities--you obtain the net increase (decrease) in cash and marketable securities for the year.