Financial Analysis and Decision Making : Tools and Techniques to Solve Financial Problems and Make Effective Business Decisions

428 Pages·2002·3.37 MB·English

by  David E. Vance

FINANCIAL
ANALYSIS AND
DECISION MAKING
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FINANCIAL
ANALYSIS AND
DECISION MAKING
Tools and Techniques to Solve
Financial Problems and Make
Effective Business Decisions
DAVID E. VANCE, MBA, CPA, JD
McGraw-Hill
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DOI: 10.1036/0071415599
Contents ix
Chapter 14
Working Capital and Cash Budgeting 217
Working Capital 217
Cash Budgeting 218
Opening a New Facility 221
Line of Credit 226
Seasonal Cash Demand 228
Managing Working Capital 230
Summary 248
Chapter 15
Master Budgets and Variance Analysis 251
Basic Budgets 252
Master Budgets 253
Master Budgets Versus Financial Statements 259
Supplemental Budgets 261
Summary 261
Chapter 16
Pricing Theory 263
Cost-Centered Pricing 263
Market-Centered Pricing 265
Engineered Cost 269
Price Elasticity 270
Product Life Cycle 272
Transfer Pricing 273
Opportunistic Pricing 275
Microeconomics Pricing 277
Summary 286
Chapter 17
Advanced Cost Concepts and Allocation of Resources 289
Cost Drivers 289
Activity-Based Costing 291
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C O N T E N T S
PREFACE xi
ACKNOWLEDGMENTS xv
Chapter 1
Financial Statements and Accounting Concepts 1
Income Statement 1
Balance Sheet 5
Statement of Cash Flows 10
Accounting Definitions 13
Generally Accepted Accounting Principles 14
Summary 17
Chapter 2
Financial Ratios and Other Measures of Performance 19
Measurement of Operating Performance 19
Measures of Financial Performance 30
Risk Measurement 38
Cautions on Ratios 47
Summary 48
Chapter 3
Factors Determining Interest Rates and Required
Debt Yields 51
Components of Interest: Risk-Free Rate of Return, Default, Liquidity,
and Maturity Risk Premiums 52
Effect of Supply and Demand on Interest Rates 56
Summary 65
Chapter 4
Forecasting Yield and Risk 67
Forecasting with A Priori Probabilities 68
v
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vi Contents
Forecasting with Historical Data 75
Using Expected Values and Standard Deviations to Make Decisions 77
Portfolio Theory 81
How to Use Required Rate of Return 85
Summary 85
Chapter 5
Time Value of Money 87
Four Classes of Time Value Problems 87
Future Value 88
Future Value: Annual Growth Rates 90
Future Value Formula 90
Present Value Theory and Mathematical Formula 91
Present Value Using Tables 92
Present Value of an Annuity 94
Loan Payments 94
Loan Amortization Schedules 96
Mathematical Formula for Present Value of an Annuity 98
Future Value of an Annuity 98
Mathematical Formula for Future Value of an Annuity 99
Summary 100
Chapter 6
Bond Valuation 101
Bond Valuation 101
Callable Bonds 104
Convertible Bonds 106
Bond Yield 107
Yield to Call 112
Interpolation Theory 114
Summary 116
Chapter 7
Leases 119
Operating Versus Capital Leases 119
Imputed Interest Rates 120
Contents vii
Effect of Deposits and Prepayments on the Imputed Interest Rate 122
Capitalizing Leases 125
Summary 128
Chapter 8
Stock Valuation 129
Stock Valuation 129
Computing Stock Value 132
Stock Yield 136
Stock Valuation Based on Cash Flow 136
Stock Valuation Based on Earnings 138
Stock Valuation Based on Sales 140
Summary 142
Chapter 9
Cost of Capital 143
Cost of Debt Capital 143
Cost of Preferred Stock Capital 144
Cost of Common Equity 145
Cost of New Common Equity Capital 148
Cost-Free Capital 151
Weighted Average Cost of Capital (WACC) 151
When Should New Common Stock Be Issued? 154
Cost of Leased Capital 158
Marginal Cost of Capital 158
Decision Rules for the Optimal Capital Budget 160
Summary 162
Chapter 10
Capital Budgeting 165
Methods for Evaluating Capital Projects 166
Payback Method 166
Discounted Payback Method 168
Net Present Value 170
Internal Rate of Return 171
viii Contents
Modified Rate of Return 175
Comparison of Capital Budgeting Methods 178
Summary 178
Chapter 11
Cash Flow Estimation for Capital Budgeting 181
Capital Budgeting Ground Rules 181
Capital Budgeting Format 183
Replacement Equipment 185
Inflation and Price Pressure 185
Spreadsheet Modeling 185
Summary 187
Chapter 12
Product Costing 189
Cost Versus Expense 189
Financial Accounting Versus Managerial Accounting 190
Unallocated Manufacturing Overhead 193
Expenses Versus Inventory 197
Full Absorption Cost of Purchased Merchandise 197
Make or Buy Decisions 198
Managerial Accounting 199
Gross Profit Versus Contribution 201
Summary 203
Chapter 13
Break-Even Analysis and Modeling 205
Break-Even Analysis 205
Modeling Profit 208
Sales Volume Break-Even 210
Relevant Range 212
Reality Testing 212
Break-Even and Risk 213
Summary 216