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Financial Analysis, Modeling, and Forecasting Techniques PDF

433 Pages·2007·3.32 MB·English
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Financial Analysis, Modeling, and Forecasting Techniques Course #5710A/QAS-5710A Course Material Financial Analysis, Modeling, and Forecasting Techniques (Course #5710A/QAS-5710A) Table of Contents Page PART I: TOOLS AND TECHNIQUES FOR FINANCIAL ANALYSIS Chapter 1: Break-Even and Contribution Margin Analysis I. What is Cost-Volume-Profit Analysis? 1-1 A. Applications of the CVP Model 1-1 B. What and Why of Break-Even Sales 1-2 C. Break-Even Point 1-3 D. The Formula Approach 1-6 E. What is Margin of Safety? 1-7 F. Cash Break-Even Point 1-7 II. What is Operating Leverage? 1-8 III. Sales Mix Analysis 1-10 IV. Contribution Margin Analysis 1-11 A. Accepting or Rejecting a Special Offer 1-12 B. Analyzing the Make-or-Buy Decision 1-13 C. Determining Whether to Sell or Process Further 1-14 D. Adding or Dropping a Product Line 1-15 E. Utilizing Scarce Resources 1-16 F. Don’t Forget the Qualitative Factors 1-17 V. Conclusion 1-17 Review Questions & Solutions 1-18 Chapter 2: Understanding and Applying the Time Value of Money Concept I. Assumptions of Present Value and Future Value Techniques 2-1 II. Present Value Table 2-1 III. Future Value Table 2-2 IV. Both Present Value and Future Value Tables 2-2 A. Future Value of $1 (Table 2.1) 2-2 B. Future Value of An Annuity of $1 (Table 2.2) 2-4 C. Future Value of An Annuity Due of $1 (Table 2.2 Adjusted) 2-6 D. Present Value of $1 (Table 2.3) 2-9 E. Present Value of An Annuity of $1 (Table 2.4) 2-9 F. Present Value of An Annuity Due of $1 (Table 2.4 Adjusted) 2-12 V. Perpetuities 2-15 VI. Conclusion 2-15 Review Questions & Solutions 2-16 Table of Contents 1 Table of Contents (cont.) Page Chapter 3: How to Assess Capital Expenditure Proposals for Strategic Decision Making I. Factors to Consider in Determining Capital Expenditure 3-3 II. Type of Capital Budgeting Decisions to Be Made 3-3 III. Capital Budgeting Methods 3-3 A. Payback Period 3-3 B. Discounted Payback Period 3-4 C. Accounting Rate of Return 3-5 D. Net Present Value 3-6 E. Internal Rate of Return 3-6 F. Profitability Index 3-8 IV. How to Select the Best Mix of Projects with a Limited Budget 3-8 V. How to Handle Mutually Exclusive Investments 3-9 VI. Risk Analysis in Capital Budgeting 3-10 A. Probability Distributions 3-10 B. Risk-Adjusted Discount Rate 3-11 C. Certainty Equivalent Approach 3-12 D. Simulation 3-13 E. Sensitivity Analysis 3-13 F. Decision Trees 3-13 VII. Conclusion 3-14 Review Questions & Solutions 3-15 Chapter 4: Analyzing Financial Statements for Financial Fitness I. Who Uses Financial Analysis 4-1 A. Internal Managers 4-1 B. External Users 4-1 C. Horizontal and Vertical Analysis 4-2 II. Financial Statement Analysis 4-2 A. Trend Analysis 4-2 B. Horizontal Analysis 4-3 C. Vertical Analysis 4-5 III. Ratio Analysis 4-8 A. Liquidity Analysis 4-8 B. Measuring a Company’s Ability to Pay its Long-Term Debt 4-14 C. Profitability Ratios 4-16 D. Evaluating Stock as an Investment 4-18 IV. Limitations of Ratio Analysis 4-20 Review Questions & Solutions 4-21 Chapter 5: Analyzing Quality of Earnings I. Quality of Earnings 5-1 II. Analysis of Discretionary Costs 5-3 III. Accounting Estimates 5-3 IV. Internal Control and Management Honesty 5-4 V. Auditor Relations and Reports 5-5 VI. Conclusion 5-5 Review Questions & Solutions 5-6 Table of Contents 2 Table of Contents (cont.) Page Chapter 6: Analysis of Variance Analysis for Cost Control I. Responsibility Accounting and Responsibility Center 6-1 II. Standard Costs and Variance Analysis 6-2 III. General Model for Variance Analysis 6-4 A. Materials Variances 6-4 B. Labor Variances 6-5 C. Variable Overhead Variances 6-6 IV. Flexible Budgets and Performance Reports 6-7 V. Nonfinancial Performance Measures 6-9 VI. Conclusion 6-10 Review Questions & Solutions 6-11 Chapter 7: Analysis of Segmental Performance and Profit Variance I. Segmental Reporting for Profit Centers 7-1 II. Profit Variance Analysis 7-3 A. Types of Standards in Profit Variance Analysis 7-3 B. Single Product Firms 7-4 C. Multi-Product Firms 7-4 D. Managerial Planning and Decision Making 7-9 III. Sales Mix Analysis 7-10 IV. Conclusion 7-10 Review Questions & Solutions 7-12 PART II: MANAGING AND CONTROLLING FINANCIAL ASSETS, INVESTING, AND POTENTIAL ACQUISITIONS Chapter 8: Evaluating Divisional Performance I. Rate of Return on Investment (ROI) 8-1 A. The Breakdown of ROI – Du Pont Formula 8-2 II. ROI and Profit Planning 8-3 III. Residual Income (RI) 8-5 A. Residual Income and Economic Value Added 8-6 IV. Investment Decisions Under ROI and RI 8-6 V. Conclusion 8-7 Review Questions & Solutions 8-8 Chapter 9: Analyzing Working Capital I. Evaluating Working Capital 9-1 II. Cash Management 9-2 A. Acceleration of Cash Inflow 9-2 B. Delay of Cash Outlay 9-6 C. Cash Models 9-7 III. Management of Accounts Receivable 9-9 A. Credit Policies 9-10 B. Monitoring Receivables 9-10 C. Credit Policy 9-11 D. Determining the Investment in Accounts Receivable 9-12 E. Discount Policy 9-13 Table of Contents 3 Table of Contents (cont.) Page IV. Inventory Management 9-17 A. Quantity Discount 9-18 B. Investment in Inventory 9-18 C. Determining Carrying and Ordering Costs 9-19 D. The Reorder Point 9-21 E. Control of Stockouts 9-22 V. Conclusion 9-23 Review Questions & Solutions 9-24 Chapter 10: Corporate Investments I. Accounting Aspects 10-1 II. Analytical Implications 10-2 III. Obtaining Information 10-3 A. Market Information and Indexes 10-3 B. Economic and Political Events 10-4 C. Industry and Company Analysis 10-4 D. Microcomputers and Electronic Data Bases 10-4 IV. Risk Versus Return 10-5 V. Financial Assets 10-6 A. Common Stock 10-7 B. Preferred Stock 10-7 C. Bonds 10-8 D. Convertible Securities 10-8 E. Warrants 10-8 F. Options 10-9 G. Futures Contracts 10-11 VI. Real Assets 10-13 A. Real Estate 10-13 B. Precious Metals 10-14 VII. Portfolio Analysis 10-14 VIII. Mutual Funds 10-14 IX. Fundamental Analysis 10-16 X. Technical Analysis 10-16 A. Key Indicators 10-16 B. Charting 10-21 XI. Conclusion 10-24 Review Questions & Solutions 10-25 Chapter 11: Obtaining Funds: Short-Term and Long-Term Financing I. Financial Planning 11-1 II. Short-Term Financing 11-1 A. Using Trade Credit 11-2 B. Bank Loans 11-2 C. Interest 11-4 D. Commercial Finance Loans 11-4 E. Commercial Paper 11-5 F. Using Receivables for Financing 11-5 G. Using Inventories for Financing 11-7 H. Financing with Other Assets 11-7 Table of Contents 4 Table of Contents (cont.) Page III. Intermediate-Term Financing: Term Loans and Leasing 11-7 A. Purposes of Intermediate-Term Bank Loans 11-8 IV. Types of Long-Term Debt 11-8 A. Mortgages 11-8 B. Bonds 11-9 C. Interest 11-9 V. Cost of Capital 11-9 A. Computing Individual Costs of Capital 11-10 B. Cost of Debt 11-10 C. Cost of Preferred Stock 11-11 D. Cost of Equity Capital 11-11 E. Cost of Retained Earnings 11-13 F. Measuring the Overall Cost of Capital 11-13 G. Historical Weights 11-13 VI. Conclusion 11-15 Review Questions & Solutions 11-16 Chapter 12: Analyzing Mergers and Acquisitions I. Mergers 12-2 II. Deciding on Acquisition Terms 12-4 A. Earnings 12-4 B. Dividends 12-4 C. Market Price of Stock 12-4 D. Book Value Per Share 12-5 E. Net Working Capital Per Share 12-5 III. Acquisition of Another Business 12-5 IV. Impact of Merger on Earnings Per Share and Market Price Per Share 12-8 V. Risk 12-10 VI. Holding Company 12-11 VII. Conclusion 12-12 Review Questions & Solutions 12-13 Chapter 13: Forecasting and Financial Planning 13-1 I. Who Uses Forecasts? 13-2 II. Forecasting Methods 13-3 III. Selection of Forecasting Method 13-4 IV. The Qualitative Approach 13-4 A. Executive Opinions 13-5 B. The Delphi Method 13-5 C. Sales-Force Polling 13-7 D. Consumer Surveys 13-7 E. Pert-Derived Forecasts 13-7 V. Common Features and Assumptions Inherent in Forecasting 13-8 VI. Steps in the Forecasting Process 13-9 Review Questions & Solutions 13-10 Table of Contents 5 Table of Contents (cont.) Page Chapter 14: Forecasting Methodology I. Naïve Models 14-1 II. Smoothing Techniques 14-2 A. Moving Averages 14-2 B. Advantages and Disadvantages 14-4 C. Exponential Smoothing 14-5 D. The Model 14-5 E. The Computer and Exponential Smoothing 14-7 III. Forecasting Using Decomposition of Time Series 14-7 IV. Conclusion 14-13 Review Questions & Solutions 14-14 Chapter 15: Forecasting with Regression and Markov Methods I. The Least-Squares Method 15-1 II. Trend Analysis 15-4 III. Regression Statistics 15-8 IV. Statistics to Look for in Multiple Regressions 15-12 A. T-Statistics 15-13 2 B. R-Bar Squared (R ) and F-Statistic 15-13 C. Multicollinearity 15-13 D. Autocorrelation (Serial Correlation) 15-14 V. Checklists – How to Choose the Best Forecasting Equation 15-14 A. How to Eliminate Losers 15-14 B. How to Choose the Best Equation 15-15 VI. Use of a Computer Statistical Package for Multiple Regression 15-15 VII. Measuring Accuracy of Forecasts 15-24 A. MAD and MSE 15-24 B. The U Statistic and Turning Point Errors 15-24 C. Control of Forecasts 15-25 VIII. Forecasting Sales with the Markov Model 15-26 IX. Conclusion 15-29 Review Questions & Solutions 15-30 Chapter 16: Financial Forecasting and Budgeting Tools I. Forecasting External Financing Needs – The Percent-of-Sales Method 16-1 II. Budgeting and Financial Planning 16-3 III. How the Budget Works: An Example 16-7 A. The Sales Budget 16-7 B. Monthly Cash Collections from Customers 16-8 C. The Production Budget 16-8 D. Inventory Purchases – Merchandising Firm 16-9 E. The Direct Material Budget 16-10 F. The Direct Labor Budget 16-11 G. The Factory Overhead Budget 16-12 H. The Ending Finished Goods Inventory Budget 16-13 I. The Selling and Administrative Expense Budget 16-14 J. The Cash Budget 16-15 K. The Budgeted Income Statement 16-18 Table of Contents 6 Table of Contents (cont.) Page L. The Budgeted Balance Sheet 16-18 M. Some Financial Calculations 16-21 N. Computer-Based and Spreadsheet Models for Budgeting 16-21 IV. Zero Base Budgeting 16-21 V. The Certified Public Accountant’s Involvement and Responsibility With Prospective Financial Statements 16-22 VI. Conclusion 16-26 Review Questions & Solutions 16-27 Chapter 17: Forecasting Cash Flows I. Markov Approach 17-1 A. Simple Average 17-4 II. Lagged Regression Approach 17-5 A. Is Cash Flow Software Available? 17-8 III. Conclusion 17-9 Review Questions & Solutions 17-11 PART III: BUILDING FINANCIAL MODELS FOR BUDGETING AND PLANNING Chapter 18: How to Use Corporate Planning Models I. Types of Analysis 18-2 I. Typical Questions Addressed Via Corporate Modeling 18-2 III. Types of Models 18-3 A. History of Models 18-3 IV. Current Trends in Modeling 18-4 A. Attitudes and Problems 18-5 B. State-of-the-Art and Recommended Practice 18-6 V. MIS, DSS, EIS, and Personal Computers 18-8 VI. The Future of Corporate Planning Models 18-9 VII. Conclusion 18-10 Review Questions & Solutions 18-11 Chapter 19: Financial Modeling for “What-if” Analysis I. A Financial Model 19-1 A. Types of Financial Models 19-1 II. Applications and Uses of Financial Modeling 19-2 III. Putting Financial Modeling into Practice 19-2 IV. Quantitative Methods Used in Financial Models 19-3 V. Developing Financial Models 19-4 A. Definition of Variables and Input Parameters 19-4 VI. Model Specification 19-5 A. Definitional Equations 19-6 B. Behavioral Equations 19-6 C. Model Structure 19-7 D. Decision Rules 19-8 E. Lagged Model Structure 19-9 VII. Comprehensive Financial Model 19-9 VIII. Conclusion 19-12 Review Questions & Solutions 19-13 Table of Contents 7 Table of Contents (cont.) Page Chapter 20: Using Optimization Techniques to Build Optimal Budgets I. Use of Linear Programming 20-1 A. Applications of LP 20-1 B. Formulation of the LP Model 20-2 C. Generations of Budgets on the Basis of Optimal Mix 20-5 II. Use of Goal Programming (GP) 20-7 III. Conclusion 20-11 Review Questions & Solutions 20-12 Chapter 21: Using Spreadsheet and Financial Modeling Packages I. Using Spreadsheet Programs 21-1 II. Forecasting Financial Distress with Z Score 21-6 A. Z-Score Model 21-6 B. More Applications of the Z Score 21-10 C. Words of Caution 21-10 III. Budgeting and Planning Software 21-10 A. Adaytum Planning 21-10 B. Budget Maestro V5.8 21-11 C. Microsoft Business Solutions for Analytics-Forecaster 21-12 D. Host Budget V3.2 21-12 E. SRC Systems 21-13 IV. Conclusion 21-14 Review Questions & Solutions 21-15 Chapter 22: Using Management Games for Executive Training I. Executive Management Games 22-5 A. Advantages and Disadvantages of Executive Games 22-12 II. Validating the Game 22-13 III. A New Role for Computerized Executive Games 22-14 IV. Conclusion 22-14 V. References and Additional Readings 22-14 Review Questions & Solutions 22-18 Glossary Index Table of Contents 8 PART I. TOOLS AND TECHNIQUES FOR FINANCIAL ANALYSIS

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