EXECUTIVE SUMMARY We commissioned this report to inspect the importance of cases in finance. A company that would be mainly focused on is ratios. Issues, such as the reason it is significant for managers to recognize the sustainability and the impact of sustainability, would be discussed. The research brings attention to the fact that sustainability, which comprises economic, environmental and social aspect, has become more challenging for organizations today compared to the past.
Balancing the three aspects is crucial for organizations that want to be profitable, able to protect the environment and sorting out problems which are socially related simultaneously. The manager plays the role of decision-makers, thus contributes to the organizations. The transition towards a sustainable path. 2 TABLE OF CONTENTS Sr.No Topic Pages 1 Introduction 4 2 Part A 5 3 Part B 15 4 References 22 3 INTRODUCTION The significant financial statements of a company are the balance sheet, income statement and cash flow statement (statement of sources and applications of funds).
These statements present an overview of the financial position of a firm to both the stakeholders and the management we analyze the information provided by these statements. We cannot understand the right financial situation of the firm. The analysis of financial statements plays an essential role in determining the financial strengths and weaknesses of a company relative to that of other companies in the same industry. The analysis also reveals whether the company's financial position has been improving or deteriorating.
FINANCIAL RATIO ANALYSIS Financial ratio analysis involves the calculation and comparison of ratios which are derived from the information given in the company's financial statements. The historical trends of these ratios can make inferences about a company's financial condition, its operations and its investment attractiveness. Financial ratio analysis groups the ratios into categories that tell us about the different facets of a company's financial state of affairs. They describe some types of rates below: • Liquidity Ratios give a picture of a company's short term financial situation or solvency.
• Operational/Turnover Ratios show how efficient a company's operations and how well it is using its assets. • Leverage/Capital Structure Ratios show the quantum of debt in a company's capital structure. • Profitability Ratios use margin analysis and show the return on sales and capital used. • Valuation Ratios show the performance of a company in the capital market.
4 Part A Q1) Explain various problems associated with financial statement analysis. While financial statement analysis is an excellent tool, there are several issues to be aware of that can interfere with the interpretation of the analysis results. These issues are: • Comparability between periods. The company preparing the financial statements may have changed the accounts in which it stores financial information, so that results may differ from period to period.
For example, an expense may appear in the cost of goods sold in one period, and in administrative costs in another period. • Comparability between companies. An analyst frequently compares the financial ratios of different companies to see how they match up against each other. However, each compa ny may aggregate financial information differently, so that the results of their ratios are not comparable.
Can lead an analyst to draw incorrect conclusions about the effects of a company in comparison to its competitors. The financial analysis only reviews a company's financial information, not its operational data, so you cannot see a variety of key indicators of future performance, such as the size of the order backlog, or changes in warranty claims. Thus, the financial analysis only presents part of the total picture. Q2) Discuss various types of capital budgeting techniques.
Also, identify the most appropriate technique and justify with logical reasoning. • Capital budgeting is used by companies to evaluate significant projects and investments, such as new plants or equipment. • The process involves analyzing a project's cash inflows and outflows to determine whether the expected return meets a set benchmark. 5 • The significant methods of capital budgeting include throughput, discounted cash flow, and payback analyses • Types of Capital Budgeting ▪ Throughput Analysis Throughput analysis is the most complicated form of capital budgeting analysis but also the most accurate in helping managers decide which projects to pursue.
Under this method, the entire company is considered as a single profit-generating system. Throughput is measured as an amount of material passing through that system. The analysis assumes that nearly all costs are operating expenses, that a company needs to maximize the throughput of the entire system to pay for expenses, and that the way to maximize profits is to maximize the performance passing through a bottleneck operation. A bottleneck is a resource in the system that requires the longest time in activities.
This means that managers should always place a higher priority on capital budgeting projects that will increase throughput passing through the bottleneck. ▪ DCF Analysis Discounted cash flow (DCF) analysis looks at the initial cash outflow needed to fund a project, the mix of cash inflows in the form of revenue, and other future flows in the way of maintenance and additional costs. These costs, except for the initial outflow, are discounted back to the present date. The resulting number from the DCF analysis is the net current value (NPV).
Projects with the highest NPV should rank over others unless one or more are mutually exclusive. ▪ Payback Analysis 6 Payback analysis is the purest form of capital budgeting analysis, but it's also the least accurate. It's still widely used because it's quick and can give managers a "back of the envelope" understanding of the real value of a proposed project. This analysis calculates how long it will take to recoup the costs of an investment.
The payback period is identified by dividing the initial investment in the project by the average yearly cash inflow that the project will generate. Q3) List and describe the three general areas of responsibility for a financial manager. Forecasting and Planning: The financial manager must interact with other executives as they look ahead and lay the plans which will shape the firm's future. Significant Investment and Financing Decisions: A successful firm usually has rapid growth in sales, which requires investments in plant, equipment and inventory.
It is the task of the financial manager to help determine the optimal sales growth rate, and he (she) must help decide what specific assets to acquire and the best way to finance those assets. For example, should the firm finance with debt, Equity, or some combination of the two, and if the debt is used, how much should be long term and how much should be short term? 3. Coordination and Control: The financial manager must interact with other executives to ensure that the firm is operated as efficiently as possible. All business decisions have financial implications, and all managers financial and otherwise need to take this into account.
Dealing with Financial Markets: The financial manager must deal with the money and capital markets. Each firm affects and is affected by the general financial markets where funds are raised, where the firm's shares and debentures are traded, and where its investors either make or lose money. Risk Management: All business face risks, including natural disasters such as fires and floods, uncertainties in commodity and share prices, changing interest rates and fluctuating foreign exchange rates. However, many of these risks can be reduced by purchasing insurance or by hedging.
Q4) The managers of a firm wish to expand the firm's operations and are trying to determine the amount of debt financing the firm should obtain versus the amount of equity financing that should be raised. The managers have asked you to explain the effects that both of these forms of investment would have on the cash flows of the firm. Write a short response to this request. Debt Financing When a firm raises money for capital by selling debt instruments to investors, it is known as debt financing.
In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid on a regular schedule. Equity Financing Equity financing is the process of raising capital through the sale of shares in a company. With equity financing comes an ownership interest for shareholders. Equity financing may range from a few thousand dollars raised by an entrepreneur from a private investor to an initial public offering (IPO) on a stock exchange running into the billions.
8 Q5) Assume you are a credit manager in charge of approving commercial loans to business firms. Identify three aspects of a firm's cash flows you would review and explain the type of information you hope to gain from studying each of those five aspects. Types of cash flow include: Cash from Operating Activities – Cash that is generated by a company's core business activities – does not include CF from investing. This is found on the company's Statement of Cash Flows (the first section).
Free Cash Flow to Equity (FCFE) – FCFE represents the cash that's available after reinvestment back into the business (capital expenditures). Read more about FCFE. Free Cash Flow to the Firm (FCFF) – This is a measure that assumes a company has no leverage (debt). It is used in financial modelling and valuation.
Read more about FCFF. Net Change in Cash – The change in the amount of cash flow from one accounting period to the next. This is found at the bottom of the Cash Flow Statement. Q6) Give some examples of ways in which a manager's goals can differ from those of shareholders.
Value Profitability is the bottom line in the business world and both the manager and shareholders are typically in agreement on this point, in principle. However, the way that a manager tries to achieve profitability won't always be in line with the shareholders' ideas. For example, shareholders may be focused on cost-cutting while the manager seeks additional resources to improve productivity. Managers may find their hands tied from time to time regarding what they can do to increase productivity.
Time 9 Performance levels measured by both managers and shareholders in various increments of time. Long-term profitability and sustainability are generally more important than the short-term bottom line -- but not to investors who buy and sell frequently, trying to time the rise and fall of the market. Managers must also be focused on short-term and intermediate goals -- because these results affect their employment in the present -- while remaining mindful of the company's long- term prospects. Employees Although profitability is the bottom line and affects everyone within a company, managers who get the most out of their employees generally have some type of ongoing relationship with those employees.
In some cases, it may be merely an artificial working relationship, but in other cases, managers do get deeply involved in the lives of their workers. Shareholders do not necessarily align their goals with this type of relationship in mind. The shareholder does not have to be involved in the lives of employees and may make decisions about his holdings within the company based on numbers alone. Risk A manager's goals based on calculated risks that the manager is willing to take.
This is true of shareholders as well, but agency theory suggests that managers will sometimes set personal goals and make decisions based on what they believe they can do to meet the goals of shareholders. The manager sometimes finds that she cannot realistically achieve the shareholders' goals and, therefore, acts in her self-interest based on the calculated risk that she can meet the needs of shareholders by doing things her way, rather than theirs. While shareholders may set goals that require a considerable amount of risk, the manager may decide to scale back and avoid some of that risk for the good of herself, her workers and the company as a whole. Q7) Describe the major differences between individual and institutional investors.