Financial Management ProfitabilityRatios ......................................... 23 Liquidity Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Solvency(Leverage)Ratios................................... 33 Altman’s Z-Score: Measuring Liquidity and Solvency . . . . . . . . . . . . . . 39 ActivityRatios............................................. 40 MarketValuationRatios..................................... 48 OtherFinancialRatios....................................... 55 DuPont Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Analyzing Free Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 CalculatingFCFfromOperatingProfit.......................... 61 Calculating FCF from Operating Cash Flows . . . . . . . . . . . . . . . . . . . . . 62 FreeCashFlowstoEquity.................................... 62 Comprehensive Illustration: Jollibee’s Free Cash Flows . . . . . . . . . . . . 65 Financial Ratios Using Free Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . 65 Limitations of Financial Statements Analysis . . . . . . . . . . . . . . . . . . . . 68 AFinalWordonJollibee..................................... 68 Gross Profit Variance Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Four-WayAnalysis.......................................... 69 Three-WayAnalysis......................................... 71 Six-WayAnalysis ........................................... 71 AnalyticalModel........................................... 72 Limitations of Gross Profit Variance Analysis . . . . . . . . . . . . . . . . . . . . 74 Extension 1: If Unit Prices or Volumes Are Not Provided . . . . . . . . . . . . . 74 Illustration ................................................ 75 Extension 2: Further Analysis of Sales Variances . . . . . . . . . . . . . . . . . . . 76 Illustration ................................................ 77 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 DiscussionQuestions............................................ 79 Practice Problem ............................................... 80 Multiple Choice Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 93 Intended Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 WhatIsaFinancialPlan?....................................... 94 What Are the Steps Involved in Developing a Financial Plan? . . . . . . . . . 95 Forecasting Sales ............................................. 95 Illustrative Problems on Forecasting Sales . . . . . . . . . . . . . . . . . . . . . . 96 Additional Funds Needed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Pro Forma Financial Statement Method . . . . . . . . . . . . . . . . . . . . . . . . 98 AFNequationmethod ...................................... 103 IsNegativeAFNPossible?.................................... 109 SimpleLinearRegression ...................................... 110 IllustrativeProblem1....................................... 110 IllustrativeProblem2....................................... 111 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 DiscussionQuestions............................................ 112 Practice Problem (Gitman, Adapted) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Multiple Choice Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 CHAPTER 3 Financial Planning and Forecasting CHAPTER 4 Capital Structure and the Cost of Capital 119 Intended Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Capital Structure ............................................. 120 Capital Components .......................................... 120 CostofDebt............................................... 121 CostofPreferredStock...................................... 125 CostofCommonStock...................................... 126 Impact of Flotation Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 CostofDebt............................................... 140 CostofPreferredStock...................................... 141 CostofCommonStock...................................... 141 The Weighted Average Cost of Capital (WACC). . . . . . . . . . . . . . . . . . . . . 142
CONTENTS
CONTENTS
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii Preface ....................................................... v Figures ....................................................... xv CHAPTER 1 Introduction to Financial Management 1 Intended Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 WhatIsFinance?............................................. 2 Shareholder Wealth Maximization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Rise of Stakeholder Capitalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 FormsofBusinessOrganizations.............................. 5 RoleofFinancialManagementinFirms........................... 6 Career Options in Financial Management. . . . . . . . . . . . . . . . . . . . . . . 9 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 DiscussionQuestions............................................ 11 Multiple Choice Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 CHAPTER 2 Financial Statements Analysis 15 IntendedLearningOutcomes..................................... 17 Financial Statements .......................................... 18 Importance of Financial Statement Analysis. . . . . . . . . . . . . . . . . . . . . 18 Trend Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Year-over-YearChange ...................................... 19 Compound Annual Growth Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Index Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Common-SizeAnalysis ........................................ 21 Illustration of Common-Size Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Limitations of Common-Size Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . 23 FinancialRatioAnalysis........................................ 23 ProfitabilityRatios ......................................... 23 Liquidity Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Solvency(Leverage)Ratios................................... 33 Altman’s Z-Score: Measuring Liquidity and Solvency . . . . . . . . . . . . . . 39 ActivityRatios............................................. 40 MarketValuationRatios..................................... 48 OtherFinancialRatios....................................... 55 DuPont Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 AnalyzingFreeCashFlows ..................................... 61 CalculatingFCFfromOperatingProfit.......................... 61 Calculating FCF from Operating Cash Flows . . . . . . . . . . . . . . . . . . . . . 62 FreeCashFlowstoEquity.................................... 62 Comprehensive Illustration: Jollibee’s Free Cash Flows . . . . . . . . . . . . 65 Financial Ratios Using Free Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . 65 Limitations of Financial Statements Analysis . . . . . . . . . . . . . . . . . . . . 68 AFinalWordonJollibee..................................... 68 Gross Profit Variance Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Four-WayAnalysis.......................................... 69 Three-WayAnalysis......................................... 71 Six-WayAnalysis ........................................... 71 AnalyticalModel........................................... 72 Limitations of Gross Profit Variance Analysis . . . . . . . . . . . . . . . . . . . . 74 Extension 1: If Unit Prices or Volumes Are Not Provided . . . . . . . . . . . . . 74 Illustration ................................................ 75
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