Understand the purpose of basic financial statements and their contents.
Explain why financial statement analysis is important to the firm and to outside suppliers of capital.
Define, calculate, and categorize (according to liquidity, financial leverage, coverage, activity, and profitability) the major financial ratios and understand what they can tell us about the firm.
Define, calculate, and discuss a firm’s operating cycle and cash cycle.
Use ratios to analyze a firm’s health and then recommend reasonable alternative courses of action to improve the health of the firm.
Analyze a firm’s return on investment (i.e., “earning power”) and return on equity using a Du Pont approach.
Understand the limitations of financial ratio analysis.
Use trend analysis, common-size analysis, and index analysis to gain additional insights into a firm’s performance.
Chapter 7: Funds Analysis, Cash-Flow Analysis, and Financial Planning
Explain the difference between the flow of funds (sources and uses of funds) statement and the statement of cash flows – and understand the benefits of using each.
Define “funds,” and identify sources and uses of funds.
Create a sources and uses of funds statement, make adjustments, and analyze the final results.
Describe the purpose and content of the statement of cash flows as well as implications that can be drawn from it.
Prepare a cash budget from forecasts of sales, receipts, and disbursements – and know why such a budget should be flexible.
Develop forecasted balance sheets and income statements.
Understand the importance of using probabilistic information in forecasting financial statements and evaluating a firm’s condition.
Chapter 8: Overview of Working Capital Management
Explain how the definition of “working capital” differs between financial analysts and accountants.
Understand the two fundamental decision issues in working capital management – and the trade-offs involved in making these decisions.
Discuss how to determine the optimal level of current assets.
Describe the relationship between profitability, liquidity, and risk in the management of working capital.
Explain how to classify working capital according to its “components” and according to “time” (i.e., either permanent or temporary).
Describe the hedging (maturity matching) approach to financing and the advantages/disadvantages of short- versus long-term financing.
Explain how the financial manager combines the current asset decision with the liability structure decision.
Chapter 9: Cash and Marketable Securities Management
List and explain the motives for holding cash.
Understand the purpose of efficient cash management.
Describe methods for speeding up the collection of accounts receivable and methods for controlling cash disbursements.
Differentiate between remote and controlled disbursement, and discuss any ethical concerns raised by either of these two methods.
Discuss how electronic data interchange (EDI) and outsourcing each relates to a company’s cash collections and disbursements.
Identify the key variables that should be considered before purchasing any marketable securities.
Define the most common money-market instruments that a marketable securities portfolio manager would consider for investment.
Describe the three segments of the marketable securities portfolio and note which securities are most appropriate for each segment and why.
Chapter 10: Accounts Receivable and Inventory Management
List the key factors that can be varied in a firm’s credit policy, and understand the trade-off between profitability and costs involved.
Explain how the level of investment in accounts receivable is affected by the firm’s credit policies.
Critically evaluate proposed changes in credit policy, including changes in credit standards, credit period, and cash discount.
Describe possible sources of information on credit applicants and how you might use the information to analyze a credit applicant.
Identify the various types of inventories and discuss the advantages and disadvantages to increasing/decreasing inventories.
Define, explain, and illustrate the key concepts and calculations necessary for effective inventory management and control, including classification, economic order quantity (EOQ), order point, safety stock, and just-in-time (JIT).
Understand the sources and types of spontaneous financing.
Calculate the annual cost of trade credit when trade discounts are forgone.
Explain what is meant by “stretching payables” and understand its potential drawbacks.
Describe the various types of negotiated (or external) short-term financing.
Identify the factors that affect the cost of short-term borrowing.
Calculate the effective annual interest rate on short-term borrowing with or without a compensating balance requirement and/or a commitment fee.
Understand what is meant by factoring accounts receivable.
Chapter 12: Capital Budgeting and Estimating Cash Flows
Define “capital budgeting” and identify the steps involved in the capital budgeting process.
Explain the procedure used to generate long-term project proposals within the firm.
Justify why cash, not income, flows are the most relevant to capital budgeting decisions.
Summarize in a “checklist” the major concerns to keep in mind as one prepares to determine relevant capital budgeting cash flows.
Define the terms “sunk cost” and “opportunity cost” and explain why sunk costs must be ignored, whereas opportunity costs must be included, in capital budgeting analysis.
Explain how tax considerations, as well as depreciation for tax purposes, affect capital budgeting cash flows.
Determine initial, interim, and terminal period “after-tax, incremental, operating cash flows” associated with a capital investment project.
Chapter 13: Capital Budgeting Techniques
Understand the payback period (PBP) method of project evaluation and selection, including its: (a) calculation; (b) acceptance criterion; (c) advantages and disadvantages; and (d) focus on liquidity rather than profitability.
Understand the three major discounted cash flow (DCF) methods of project evaluation and selection – internal rate of return (IRR), net present value (NPV), and profitability index (PI).
Explain the calculation, acceptance criterion, and advantages (over the PBP method) for each of the three major DCF methods.
Define, construct, and interpret a graph called an “NPV profile.”
Understand why ranking project proposals on the basis of the IRR, NPV, and PI methods “may” lead to conflicts in rankings.
Describe the situations where ranking projects may be necessary and justify when to use either IRR, NPV, or PI rankings.
Understand how “sensitivity analysis” allows us to challenge the single-point input estimates used in traditional capital budgeting analysis.
Explain the role and process of project monitoring, including “progress reviews” and “post-completion audits.”
Chapter 14: Risk and Managerial (Real) Options in Capital Budgeting
Define the “riskiness” of a capital investment project.
Understand how cash-flow riskiness for a particular period is measured, including the concepts of expected value, standard deviation, and coefficient of variation.
Describe methods for assessing total project risk, including a probability approach and a simulation approach.
Judge projects with respect to their contribution to total firm risk (a firm-portfolio approach).
Understand how the presence of managerial (real) options enhances the worth of an investment project.
List, discuss, and value different types of managerial (real) options.
Chapter 15: Required Returns and the Cost of Capital
Explain how a firm creates value, and identify the key sources of value creation.
Define the overall “cost of capital” of the firm.
Calculate the costs of the individual components of a firm’s overall cost of capital: cost of debt, cost of preferred stock, and cost of equity.
Explain and use alternative models to determine the cost of equity, including the dividend discount approach, the capital-asset pricing model (CAPM) approach, and the before-tax cost of debt plus risk premium approach.
Calculate the firm’s weighted average cost of capital (WACC) and understand its rationale, use, and limitations.
Explain how the concept of Economic Value Added (EVA) is related to value creation and a firm’s cost of capital.
Understand the capital-asset pricing model’s role in computing project-specific and group- specific required rates of return.
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