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successful businesspeople should have a good basic understanding of the main financial ratios. Beyond the present chapter, this book contains further information and explanations relating to financial ratios: Chapter 3, Analyzing Business Earnings Chapter 10, The Integrity of Financial Reporting Chapter 16, Business Valuation On this book‟s Web site you will find an Excel file named DrugstoreChains.xls. This file contains a complete financial ratio analysis for two national drugstore chains. It illustrates all of the ratios and analyses discussed in this chapter. Downloadable Resources for this chapter available at www.wiley.com/go/portablembainfinance Analyzing Financial Statements: Direct Competitor Comparison Worksheet Analyzing Financial Statements: Financial Statement Ratio Analysis Internet Links There are several Web sites where you can find the financial statements of U.S. public companies, and from which financial ratios can be obtained or computed. Probably the most convenient are MSN Money and Yahoo! Finance. Go to MSN Money or Yahoo! Finance, provide the stock symbols for each company (for example: FDX for FedEx and UPS for UPS, or KO for Coca-Cola and PEP for PepsiCo), 4 and all the relevant financial information will become available on-screen. Industry information can also be found in MSN Money and Yahoo! Finance. The financial statements in MSN Money and Yahoo! Finance are displayed in standard uniform formats, and can differ slightly from the actual financial statements, which are in the Securities and Exchange Commission (SEC) Forms 10-K of the respective companies (accessible from MSN Money and Yahoo! Finance) and on the various corporate Web sites. Other helpful sites include: • Teach Me Finance (http://teachmefinance.com/). This Web site presents basic finance concepts. • Introductory Finance Lectures, University of Arizona (www.studyfinance.com/). • Tools and Resources for Financial Executives (www.CFO.com/). Useful information about news and current events of interest to financial executives, how-to tips, and career advice. • Java Financial Ratio Calculators (www.dinkytown.net/java/Ratios.html). Calculate 10 financial ratios. • Wachowicz‟s Web World (http://web.utk.edu/~jwachowi/wacho_world.html). A very large collection of useful links to Web sites on financial topics, techniques, and information. • Web site for the American Institute of Certified Public Accountants (www.aicpa.org).
• Risk Management Association (RMA) (www.rmahq.org). This Web site contains financial ratios, classified by size of firm, for more than 600 industries. Notes 1 The name comes from its original use at the DuPont Corporation. 2 After income taxes. 3 After income taxes. 4 MSN Money and Yahoo! Finance allow you to look up stock symbols by using company names. For Further Reading Penman, Stephen, Financial Statement Analysis and Security Valuation (New York: McGraw-Hill /Irwin, 2006). Peterson, Pamela P., and Frank J. Fabozzi, Analysis of Financial Statements, Frank J. Fabozzi Series (Hoboken, NJ: John Wiley & Sons, 2006). Stickney, Clyde P., Paul Brown, and James M. Wahlen, Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective (with Thomson One Access Code) (Florence, KY: South-Western College Publishing, 2006). Subramanyam, K. R., and John J. Wild, Financial Statement Analysis (New York: McGraw-Hill /Irwin, 2008). 3 Analyzing Business Earnings Virginia Earll Soybel
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Table of Contents Title Page Copyri
Page 3 and 4: Chapter 6 - Planning Capital Expend
Page 5 and 6: For Further Reading Part IV - Manag
Page 7 and 8: Successful Postmerger Implementatio
Page 10 and 11: This book is printed on acid-free p
Page 12 and 13: Syllabus How Chapter Topics in This
Page 14 and 15: Some of these experts are full-time
Page 16 and 17: About the Contributors Richard T. B
Page 18 and 19: Advances in Quantitative Analysis o
Page 20 and 21: enterprise development. Dr. Zachara
Page 22 and 23: The left side shows Nutrimin‟s in
Page 24 and 25: Gail, let‟s go over this balance
Page 26 and 27: Gail, do you have any questions abo
Page 28 and 29: 11. Not all expenses are cash outfl
Page 30 and 31: Financial Statements: Who Uses Them
Page 32 and 33: profitability to keep investing for
Page 34 and 35: Financial Accounting Standards It i
Page 36 and 37: Downloadable Resources for this cha
Page 38 and 39: Next, we explain each of these thre
Page 40 and 41: liquidity. Or, more simply, achievi
Page 42 and 43: If these ratios are seriously defic
Page 44 and 45: The debt-to-equity ratio is evaluat
Page 46 and 47: year 1 to year 3. The net effect wa
Page 48 and 49: to rate of return on the equity. Th
Page 50 and 51: Other types of comparisons of finan
Page 52 and 53: income/sales), asset turnover (sale
Page 58 and 59: More than a decade ago, a special c
Page 60 and 61: companies is used for illustration.
Page 62 and 63: The identification of nonrecurring
Page 64 and 65: The Dow Chemical single-step income
Page 66 and 67: is a pretax measure, but income fro
Page 68 and 69: Sources: Companies‟ annual report
Page 70 and 71: Exhibit 3.11 Examples of discontinu
Page 72 and 73: amortization purposes, the Company
Page 74 and 75: Examples of nonrecurring items disc
Page 76 and 77: During Fiscal 2006, inventory quant
Page 78 and 79: The nonrecurring items of Boston Sc
Page 80 and 81: The disclosure presented earlier in
Page 82 and 83: gains or losses that appear as part
Page 84 and 85: ecurring as for Kimberly-Clark, the
Page 86: Summarizing Nonrecurring Items and
Page 89 and 90: This example of using the SEB works
Page 92 and 93: Exhibit 3.27 Other income (expense)
Page 97 and 98: Source: Pfizer, Inc., annual report
Page 99 and 100: Exhibit 3.30 Acquisitions note: Pfi
Page 101 and 102: Source: Pfizer, Inc., annual report
Page 103 and 104: Exhibit 3.33 Cost-reduction initiat
Page 105 and 106:
Exhibit 3.36 Share-based payment no
Page 107:
The Pfizer Worksheet Analysis: Down
Page 110 and 111:
Some Further Points on the Pfizer W
Page 112 and 113:
• It is common to treat items as
Page 114 and 115:
FedEx Corporation (2007) First Sola
Page 116 and 117:
1 The American Institute of Certifi
Page 118 and 119:
28 These alternative translation me
Page 120 and 121:
If you need some instruction in Exc
Page 122 and 123:
To solve using Excel, open your Exc
Page 124 and 125:
As you can see from the previous ex
Page 126 and 127:
C6 = 5 • Now enter the “=” si
Page 128 and 129:
Ordinary Annuity An ordinary annuit
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To confirm that the number of payme
Page 132 and 133:
The FV of this first payment into t
Page 134 and 135:
Exhibit 4.15 Finding the future val
Page 136 and 137:
Exhibit 4.18 Finding the present va
Page 138 and 139:
From Exhibit 4.20, we see that as t
Page 140 and 141:
Exhibit 4.22 Amortization schedule
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Exhibit 4.25 Regular cash flows wit
Page 144:
Internet Links For Further Reading
Page 148 and 149:
Investors who are risk averse will
Page 150 and 151:
considering the risk of a single as
Page 152 and 153:
Portfolio Risk Stand-alone risk is
Page 154 and 155:
In spite of unique or diversifiable
Page 156 and 157:
If a particular stock is highly sus
Page 158 and 159:
The formula tells us that, to begin
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for the entire market of stocks sin
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The dividend per share for preferre
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If you are able to determine the cu
Page 166 and 167:
Debt finance is the lower-cost meth
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We don‟t observe many firms whose
Page 170 and 171:
Capital Structure in Practice Finan
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are able to observe regularities in
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dividends and capital gains. We wil
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where EBIT is earnings before inter
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Since long-term debt holders have a
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accept more investment projects. Re
Page 184 and 185:
A beer company is considering build
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accounts receivable, and tabulates
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profit by the tax rate determines t
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Accounting profit often mixes varia
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The concept that future cash flows
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Like project A, project C also cost
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The after-tax interest rate is the
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equal mix of debt and equity, its d
Page 200 and 201:
The payback period rule stipulates
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The IRR rule is appealing in that i
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complete with its real options is g
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What does it matter that one invest
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Exhibit 7.3 Time line in dollars an
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There are a number of countries in
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eturn of 10% on its investments in
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Exhibit 7.12 Summary of exchange ra
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and so will the value of the liabil
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Source: CIA, World Factbook, availa
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Exhibit 7.18 Net present value of c
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equired interest payments to be pai
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So if the assistant treasurer was r
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This theory is far from perfect, as
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The Consulting Firm Jennifer, Jean,
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part by a statute, the Uniform Limi
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formation in Delaware (or any state
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purpose of requiring qualification.
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Phil‟s death may terminate the bu
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the transfer. This means that if Br
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These rules extend to tort liabilit
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In the absence of a meeting, stockh
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A more detailed discussion on the b
Page 248 and 249:
Partnerships If possible, the resul
Page 250 and 251:
associated with this arrangement ar
Page 252 and 253:
Partnerships are also not separate
Page 254 and 255:
For most start-up businesses, howev
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form, even at the risk of some unli
Page 258 and 259:
likely that our consultants will be
Page 260 and 261:
Thus, the corporation and LLC, with
Page 264 and 265:
It is not possible to fully describ
Page 266 and 267:
usiness corporation for all purpose
Page 268 and 269:
a cash-basis taxpayer to be taxed a
Page 270 and 271:
The Tax Reform Act of 1986 substant
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limit is the product of the value o
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he would have spent anyway. In fact
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protect Brad from the scenario of h
Page 278 and 279:
paying for the privilege. If the st
Page 280 and 281:
The second tax scenario attaches to
Page 282 and 283:
include that nullity in his taxable
Page 284 and 285:
then the capital gain to be taxed h
Page 286 and 287:
Most relevant to Morris is Section
Page 288 and 289:
To begin with, the ESOP will have t
Page 290 and 291:
general partner of a limited partne
Page 292 and 293:
small businesses) is also subject t
Page 294 and 295:
oth Lisa and Brad would be free to
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Assume that a limited liability com
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corporations, and had been audited
Page 300 and 301:
There is plenty of blame from the c
Page 302 and 303:
• An important study about top ma
Page 304 and 305:
• The federal government made at
Page 306 and 307:
$79.7 million for other services, a
Page 308 and 309:
Budgets offer a variety of benefits
Page 310 and 311:
determine the impact of specific pr
Page 312 and 313:
Exhibit 11.2 Budget variance report
Page 314 and 315:
udget, we just add more to it next
Page 316:
income statement. The financial bud
Page 319 and 320:
For a manufacturing company, cost o
Page 321 and 322:
C&G‟s Gift Shop has a policy to m
Page 323 and 324:
Meeting cash obligations as they co
Page 325 and 326:
was unusually low, say, due to the
Page 327 and 328:
A fixed budget, sometimes called a
Page 329 and 330:
A large part of the budget selling
Page 331 and 332:
• Centralized resource allocation
Page 333:
Merewitz, Leonard, and Stephen H. S
Page 337 and 338:
This chapter starts with a discussi
Page 339 and 340:
Interestingly the numbers for quart
Page 341 and 342:
Exhibit 12.4 Scenarion analysis.
Page 343 and 344:
Pitfalls Although this analytic tec
Page 345 and 346:
Exhibit 12.6 Variable cost element
Page 347 and 348:
Variable Cost as a Function of Outp
Page 349 and 350:
If scenario 2 yields a lower profit
Page 351 and 352:
Microsoft certainly does not price
Page 353 and 354:
If it is determined that dumping ha
Page 357 and 358:
Leaving government agencies and not
Page 359 and 360:
transaction processing. Each proces
Page 361 and 362:
Exhibit 13.3 E-commerce transaction
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To summarize the analysis, the busi
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Capacity costs are probably the mos
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which it was, but for the inventory
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They called this strategic cost man
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A closer study, however, revealed s
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the benefits of business planning.
Page 375 and 376:
The last type of plan is called a d
Page 377 and 378:
The Business Plan We will progress
Page 379 and 380:
Hook the Reader That means having t
Page 381 and 382:
Industry The goal of this section i
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upscale suburban client who wants p
Page 385 and 386:
Company and Product Description Com
Page 387 and 388:
Exhibit 14.8 shows the competitive
Page 389 and 390:
Exhibit 14.9a Advertising schedule.
Page 391 and 392:
Scope of Operations What is the pro
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Development Time Line A development
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By law, most organization types req
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As mentioned in the development pla
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that can be depreciated, you should
Page 401 and 402:
1 Special thanks to Matt Feczko, Mi
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For better or worse, the business e
Page 407 and 408:
Leeson bet and lost. Japanese stock
Page 409 and 410:
Between February and April 1994, Da
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LTCM could be picky when it came to
Page 413 and 414:
An investor who wished to invest in
Page 415 and 416:
Similarly, the swaps market has rev
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speculator would suffer losses equa
Page 419 and 420:
American manufacturer will suffer l
Page 421 and 422:
The ease with which futures facilit
Page 423 and 424:
Exhibit 15.1 Call option payoff dia
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Exhibit 15.2 Payoff diagram for a w
Page 427 and 428:
Notice that the put option payoff r
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Bank, owns a large block of NASDAQ
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can be tailored so that the money r
Page 433 and 434:
Finally, the last step is to choose
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3 Fischer Black, who co-invented th
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not include assets that the firm ha
Page 441 and 442:
Thus, a business valuation will usu
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Negative • Acme is highly depende
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Exhibit 16.3 Acme Manufacturing, In
Page 447 and 448:
Profitability ratios reflect the re
Page 449 and 450:
When we talk about the value of a b
Page 451 and 452:
This example illustrates that with
Page 453 and 454:
Income Approach: Discounted Cash Fl
Page 455 and 456:
Exhibit 16.5 Acme Manufacturing, In
Page 457 and 458:
Victoria explains that the second p
Page 459 and 460:
Victoria analyzes Acme‟s audited
Page 461 and 462:
In summary, the discounted cash flo
Page 463 and 464:
Adjustment for Illiquidity As previ
Page 465 and 466:
51% position sells for a higher pri
Page 467 and 468:
examples. The proper application of
Page 471 and 472:
The subject of this chapter is grow
Page 473 and 474:
Finally, an acquisition can be effe
Page 475 and 476:
M&A activity has been the focus of
Page 477 and 478:
companies continue to make the same
Page 479 and 480:
equals was taking on a distinctive
Page 481 and 482:
Anatomy of a Successful Acquirer: T
Page 483 and 484:
employees kept their original jobs
Page 485 and 486:
where ΔCF t is the incremental cas
Page 487 and 488:
where it‟s ultimately buried. Suc
Page 489 and 490:
The following example summarizes th
Page 491 and 492:
make sure that you are at least awa
Page 493 and 494:
acquisition, there is no immediate
Page 495 and 496:
its vascular business, which was so
Page 497 and 498:
While all employees should be part
Page 499 and 500:
makes strategic and financial sense
Page 501 and 502:
Bhagat, Sanjai, Ming Dong, David Hi
Page 505 and 506:
The 2008 financial crisis underscor
Page 507 and 508:
Source: Plunkett’s Outsourcing &
Page 509 and 510:
To summarize: Trends • Large numb
Page 511 and 512:
Companies are becoming increasingly
Page 513 and 514:
What steps should a company follow
Page 515 and 516:
• Results of meetings with vendor
Page 517 and 518:
• Breach of contract and remedies
Page 519 and 520:
Assuming the project or service rev
Page 521 and 522:
The answer is: profits. The company
Page 523:
19 Information Technology and You D
Page 527 and 528:
People‟s lives have been turned u
Page 529 and 530:
its self-contained rechargeable bat
Page 531 and 532:
Random-Access Memory (RAM) Random-a
Page 533 and 534:
On laptop computers and PDAs, the s
Page 535 and 536:
Operating System An operating syste
Page 537 and 538:
the spreadsheet software together w
Page 539 and 540:
Exhibit 19.5 Pro forma sales and in
Page 541 and 542:
Database Software A database is a c
Page 543 and 544:
Internet e-mail addresses often con
Page 545 and 546:
Personal Finance Software There are
Page 547 and 548:
There are several different approac
Page 549 and 550:
One of the major attractions of the
Page 551 and 552:
While not a new version of the Web
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industrial revolution, and has occu
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Dummies Inc. has a series of books
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organization. This chapter is desig
Page 561 and 562:
As technology has evolved, the term
Page 563 and 564:
While the software mentioned earlie
Page 565 and 566:
Most of the focus of the investor c
Page 567 and 568:
Data Access and OLAP Before the lat
Page 569 and 570:
Exhibit 20.5 illustrates a differen
Page 571 and 572:
Productivity Tools Workers expect t
Page 573 and 574:
Client-server technology is based o
Page 575 and 576:
Today, most programmers write in C+
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Exhibit 20.6 is a model of a typica
Page 579 and 580:
No treatment of relational database
Page 581 and 582:
Online analytical processing (OLAP)
Page 583 and 584:
server) and the rest on the users
Page 585 and 586:
the other operational departments w
Page 587:
The world of business has changed d
Page 591:
Chaffey, Dave, E-Commerce and E-Com
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According to the results of the sur
Page 597 and 598:
understand the financial situation
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MBA graduates who are hoping to ent
Page 601 and 602:
Summary Financial services opportun
Page 603 and 604:
Let‟s begin with the “I left it
Page 605 and 606:
MBA student: “Well, I go to [Grea
Page 607 and 608:
Aiming for Your Goals For career ch
Page 609 and 610:
Networking is generally regarded as
Page 611 and 612:
Let‟s begin with some key assumpt
Page 613 and 614:
like, or moving ahead in the compan
Page 618 and 619:
Accrual accounting: An accounting m
Page 620 and 621:
Cash flow: Cash that is spent or re
Page 622 and 623:
Distribution channel: A chain of in
Page 624 and 625:
Goodwill: As it relates to valuatio
Page 626 and 627:
Management’s discussion and analy
Page 628 and 629:
Ordinary annuity: An annuity that p
Page 630 and 631:
Securities and Exchange Commission
Page 632 and 633:
Vertical merger: A merger in which
Page 634 and 635:
about activity-based costing progre
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Application systems ARPAnet Arthur
Page 638 and 639:
Bell Labs Benefit measurement Beta
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goal orientation legal and contract
Page 642 and 643:
segment information note share-base
Page 644 and 645:
process of purpose of real world us
Page 646 and 647:
uy/build decision capital budget in
Page 648 and 649:
written resume Careers in corporate
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Cell Center for Research in Securit
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Compensation and ownership Competit
Page 654 and 655:
Corporate culture Corporate debt in
Page 656 and 657:
profit planning from an internal pe
Page 658 and 659:
Data Data access and OLAP Database
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Askin Capital Management Barings Ba
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market approach publicly traded gui
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Electronic data interchange (EDI) E
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Extensible markup language (XML) Ex
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short term liquidity users and uses
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Fourth generation programming (4GL)
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Going private Going private transac
Page 674 and 675:
Hypertext links Hypertext markup la
Page 676 and 677:
Information technology and the firm
Page 678 and 679:
International Accounting Standards
Page 680 and 681:
Last-in-first out (LIFO) vs. curren
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Long call option payoff Longer-term
Page 684 and 685:
Market risks Market size and struct
Page 686 and 687:
Motivation to outsource Multiple IR
Page 688 and 689:
Nonrecurring items defined disclosu
Page 690 and 691:
Operational complexity Operational
Page 692 and 693:
Outsourcing metrics Overhead Over-t
Page 694 and 695:
Personal end game Personal expense
Page 696 and 697:
Price competition Price decreases P
Page 698 and 699:
Projected cash flow statements Proj
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Relevant range Relevant range assum
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Risk sharing Risk transfer Risk vs.
Page 704 and 705:
Short call option payoff Short part
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Spot price Spreadsheet software Spr
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Summarizing nonrecurring items and
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acquisition the business dividends
Page 712 and 713:
Timmon‟s Model of Opportunity Rec
Page 714 and 715:
U.S. immigration quotas U.S. Intern
Page 716 and 717:
discounting with discount rate form
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