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Business Administration 2257 Study Guide - Final Guide: Sunk Costs, Internal Financing, Contribution Margin


Department
Business Administration
Course Code
Business Administration 2257
Professor
Prof
Study Guide
Final

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1. Read the case (30 min)
Role, goals, constraints (qualitative and quantitative, potential obstacles)
Outline necessary decision and recommendations (wondered, wanted to)
2. Understand the organization (1.5 hours)
Business size-up (45 min): industry/environment analysis, consumer, competitor, corporate capabilities
Financial size-up (45 min): past long analysis: statement of cash flows, ratio analysis, contribution analysis
3. Access future opportunities/decision (1 hour)
Qualitative: pros, cons
Quantitative: differential, contribution, breakeven, cash budgeting, sensitivity analysis
How does sensitivity analysis affect the results?
Make a decision (launch? Financing? Promotions?)
How do goals and constraints influence your decisions?
Marketing (push vs. pull strategy) depend on environment, company, customers, competitors
New product launch, pricing (cost behavior analysis): do contribution, breakeven, sub-unit, cost-price analysis
New product, expansion, fit within industry, new plan or revise promotion plan: do marking analysis
Experiencing cash flow problems: do cash budget analysis
Cash management issues, new financing required, current financial position: do statement of cash flow analysis
Do Ratio Analysis after SCF is analyzed, understand the past, access profitability
Access future opportunity: differential analysis
4. Evaluate effectiveness of decision/overall strategy (1 hour)
Projected income statement (changes in profitability) and balance sheet (expose financing requirements)
Action plan (Specific, long-term and short-term. Additional funding?)
Contingency plan
Sensitivity
Access future opportunity, overall strategy effectiveness, determine financing needed: projected statement analysis
Consistency, Implications, be specific
Statement of Cash Flow
1. Operations: (operating activities, net income, adjustment to cash basis)
Record Net Income Add back non-cash expense (amortization)Add back losses, subtract gains
Add sources, subtract uses Net Cash Flow from Operations
2. Financing Activities
or in loans, stock, personal investment, Reconstruct the R/E (or Equity) to determine dividends (or drawings) subtract dividends/drawings Net
Cash Flow from Financing
3. Investing Activities:
Non-current Assets (excluding trading investments), consider depreciation and losses or gains
Increase Decrease
Asset Use Source
Liabilit
y
Source Use
Equity Source Use
Analysis of SCF:
Operations: Cash flow, positive or negative? Driven by Net Income? Working capital accounts?(AP, AR, Inventory) Sustainable?
Sources/Uses: Major sources/uses? Meet expectations? Sustainable? Concerns?
AR Use + Inventory Source < AP Source: adequately managed. Can AP be extended?
AR : Large sales increases, Longer collection period
Ratios: Age of AR, AP, Inventory
Matching: Appropriately?
Large source from capital investment used to finance purchase of building (Long-term to Long-term). Effective matching. Additional
financing? Repayment of long-term debt?
Large use of cash for purchases of buildings. Expected? Expanding operations? Required?
Ratio Analysis
Profitability Investment Utilization Liquidity Stability Growth
Vertical Analysis
COGS to sales=
Gross Profit to Sales
Operating Ex. to Sales
Net income to Sales
Measures efficiency
Inventory Turnover=
Fixed Asset Turnover=
Total Asset Turnover=
Current Ratio= (2:1)
Acid Test= (1:1)
Working Capital=
Current Assets-Cur. Li
Age of AR=
Age of AP=
Net worth to total
Assets=
Tot.Debt to Tot. Asset
Debt to Equity=
Long-term Debt Interest
Coverage=
Sales Growth=
Profit Growth
Asset Growth
Return on Investm’t
Return on assets=
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