Final Exam Cheat Sheet

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Western University
Business Administration
Business Administration 2257
Alexander Miller

PrCost Behaviore Statement Differential Analysis FIRST SOE Semi-Variable = taxi Differential working capital investment: amount of additional money that would be tied up in 1. Manager’s estimates for new sales volumene unit contributes toward recovery of fixed costs & then toward profit working capital: Investment? or disinvestment? INV+AR-AP 2. ASSUMPTIONSution = Selling Price - Variable Cost Per Unit INV = [Diff COGS/(360 days x yr)] xDays of INV Contribution Margin Rate (what % of selling price can cover fixed assets) = Unit Contribution/Selling Price AR=[Diff Credit Sales/(360*yr)]xDays of AR 3.Breakevenility ratios needed for cogs, gross AP=[Diff Credit Purchases (or COGS)/(360*yr)]*Days of AP Uniprofit &op x (see if need to do some Working capital: Sales=Fixed Costs/Contribution Margin 1. does AR, INV, AP permanently change? Cash Breakevenon one) 2. up or down? 4.Units = Cash Fixed Costs/(Selling Price-Cash variable costs/unit) 3. is it investment or disinvestment (sell)? Sales = Cash Fixed Costs/((SP-Cash VC per unit)/SP) Differential ROI = (Differential Cash Flow/Differential Investment)*100 Target Profit Breakeven Differential payback = Differential Investment/Differential Cash Flow Units= (Fixed Costs+Target Profit)/(SP-VC per unit) ****IN EITHER DO NOT include interest/financing costs only have operating decisions Sales=(Fixed Costs+Target Profit)/((SP-VC per unit)/SP) payback = has to be able to payback investors Breakeven with Multi-Products compare % to hurdle rate: Sales = Fixed Costs/(Weighted Avrg Contr. Margin Rate) given & minimum target rate of return for project (always higher than bank rate) Weighted Average: - ALL OTHER INFO OUTSIDE OF differential assumed to be CONSTANT 1. 2. - no income tax 1. Different btw alternatives 2. cash inflow/outflow (no amort) 3. future consideration (no past costs bc “sunk”) - ROI- describe size of investors financial return relative to size of initial investment -THESE ratios assume recurring annual cash inflow or return which is constant over time 1. Sub-unit Evaluation - predict # of units sold RISK ASSESSMENT: - calculate variable cost as % of sales Margin of Safety How much can projections be off before venture becomes breakeven proposition? - Sensitivity = selling price, units to be sold, variable & fixed Margin of Safety = (Projected Sales-Breakeven Sales)/Projected Sales - What if? (what’s profit if lower selling price? what’s profit difference if units sold Breakeven as % of Margin is 20% higher or lower than projected? what if variable/fixed goes up/down 5%?) How much of the current market must be captured to breakeven? =Breakeven Sales dollars(or units)/Total Market (dollars or units) ROI = Recurring Annual Return/Initial Investment Marketing - ASK QUESTIONS! Define Marketing Challenge, Identify market opportunities, select target market, decide on produce/service offerings, decide on distribution approach, how to - improve Product B or take out - this shows you problems with product B, which you wouldn’t have noticed attract customers, pricing, how to keep/grow customer base, ensure financials otherwise - BAD PRODUCT if no unit contribution(not contributing toward fixed make sense (cost/results), How to learn (research) Product Life: Introduction, Growth, Maturity, Decline assets) (doesn’t matter if negative net income) Pull: marketing directed towards ultimate user (creates consumer demand) so consumer asks store for product when then pulls goods thru distribution channel Push: marketing directed toward retailers who are motivated thru advertising allowances & discounts Skimming: set high price to cover R&D cost, before competitors have smtg similar (lwr price later) Penetration: set low price to attract a lot of market share Outline of Steps 1. Understand Organization a. Business Size-up - Make a risk line industry/environment analysis-opportunities/threats consumer analysis competitive analysis -KSF/sustainable? corporate capabilities b. Financial Size up statement of cash flows ratio analysis contribution analysis 2. Assess Future Opportunities a. Qualitative - Do nothing option? qualitative? quantitative? b. Quantitative i. Differential Analysis ii. Contribution Analysis iii. Breakeven Analysis iv. Cash Budgeting v. Sensitivity Analysis Projected Statements - when do we ensure these estimates? or 3. Decision alter policy to get better projections -Pros/Cons - WRITE ALL ASSUMPTIONS Ratio Analysis: How is business impacted? new insight? - divide 2001 tax with Net income before tax (tax / - All years, all competitor ratios Action Plan: What are key priorities? Who will be responsible for them? How net income before tax) - **Give Assumptions (whether avrg or total) will they be achieved? When will they be achieved? Consistent with firm’s goals. All biz aspects must fit into overall strategic plan. Why is this worth doing? BS - MUST DO: AP/AR/INV (needed in projections) Monitor results. Have an adaptive strategy. Cans/Needs/Wants. Potential - ANALYZE projected: do they match company’s - A ratio is high bc the numerator is high or the outcomes? Risk? how to overcome cons. Convince!! So what? goals? denominator is low (look at BS & SOE to figure 4. Evaluate Effectiveness of Strategy - SENSITIVITY: what’s most important & what’s a. Projected Statements most uncertain, Qualitatively talk about worst case out which one & state specific #’s to give more b. Income Statement scenario detail LIMITATIONS: - A ratio is low bc numberator is low OR c. Balance Sheet - many assumptions & estimates denominator is high b. Action Plan & Contingency Plan - imprecise --> can’t predict future a. close can/need/want gap - ***For the purposes of this case assume industry calculated ratios in the same way “didn’t have time for sensitivity but I could’ve done.. - debt to equity ratio to see liklihood of receiving external financing Hurdle rate--> will it actually be over? - high debt to equity = risky company Financing Alternatives - high debt equity due to - debt increases & equity constant and equity down if no trend/industry say this would be useful - consider: current debt, financing costs, accepted risk lvl, desire for control, but debt same Limitations flexibility to respond to future financing needs & pattern of capital structure 1. Quantitative only (there are external factors) - Internal: improve cash flows= difficult to do quickly,cut off unnecessary - the closer to 100%, the more control the owners are losing expenses/those that won’t affect sales - raise publicly if qualify but usually thru investors 2. standards of comparison imperfect - adjust working capital-amount that remains if all current obligations paid off - dividends can be postponed 3. difficult to compare with other fir
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