2. Welcome to Class 15 Research: Financial Domain & Case Studies – Part 1 Chapter 8

3. Corporate Financial Performance  Revenue  Profitability  Cash flow  Liquidity  Asset utilization  Financial leverage  Operating leverage  Return on stockholder investment  Stock value, and more Assess each of the following:

4. Performance Assessment: Issues to Remember Performance is a matter of opinion Performance is a matter of opinion Terminology is often inconsistent Terminology is often inconsistent

5. Different analysts may have different opinions about performance. 1.They may compare a firm’s achievements to a different set of performance benchmarks. OR 2. They may be assigning different values to individual performance components. Opinion

6. terminologist A “ terminologist ” is one who uses or creates words or phrases to "technicate" terms in order to convey a unique thought or idea. terminological incongruity The result is " terminological incongruity “ which creates barriers to communication. “Technicate ” is an original word created to demonstrate what terminologists do in creating or redefining words to describe thoughts or ideas. Technicate Terminology Every profession has multiple terminologists.

7. Clarification = Communication Thus, we define how the term: “INVESTED CAPITAL” will be used for analysis purposes

8. Invested Capital Invested Capital will represent the total of all funds contributed by both Shareholders and Creditors. Invested Capital $$ Shareholder$$Creditor$$

9. Invested Capital = Creditor Capital + Equity Capital [IC] = [CC] + [EC] or Creditor Capital + Equity Capital = Invested Capital [CC] + [EC] = [IC]

10. Accounting Equation Assets = Liabilities + Equity [A] = [L] + [E] or Liabilities + Equity = Assets [L] + [E] = [A]

11. Think about it… Creditor Capital Equity Capital Invested Capital Liabilities Equity Assets InvestedCapital Assets

12. A closer look at Assets, Liabilities, & Equity

13. For analysis purposes we will divide as follows: Assets are divided into "current" and “noncurrent.” Liabilities are divided into "current" and “noncurrent.” Equity is divided into "paid in" and "earned.“ Invested capital is divided into "borrowed" and "equity." Financial services firms generally do not divide their assets and liabilities. These organizations include S & Ls, banks, investment houses, etc. They believe the financial nature of their business does not require this distinction. Although, some analysts are likely to disagree.

14. Assets: (1) Current Assets (1) Current Assets ( assist with required payments) (2) Noncurrent Assets (2) Noncurrent Assets (enable the firm to conduct its business) [facilities, equipment, property, long-term investments, intangibles, etc.] Liabilities Liabilities (Borrowed Capital): (1) Current Liabilities (1) Current Liabilities or near-term debt (due within 1 yr. or the operating cycle) (2) Long-term debt (2) Long-term debt (all the other debt) Shareholder Equity Shareholder Equity (Equity Capital): (1) Earned Capital (1) Earned Capital (accumulated earnings that have been retained in the business) (2) Paid-in Capital (2) Paid-in Capital (money paid by stockholders to purchase stock) Invested Capital: (1) Borrowed Capital (1) Borrowed Capital (credit extended by suppliers, banks, and note and bondholders, etc.) (2) Equity Capital (2) Equity Capital (investments by stockholders)

15. Understanding the relationship between the different classes of accounts is fundamentally important to financial analyses. These are highlighted in the Financial Position Model

16. Financial Position Model Important relationship between CA & CL Important relationship

17. A thorough understanding of the Financial Position Model is crucial to Financial Decision-Making

18. The Financial decision-making domain includes: 1. Internal Financing Decisions 2. Asset/Debt Decisions 3. Debt/Equity Decisions

19. Financing Decisions Internal Financing Asset/DebtDebt/Equity

20. 1. Internal Financing Decisions: Tactical and Strategic Internal financing decisions fall into two main categories: Short-term focus (1) Short-term focus Tactical financing decisions Long-term focus (2) Long-term focus Strategic financing decisions

21. (1)Tactical financing decisions center on maximizing internal funding by changing the way things are done. For example, directing staff to consider ► SPEEDING collections of accounts receivable (ACP) ► REDUCING inventory with JIT (just-in-time) techniques improving current system Objective: Improve performance by improving current system Internal Financing Decisions: TACTICAL

22. Internal Financing Decisions: STRATEGIC (2) Strategic financing decisions center on making significant changes to some particular aspect of the firm in order to improve cash flow. Significant changes in corporate operations, such as: ► OUTSOURCING customer service, or ► SUBCONTRACTING major manufacturing (e.g. NIKE) completely changing Objective: Improve performance by completely changing system

23. 2. Asset and Debt Management Decisions Asset/Debt decisions include consideration of how to maximize utilization of high-ticket assets such as property, facilities, equipment, intangibles, etc. These decisions are also directed at maintaining an optimum balance between: 1.current assets and current liabilities 2.current and noncurrent debt 3.current and noncurrent assets Capital budgeting: Decisions about whether to buy or sell property, plant, & equipment are part of this domain

24. 3. Debt/Equity Decisions Debt and Equity decisions are primarily concerned with: 1.The use and extent of long-term financing 2.The optimum level and configuration of equity 3.The appropriate balance between total debt and total equity. Decision-making in this domain involves considering issues such as: 1.How much money is needed to sustain growth 2.How should the company acquire those funds (For example, should the corporation issue bonds, issue common stock, issue preferred stock, or borrow from other sources?)

25. Important Financial questions: How much short-term cash is necessary and what is the best strategy to ensure that cash is available when necessary? What is the best long-term strategy for investment in this company? What is the optimum financial leverage? What are the most appropriate sources of cash in-flow? What is the optimum relationship between equity and debt financing?

26. End, Research: Financial Domain & Case Studies – Part 1 Re-read Chapter 8

27. Special note on Proxy Statements…. THEY ARE VERY IMPORTANT!!! They include: 1.Invitation to the annual meeting 2.Legal rights and administrative details available to the shareholders 3.Biographies of all directors (most with pictures) 4.Board committees & board compensation 5.Executive compensation 6.Shareholder proposals 7.Information on salaries and bonuses 8.Information on stock options and other significant declarations by the TMT

28. Proxy Statement & DEF 14A Proxy statements Proxy statements are available from all publicly traded companies. It contains information such as: Invitation to the annual meeting Legal rights and administrative details available to the shareholders Biographies of all directors (most with pictures) Board committees & board compensation Executive compensation Shareholder proposals SEC Form DEF 14A SEC Form DEF 14A is a filing with the Securities and Exchange Commission (SEC) used in combination with an annual proxy. It includes: 1.Adequate information to allow shareholders to make informed decision when voting their shares. 2.Date, time and place of shareholder meetings, 3.Dissenter’s right of appraisal, modification or change of securities, voting procedures, and other relevant issues and data.