1. You start this module by learning the use of financial statement ratios for long- and short-term trend identification. As long-term objectives involve assessing strategic advantage, this module looks at how to assess strategic advantages. Treasury risk management and mergers and acquisitions are touched on briefly. Finally, you apply ethical reasoning to typical business scenarios. Module 10 Long-term planning

2. Ratio analysis n Liquidity ratios u current ratio = u acid test or quick ratio = u inventory turnover =

3. n Liquidity ratios u average collection period = u receivables turnover ratio =

4. n Leverage ratios u debt-to-equity = u total debt-to-assets =

5. n Coverage ratios u times-interest-earned = u fixed-charges-coverage =

6. n Profitability and activity ratios u gross operating margin = u net operating margin = u asset turnover =

7. n Profitability and activity ratios u earnings power = earnings before interest and taxes total assets u return on common equity = earnings after taxes  preferred dividends net worth  preferred shares

8. n Market-value ratios u price-earnings ratio = u Tobin’s q ratio = u market-to-book ratio =

9. Elements in the financial planning process n A major tool in the financial planning process is the preparation of pro forma financial statements. n Preparation of pro forma financial statements: u develop estimates of future operating and financial data, such as sales and interest rates u aggregate current short-term planning tools, such as cash budgets, into annual data u weigh the effect of future strategic choices on the firm’s financial position, including capital budgeting opportunities, capital structure changes, and dividend policy

10. Preparation of a long-term financial plan n Formulate a statement of strategic, operating, and financial objectives. n Prepare a list of underlying assumptions describing the expected business and economic environment. n Assess the current and new projects. n Prepare pro forma financial statements. n Analyze the pro forma statements for feasibility and consistency. n Assess the sensitivity of the plan to the future business environment.

11. Developing a strategic plan n The first step is to develop an understanding of the current situation as a baseline for planning. n Planning next requires a forecast of macroeconomic conditions and an analysis of the strengths and weaknesses of the company in terms of the conditions. n Timing is an essential element of planning. n Financial policies can be built into the plan. n Marketing strategy must be part of the plan. n A strategic plan will involve tradeoffs.

12. Fundamentals of treasury risk management n Three fundamental risks are assessed and controlled: u interest rate risk u foreign-exchange rate risk u commodity price risk

13. …continued n Approaches to measuring risk include u Gap analysis — assets and liabilities are classified as either rate sensitive or not. Then, the difference between the rate-sensitive assets and liabilities is minimized. u Volatility analysis — this is the change in the present value of an asset or liability as a result of changes in the financial variable.

14. …continued n There are four approaches to treasury risk management: u Opportunistic  takes advantage of changes through transaction timing u Passive — does nothing and rides out the changes u Defensive — limits exposure using hedging techniques u Benchmarking — combines defensive and opportunistic approaches

15. Mergers and acquisitions n Motives include u synergy u changes in management u market control u raw material control u economies of scale u tax considerations u fast growth n In assessing potential mergers and acquisitions, both quantitative (business valuation, capital budgeting approach) and qualitative analyses are needed.

16. Presentation complete!