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Calculate key financial ratios, operating cash flow, and the sustainable growth rate
for a hypothetical company and use those calculations to evaluate the firm's
financial condition and performance.
Note: The assessments in this course build upon each other, so you are strongly
encouraged to complete them in sequence.
By successfully completing this assessment, you will demonstrate your proficiency
in the following course competencies and assessment objectives:
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Competency 1: Apply the theories, models, and practices of finance to the financial
management of the firm.
Demonstrate the ability to complete a balance sheet, income statement, and cash
flow statements.
Calculate operating cash flow.
Explain how operating cash flow compares to free cash flow.
Evaluate a firm's overall financial condition and performance.
Competency 4: Integrate financial analyses into general business management
planning and decision making.
Demonstrate the ability to accurately calculate key financial ratios, including
liquidity, activity, debt, and profitability.
Analyze a firm's performance from both time-series and cross-sectional points of
view.
Questions to Consider
To deepen your understanding, you are encouraged to consider the question below
and discuss it with a fellow learner, a work associate, an interested friend, or a
member of the business community.
What is the most important segment of a cash flow statement? Why?
What common mistakes do organizations make when preparing or using the cash
flow statement?
What coaching might be needed to help nonfinance professionals understand the
cash flow statement and its use?
Resources
Required Resources
This following template will assist you in formatting and completing your
assessment.:
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Financial Assessments Template [XLSX].
Suggested Resources
The resources provided here are optional. You may use other resources of your
choice to prepare for this assessment; However, you will need to ensure that they
are appropriate, credible, and valid. They provide helpful information about the
topics in this unit. The MBA-FP6016 – Finance and Value Creation Library Guide can
help direct your research. The Supplemental Resources and Research Resources,
both linked from the left navigation menu in your courseroom, provide additional
resources to help support you.
The following resources will provide assistance to complete the assessment.
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Assessment Problems – Helpful Tips.
Excel Examples.
The following text is designed to assist learners to master core concepts, solve
financial problems, and analyze results.
Boundless. (n.d.). Boundless finance. Retrieved from
https://www.boundless.com/finance/textbooks/boundless-finance-textbook/
Chapter 3, "Analyzing Financial Statements", Note that Section 1 of this chapter
covers balance sheets.
Additional Resources for Further Exploration
The following text is designed to assist learners to master core concepts, solve
financial problems, and analyze results.
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Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2014). Corporate finance:
Core principles and applications (4th ed.). New York, NY: McGraw-Hill. - Available
from the bookstore
Read Chapter 2, "Financial Statements and Cash Flow," pages 19–42.
Read Chapter 3, "Financial Statements Analysis and Financial Models," pages 43–81.
The text offers an introductory look at corporate finance.
Welch, I. (2017). Corporate finance (4th ed.). Retrieved from http://book.ivowelch.info/read/.
Chapter 14, "From Financial Statements to Economic Cash Flows," pages 355-385.
Assessment Instructions
Demonstrate your understanding of financial concepts by completing the following
calculations related to Jones Inc. and then evaluating the firm's financial condition
and performance.
To complete this assessment, use the information in the Financial Assessments
Template, which is linked in the Resources under the Required Resources heading.
Review the financial statements for Jones Inc. and the comparative financial ratios
for the year-end review. Enter your calculations and written analysis directly into
the template, and show or explain your work where appropriate.
Problem 1. Calculate the firm's 2015 financial ratios for liquidity, activity (asset
management), leverage (debt), and profitability.
Problem 2. Analyze the firm's performance from both time-series and crosssectional points of view using the key financial ratios provided in the template.
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Problem 3. Calculate the operating cash flow based on your review of the firm's
income statement.
How does operating cash flow (OCF) compare to free cash flow (FCF)?
Why is the free cash flow so meaningful to management and investors?
Problem 4. Calculate the sustainable growth rate based on your calculations of
return on equity (ROE) and assuming a 60 percent dividend-payout ratio. How can a
company increase its sustainable growth rate?
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Problem 5. Evaluate the firm's overall financial condition and performance based
on your analysis and then address these questions:
Is the company improving or deteriorating over this three-year period?
How does your ratio analysis justify your interpretation?
Problems 1 and 2
BALANCE SHEET
Assets
Cash and Equivalents
Accounts Receivable
Inventory
Total Current Assets
Gross Fixed Assets
Less Accumulated Depreciation
Net Fixed Assets
Total Assets
2015
$
$
INCOME STATEMENT
Sales Revenue
Cost of Sales
Gross Profits
Total Operating Profit
Less: Interest Expense
Net Profits Before Taxes
Less Taxes (40%)
Net Profits After Taxes
$
$
$
237,500.00
592,500.00
607,500.00
1,437,500.00
$
$
1,062,000.00
2,500,000.00
$
$
$
$
$
$
222,500.00
422,500.00
217,500.00
862,500.00
470,000.00
1,332,500.00
$
$
$
$
637,500.00
530,000.00
1,167,500.00
2,500,000.00
$
$
$
3,360,000.00
2,724,960.00
635,040.00
$
462,400.00
$
$
$
$
$
172,640.00
31,200.00
141,440.00
56,576.00
84,864.00
1,250,000.00
187,500.00
Liabilities and Equity
Current Liabilities
Accounts Payable
Notes Payable
Accruals
Total Current Liabilities
Long Term Debt
Total Liabilities
Stockholder's Equity
Common Stock
Retained Earnings
Total Stockholders Equity
Total Liabilities & Equity
Less: Operating Expenses
Selling Expense
General S&A
Depreciation
Total Operating Expenses
$
$
$
$
251,200.00
163,200.00
48,000.00
LIQUIDITY RATIOS
Current Ratio
Quick Ratio
Operating Cash Flow
ASSET MANAGEMENT RATIOS
Inventory Turnover
Average Collection Period
Fixed Asset Turnover
Total Asset Turnover
DEBT MANAGEMENT RATIOS
Debt Ratio
Times Interest Earned
PROFITABILITY RATIOS
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Return on Investment
Return on Equity
End of worksheet
2013
1.5
0.9
n/a
2014
1.7
1
2015 Industry Average
1.6
0.9
2014
5
50
2015 Industry Average
8.4
40
n/a
2013
6
40
n/a
n/a
1.5
1.5
1.75
2013
60%
2.5
2014
56%
3.5
2015 Industry Average
50%
4
2013
20%
4.70%
2%
3.00%
7.50%
2014
19.70%
4.80%
2.30%
3.50%
7.95%
2015 Industry Average
20%
6%
3%
5.25%
10.50%
INSTRUCTIONS: Analyze the firm's performance from both time-series and cross-sectional points of view using the key
financial ratios provided.
PROVIDE YOUR WRITTEN ANALYSIS IN THIS COLUMN.
Problem 3
INSTRUCTIONS: Calculate the operating cash flow based on your review of the firm's
income statement.
• How does operating cash flow (OCF) compare to free cash flow (FCF)?
• Why is the free cash flow so meaningful to management and investors?
= [EBITOCF
(1 - T)] + depreciation
EBIT = EARNINGS BEFORE INTEREST AND TAXES
T = TAX RATE
FCF = OCF - net fixed asset investment* - net current asset investment **
PLEASE PROVIDE YOUR ANSWERS HERE.
Problem 4
INSTRUCTIONS: Calculate the sustainable growth rate based on your calculations of return on equity (ROE) and assuming a 60 percent dividend-payout ratio. How can a company increase
its sustainable growth rate?
PLEASE PROVIDE YOUR ANSWERS HERE.
calculations of return on equity (ROE) and assuming a 60 percent dividend-payout ratio. How can a company increase
Problem 5
INSTRUCTIONS: Evaluate the firm's overall financial condition and performance based on your analysis and then address these questions:
• Is the company improving or deteriorating over this three-year period?
• How does your ratio analysis justify your interpretation?
PLEASE PROVIDE YOUR ANSWERS HERE.
ased on your analysis and then address these questions:
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