Financial Analysis, Planning and Forecasting

The following sections are included:

• Preface

• Acknowledgments

• Dedication

• Contents

The following sections are included:

• Financial Management: Analysis and Planning
  • Basic Definitions
  • Objectives of Financial Management
  • Planning Horizon Classification

• Objectives and Philosophy of the Book

• Structure of the Book

• Problem Set

• References for Chapter 1

The following sections are included:

• Introduction

• Financial Statements: A Brief Review
  • Balance Sheet
  • Statement of Earnings (Income Statement)
  • Statement of Equity
  • Statement of Cash Flows
  • Annual vs Quarterly Financial Data

• Critique of Accounting Information
  • Criticism
  • Method for Improvement
    • Use of Alternative Information
    • Statistical Adjustments
    • Application of Finance and Economic Theories

• Static-Ratio Analysis and Its Extension
  • Static Determination of Financial Ratios
  • Liquidity Ratios
  • Leverage Ratios
  • Activity Ratios
  • Profitability Ratios
  • Estimation of the Target of a Ratio
  • Dynamic Analysis of Financial Ratios
    • Single-Equation Dynamic Adjustment Process
    • Simultaneous Determination of Financial Ratios
  • Statistical Distribution of Financial Ratios

• Cost-Volume-Profit Analysis and Its Applications
  • Deterministic Analysis
  • Stochastic Analysis

• Accounting Income vs Economic Income

• Summary

• Problem Set

• Appendix 2.A: Simple Regression and Multiple Regression

• Appendix 2.B. Instrumental Variables and Two-Stage Least Squares

• References for Appendix 2

• References for Chapter 2

The following sections are included:

• Introduction

• Important Concepts of Linear Algebra

• Two-Group Discriminant Analysis

• k-Group Discriminant Analysis

• Factor Analysis and Principal-Component Analysis

• Summary

• Notes

• Problem Set

• Appendix 3.A. Relationship between Discriminant Analysis and Dummy Regression Analysis

• Appendix 3.B. Principal-Component Analysis

• References for Chapter 3

The following sections are included:

• Introduction

• Credit Analysis

• Bankruptcy and Financial Distress Analysis

• Applications of Factor Analysis to Select Useful Financial Ratios

• Bond Rating Forecasting

• Bond Quality Ratings and the Change of Quality Ratings for the Electric Utility Industry

• Ohlson's and Shumway's Methods for Estimating Default Probability

• Summary

• Problem Set

• Appendix 4.A. Jackknife Method and its Application in MDA Analysis

• References for Appendix 4

• References for Chapter 4

The following sections are included:

• Introduction

• Theoretical Justification of Paying Interest

• Rate-of-Return Measurements and Types of Averages
  • Discrete Rates-of-Return and Continuous Rates-of-Return
  • Types of Averages
  • Power Means

• Theories of the Term Structure and Their Application

• Interest Rate, Price-Level Changes, and Components of Risk Premium
  • Imperfect-Foresight Case
  • Perfect-Foresight Case

• Three Hypotheses about Inflation and the Value of the Firm: A Review
  • The Debtor-Creditor Hypothesis
  • The Tax-Effects Hypothesis
  • Operating-Income Hypothesis
  • The Relationship among the Three Hypotheses

• Summary and Concluding Remarks

• Problem Set

• Appendix 5.A. Compounding and Discounting Processes and Their Applications

• Appendix 5.B. Taylor Series Expansion and Its Applications to Rates-of-Return Determination

• References for Chapter 5

The following sections are included:

• Introduction
  • Components of Capital Structure
  • Opportunity Cost, Required Rate-of-Return, and the Cost of Capital

• Bond Valuation
  • Perpetuity
  • Term Bonds
  • Preferred Stock

• Common-Stock Valuation
  • Valuation
  • Inflation and Common Stock Valuation
  • Growth Opportunity and Common-Stock Valuation

• Financial Leverage and Its Effect on EPS
  • Measurement
  • Effect

• Degree of Financial Leverage and Combined Effect

• Optimal Capital Structure
  • Overall Discussion
  • Arbitrage Process and the Proof of M&M Proposition I

• Possible Reasons for Optimal Capital Structure
  • The Traditional Approach of Optimal Capital Structure
  • Bankruptcy Costs
  • Agency Costs
  • Imperfect Markets

• Summary and Remarks

• Questions and Problems

• Appendix 6.A. Convertible-Security Valuation Theory

• Appendix 6.B. Derivation of DOL, DFL, and CML

• Appendix 6.C Derivation of Dividend Discount Model

• References for Appendix 6

• References for Chapter 6

The following sections are included:

• Introduction

• Risk Classification
  • Business Risk
  • Financial Risk
  • Total Risk

• Portfolio Analysis and Application
  • Expected Rate of Return on a Portfolio
  • Variance and Standard Deviation of a Portfolio
  • The Two-asset Case
  • The N-asset Case
  • The Efficient Portfolios
  • Corporate Application of Diversification

• The Market Rate of Return and Market Risk Premium
  • The Risk Premium

• Determination of Commercial Lending Rates

• The Dominance Principle and Performance Evaluation

• Summary

• Questions and Problems

• Appendix 7.A. Estimation of Market Risks Premium

• Appendix 7.B. The Normal Distribution

• Appendix 7.C. Derivation of Minimum-Variance Portfolio

• Appendix 7.D. Sharpe Performance Approach to Derive Optimal Weight

• References for Appendix 7

• References for Chapter 7

The following sections are included:

• Introduction

• Capital Market Line, Efficient–Market Hypothesis and Capital Asset Pricing Model
  • Lending, Borrowing, and the Market Portfolio
  • The Capital Market Line
  • The Efficient-Market Hypothesis
  • Weak-Form Efficient-Market Hypothesis
  • Semistrong-Form Efficient-Market Hypothesis
  • Strong-Form Efficient-Market Hypothesis
  • The Capital Asset Pricing Model

• The Market Model and Beta Estimation

• Empirical Evidence for the Risk–Return Relationship

• Why Beta is Important in Financial Management

• Systematic Risk Determination
  • Business Risk and Financial Risk
  • Other Financial Variables
  • Capital Labor Ratio
  • Fixed Costs and Variable Costs
  • Market-Based versus Accounting-Based Beta Forecasting

• Some Applications and Implications of the Capital Asset Pricing Model
  • Applications

• Liquidity and Capital Asset Pricing Model

• Arbitrage Pricing Theory

• Intertemporal CAPM

• Summary

• Questions and Problems

• Appendix 8.A. Mathematical Derivation of the Capital Asset Pricing Model

• Appendix 8.B. Arbitrage Pricing Model

• References for Chapter 8

• Note

The following sections are included:

• Introduction

• The Option Market and Related Definitions
  • What is an Option?
  • Types of Options and Their Characteristics
  • Relationships Between the Option Price and the Underlying Asset Price
  • Additional Definitions and Distinguishing Features
  • Types of Underlying Asset
  • Institutional Characteristics

• Put-Call Parity
  • European Options
  • American Options
  • Future Options
  • Market Application

• Risk-Return Characteristics of Options
  • Long Call
  • Short Call
  • Long Put
  • Short Put
  • Long Straddle
  • Short Straddle
  • Long Vertical (Bull) Spread
  • Short Vertical (Bear) Spread
  • Calendar (Time) Spreads

• Examples of Alternative Option Strategies
  • Protective Put
  • Covered Call
  • Collar

• Summary

• Questions and Problems

• References for Chapter 9

The following sections are included:

• Introduction

• Basic Concepts of Options
  • Option Price Information

• Factors Affecting Option Value
  • Determining the Value of a Call Option before the Expiration Date

• Determining the Value of Options
  • Expected Value Estimation
  • The Black–Scholes Option Pricing Model
  • Taxation of Options
  • American Options

• Option Pricing Theory and Capital Structure
  • Proportion of Debt in Capital Structure
  • Riskiness of Business Operations
  • Option Pricing Approach to Determine the Optimal Capital Structure

• Warrants

• Summary

• Questions and Problems

• Appendix 10.A: Applications of the Binomial Distribution to Evaluate Call Options

• References for Chapter 10

The following sections are included:

• Introduction

• Overview of Cost of Capital

• Average Earnings Yield Versus Current Earnings Yield Method

• Discounting Cash-Flow Method

• Weighted-Average Cost of Capital
  • Theoretical Justification of the WACC

• The CAPM Method

• M&M's Cross-Sectional Method
  • The Cost of Capital
  • Regression Formulation and Empirical Results

• Chase Cost of Capital

• Summary and Concluding Remarks

• Problem Set

• Appendix 11.A. Derivative of the Basic Equilibrium Market Price of Stock and Its Implications

• References for Appendix 11

• References for Chapter 11

The following sections are included:

• Introduction

• Cash-Flow Evaluation of Alternative
  • Investment Projects

• Alternative Capital-Budgeting Methods
  • Accounting Rate-of-Return
  • Internal Rate-of-Return
  • Payback Method
  • Net Present Value Method
  • Profitability Index

• Comparison of the NPV and IRR Method
  • Theoretical Criteria
  • Multiple Rates-of-Return
  • Reinvestment Rate Problem
    • Separability of Projects
  • Practical Perspective

• Equivalent Annual NPV and Equivalent Annual Cost
  • Mutually Exclusive Investment Projects with Different Lives

• Capital-Rationing Decision
  • Basic Concepts of Linear Programming
  • Capital Rationing

• Summary

• Problem Set

• Appendix 12.A. NPV and Break-Even Analysis

• Appendix 12.B. Managers' View on Alternative Capital-Budgeting Methods

• Appendix 12.C. Derivation of Crossover Rate

• References for Appendix 12

• References for Chapter 12

The following sections are included:

• Introduction

• Risk-Adjusted Discount-Rate Method

• Certainty Equivalent Method

• The Relationship of the Risk-Adjusted Discount-Rate Method to the Certainty-Equivalent Method

• Three Other Related Stochastic Approaches to Capital Budgeting
  • The Statistical Distribution Method
  • The Decision-Tree Method
  • Simulation Analysis
  • Comparison of the Three Alternative Stochastic Methods

• Inflationary Effects in the Capital-Budgeting Procedure

• Multiperiod Capital Budgeting
  • Overall Discussion
  • The CAPM and Multi-Period Capital-Budgeting Decision-Making

• Summary and Concluding Remarks

• Problem Set

• Appendix 13.A: Time–State Preference and the Real option Approaches for Capital Budgeting Under Uncertainty

• References for Appendix 13

• References for Chapter 13

The following sections are included:

• Introduction

• Types of Leasing Arrangements and Accounting Treatments
  • Three Leasing Forms
    • Direct Leasing
    • Sale and Leaseback
    • Leveraged Leasing
  • Accounting for Leases
    • Capital Lease Treatment
    • Accounting for Operating Leases
    • Accounting for Leases from the Lessor's Standpoint

• Cash-Flow Estimation and Valuation Methods

• The Modigliani and Miller Propositions and the Theoretical Considerations of Leasing

• Leases-Versus-Buy Decisions Under Uncertainty: The CAPM Approach

• Summary and Conclusions

• Problem Set

• Appendix 14.A. APV Method and Application to Leasing Decision

• References for Appendix 14

• References for Chapter 14

The following sections are included:

• Introduction

• Overview of Mergers

• Classification of Business Combinations
  • Classification by Corporate Structure
  • Classification by Economic Relationship

• Methods of Business Combination

• Merger Accounting and Tax Effects
  • Tax Implications
  • Accounting Treatment of Business Combinations

• Economic Theories and Evidence
  • Economic Theories
  • Market Power

• Financial Theories and Evidence
  • Diversification and Debt Capacity

• Integration and Summary

• Problem Set

• Appendix 15.A. Effects of Divestiture on Firm Valuation

• References for Chapter 15

The following sections are included:

• Introduction

• The Value of Dividend Policy to the Firm
  • Methods of Determining the Relevance of Dividends
    • The Discounted Cash-Flow Approach
    • The Investment Opportunities Approach
    • Stream-of-Dividends Approach
    • Stream-of-Earnings Approach

• Issues Marring the Dividend Problem
  • The Classical CAPM
  • Brennan's CAPM with Taxes
  • The Litzenberger and Ramaswamy CAPM with Taxes
  • Empirical Evidence
    • Gordon's Empirical Work and Its Extensions
    • M&M Empirical Work
    • CAPM Approach

• Behavioral Considerations of Dividend Policy
  • Partial Adjustment and Information Content Models
  • An Integration Model

• Summary and Conclusions

• Problem Set

• References for Chapter 16

The following sections are included:

• Introduction

• Investment and Dividend Interactions: The Internal-Versus-External Financing Decision
  • Internal Financing
  • External Financing

• Interactions Between Dividend and Financing Policies
  • Cost of Equity Capital and Dividend Policy
  • Default Risk and Dividend Policy

• Interactions Between Financing and Investment Decisions
  • Risk-Free Debt Case
  • Risky Debt Case

• Implications of Financing and Investment Interactions for Capital Budgeting
  • Equity-Residual Method
  • After-Tax, Weighted-Average Cost of Capital Method
  • Arditti and Levy Method
  • Myers Adjusted-Present-Value Method

• Debt Capacity and Optimal Capital Structure

• Implications of Different Policies on the Beta Coefficient Determination
  • Impact of Financing Policy on Beta Coefficient Determination
  • Impact of Production Policy on Beta Coefficient Determination
  • Impact of Dividend Policy on Beta Coefficient Determination

• Summary and Conclusion

• Problem Set

• Appendix 17.A. Stochastic Dominance and Its Applications to Capital-Structure Analysis with Default Risk

• References for Appendix 17

• References for Chapter 17

The following sections are included:

• Introduction

• The Components of Working Capital

• The Concept of Cash Flow

• Cash Flow versus Funds Flow

• Organizing for Short-Term Financial Planning
  • Short-Term Financial Planning Principles

• The Cash Flow Cycle and Its Calculation

• Cash Flow Forecasting, Budgeting, and Planning

• The Cash Budget

• Demand-Driven, Capital-Driven, and Cost-Driven Cash Budgets

• Users of Cash Forecasts and Business Plans

• Planning Horizons and Time Intervals of Cash Budgets

• From Forecasting to Budgeting to Planning

• Summary

• Questions and Problems

• Appendix 18.A. Time-Series Components of Sales

• References for Chapter 18

The following sections are included:

• Introduction

• Trade Credit

• The Cost of Trade Credit
  • The Seller's Perspective
  • The Buyer's Perspective

• Financial Ratios and Credit Analysis
  • Financial Ratio Analysis
  • Numerical Credit Scoring
  • Benefits of Credit-Scoring Models
  • Outside Sources of Credit Information

• Credit Decision and Collection Policies
  • Collection Policy
  • Factoring and Credit Insurance

• Summary

• Questions and Problems

• References for Chapter 19

The following sections are included:

• Introduction

• The Baumol and Miller–Orr Model
  • Baumol's EOQ Model
  • Miller–Orr Model

• Cash Management Systems
  • Float
  • Cash Collection and Transference Systems
  • Cash Transference Mechanism and Scheduling

• Credit Lines and Bank Relations
  • Bank Relations

• Marketable Securities Management
  • Investment Criteria for Surplus Cash Balances
  • Types of Marketable Securities
  • Hedging Considerations

• Inventory Management
  • Inventory Loans
  • Economic Order Quantity

• Summary

• Questions and Problems

• Appendix 20.A. Derivation of Eq. (20.1)

• References for Chapter 20

The following sections are included:

• Introduction

• Linear Programming

• Working-Capital Model and Short-Term Financial Planning
  • Questions to be Answered
  • Model Specification and Its Solution
  • Which Constraints are Causing Bottlenecks?
  • How Much More Profit is Being Lost Because of Constraints?
  • How do the Constraints Affect the Solution?
  • Duality and Shadow Prices
  • Short-Term Financial Planning

• Goal Programming
  • Introduction
  • Application of GP to Working-Capital Management
  • Summary and Remarks on Goal Programming

• Programming Approach to Cash Transfer and Concentration
  • Transfer Mechanisms
  • Cash-Transfer Scheduling: Contemporary Practice
    • Managing About a Target
    • Anticipation
  • Weekend Timing and Dual Balances
  • Limitations of the Popular Techniques
  • Mathematical-Programming Formulation
    • The Objective Function
    • Constraints on Transfers Include: Average Balance, Flow Balance, Minimum Balance, and Maximum Transfer
    • Formulation Summary
    • Deposit Variation
  • Relation of Model Formulation to Current Practice
    • Implementation Tests
    • Field Concentration Tests
    • Lockbox Concentration

• Summary and Concluding Remarks

• Problem Set

• Appendix 21.A. The Simplex Algorithm for Solving Eq. (21.8)

• Appendix 21.B. Mathematical Formulation of Goal Programming

• References for Chapter 21

The following sections are included:

• Introduction

• Carleton's Model

• Brief Discussion of Data Inputs

• Objective-Function Development

• The Constraints
  • Definitional Constraints
  • Sources and Uses Definition
  • Policy Constraints

• Analysis of Overall Results

• Summary and Conclusion

• Problem Set

• Appendix 22.A. Carleton's Linear-Programming Model: General Mills as a Case Study

• Appendix 22.B General Mills' Actual Key Financial Data

• References for Chapter 22

The following sections are included:

• Introduction

• Warren and Shelton Model

• Anheuser–Busch Companies, Inc. As A Case Study
  • Data Sources and Parameter Estimations
  • Procedure for Calculating WS Model

• Francis and Rowell (FR) Model
  • The FR Model Specification
    • Sector One: Industry Sales
    • Sector Two: Company Sales and Production
    • Sector Three: Fixed Capital-Stock Requirements
    • Sector Four: Pricing
    • Sector Five: Production Costs
    • Sector Six: Income
    • Sector Seven: New Financing Required
    • Sector Eight: Risk
    • Sector Nine: Cost of Financing
    • Sector Ten: Common Stock Valuation
  • A Brief Discussion of FR's Empirical Results

• Summary

• Problem Set

• Appendix 23.A. Procedure of Using Microsoft Excel to Run FINPLAN Program

• References for Chapter 23

The following sections are included:

• Introduction

• The Classical Time-Series Component Model
  • The Trend Component
  • The Seasonal Component
  • The Cyclical Component and Business Cycles
  • The Irregular Component

• Moving Average and Seasonally Adjusted Time Series
  • Moving Average
  • Seasonal Index and Seasonally Adjusted Time Series

• Linear and Log-Linear Time Trend Regressions

• Exponential Smoothing and Forecasting
  • Simple Exponential Smoothing and Forecasting
  • The Holt–Winters Forecasting Model for Non-Seasonal Series

• Autoregressive Forecasting Model

• Summary

• Problem Set

• Appendix 24.A. The X-11 Model for Decomposing Time-Series Components

• Appendix 24.B. The Holt–Winters Forecasting Model for Seasonal Series

• References for Chapter 24

The following sections are included:

• Introduction

• Simultaneous Nature of Financial Analysis, Planning, and Forecasting
  • Basic Concepts of Simultaneous Econometric Models
  • Interrelationship of Accounting Information
  • Interrelationship of Financial Policies

• The Simultaneity and Dynamics of Corporate-Budgeting Decisions
  • Definitions of Endogenous and Exogenous Variables
  • Model Specification and Applications

• Applications of SUR Estimation Method in Financial Analysis and Planning
  • The Role of Firm-Related Variables in Capital-Asset Pricing
  • The Role of Capital Structure in Corporate-Financing Decisions

• Applications of Structural Econometric Models in Financial Analysis and Planning
  • A Brief Review
  • AT&T's Econometric Planning Model

• Programming vs Simultaneous vs Econometric Financial Models

• Financial Analysis and Business Policy Decisions

• Summary

• Problem Set

• Appendix 25.A. Johnson & Johnson as a Case Study

• References for Appendix 25

• References for Chapter 25

The following sections are included:

• Author Index

• Subject Index