CAPITAL STRUCTURE AND FINANCIAL LEVERAGE
-CREATE KEY RATIOS
-CREATE FINAL RECOMMENDATION
Use the company’s balance sheet to describe the different forms of liabilities it uses, make sure to break down the company’s debt. Is the debt increasing or decreasing? Does the company have enough operating cash to pay maturing debt (remember, maturing debt is most important, because the same way you need money to pay only the mortgage payment that is due and not your entire mortgage balance, a company is relatively OK as long as it can pay the debt that is due in a particular year rather than its entire debt.) Use the debt ratio (p 431) to show what portions of assets are financed through debt rather than equity. Use the times interest earned ratio (p431) to show the number of times over a company has its interest obligation covered by earnings before it pays interest and taxes. Use the cash coverage ratio which shows how well the company can generate cash to meet its financial obligations. Does it sound like the company is going to assume more debt in the future? (You have to read between the lines. A company that hints that it’s going to buy other companies but doesn’t have the cash on its balance sheet is indirectly telling you that it will borrow more money or raise equity from investors to finance such spending)
More debt could mean less cash for investors, which could ultimately impact the stock price. ). In this section, tell me what kinds of debt do they have? Do they get their financing from loans? Bonds? Selling common stock? Preferred stock? A combination of these? In other words, list where their primary financing comes from.
Tables
In addition to the information presented above, you will provide the following slides. The first slide, titled SELECTED FINANCIAL DATA, which has the most important financial numbers from the last two years. This could be information from the main financial statements. From IS you could include revenue, gross profit, operating profit, interest expense, EBITDA, and net income. From SOCF you include operating cash flow, investing cash flow, financing cash flow, and change in cash. From the BS, assets, cash and cash equivalents, liabilities, total debt, shareholder’s equity. If you feel other numbers are significant for your particular company, feel free to include them as well.
The second slide, titled KEY RATIOS, should have all relevant financial ratios for the last two fiscal years that you have calculated for the purpose of the project. To earn the max points, apply 10 relevant ratios we learned in chapter 14 to support your conclusion.
Conclusion
The purpose is to summarize all of your findings. You can include a summary of what they do, its income performance, its cash flow ability, its overall financial position (balance sheet). Also include non-financial factors that you think impacts the assigned investment decision. Conclude with your final recommendation. If the company is rated by one of the major risk rating agencies, Standard and Poor’s, Moody’s, or Fitch Ratings, include the rating that has been assigned by those parties, or if you can find another 3rd party rating from an analyst on the stock include this. I know this may not be as easy to get, so just a marginal point total is earned here. The last slide should list your references where you retrieved the financial statements.
The purpose of the conclusion is so the audience can quickly understand what your company does, what its financial condition is, and what investment decision has the analyst assigned for the company.
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