Class notes Principles of strategy, risk and financial management techniques MANAGING AND INVESTING FUNDS

APPENDIX C
Compilers Ms
M. Lötter
Ms C. le Roux
Mr J Moolman

Coordinator Study guide Project
Ms L. Esterhuyse

University of South Africa

Pretoria


IMPORTANT INFORMATION:

This appendix contains the second part of the module content.

,© 2012 University of South Africa

All rights reserved

Printed and published by the
University of South Africa
Muckleneuk, Pretoria

MAC2602/2/2013–2019

98917625




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INTRODUCTION

, CONTENTS

PART 3: MANAGING AND INVESTING FUNDS 1
Topic 6: Analysis of financial information 3
Study unit 15: Objectives and sources of financial analysis 5
1 Introduction 5
2 The objectives of financial analysis 5
3 The users of financial information and analysis 6
4 Sources of information regarding an organisation 6
4.1 Financial information 7
4.2 Strategic (non-financial) information 8
5 The major limitations of financial information 9
6 Techniques used in performing financial analysis 10
7 Summary 14

Study unit 16: Ratio analysis 15
1 Introduction 15
2 Financial information provided 15
3 Growth ratios 18
4 Ratio analysis 20
5 Measuring profitability and performance 22
5.1 Profit margins 22
5.2 Performance ratios 24
6 Measuring liquidity – short-term funds 29
6.1 Current ratio 30
6.2 Liquid asset ratio (or acid test or quick ratio) 30
6.3 Inventory days 31
6.4 Inventory turnover ratio 31
6.5 Receivable days (debtors' collection period) 32
6.6 Payable days (creditors' payment period) 33
6.7 Cash conversion cycle (days) 34
6.8 Cash ratio 35
7 Measuring solvency and financial/capital structure – long-term funds 35
7.1 Interest cover ratio 35
7.2 Debt to equtiy ratio (or leverage ratio) 36
7.3 Debt ratio (or gearing ratio) 37
7.4 Total assets to total debt 38
7.5 Financial leverage effect 38
8 Measuring how the organisation relates to financial market ratios 39
8.1 Earnings per share 39
8.2 Dividend pay-out ratio 40
8.3 Dividend cover ratio 41
8.4 Price/earnings ratio 42
8.5 Earnings yield 43
8.6 Dividend yield 43
9 Summary 44




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INTRODUCTION

, Topic 7: Analysing and managing working capital 49
Study unit 17: Working capital management 51
1 Introduction 51
2 Working capital definitions and concepts 52
3 Managing inventory 53
3.1 The economic order quantity (EOQ) model 54
3.2 Re-ordering and safety stock 54
3.3 Just in Time (JIT) – manufacturing inventory systems 54
4 Managing accounts receivable and credit sales 56
5 Managing accounts payable 60
5.1 The cost of financing trade accounts when discounts are offered 61
6 Managing cash and cash equivalents 65
6.1 Compiling a cash flow budget/forecast 66
6.2 Matching cash inflows and outflows 66
6.3 Accelerate cash availability 66
6.4 Delay payments 67
6.5 Liquidate (sell) short-term investments 67
7 Short-term financing 69
8 Summary 70

Study unit 18: Working capital policies and the working capital cycle 74
1 Introduction 74
2 Working capital policy 74
2.1 Working capital investment policies 75
2.2 Working capital financing policies 76
3 Working capital cycles 79
4 Summary 81

Topic 8: Capital investments and capital budgeting techniques 85
Study unit 19: Capital investments 87
1 Introduction 87
2 Objective of capital investments 87
3 Types of capital expenditure 88
4 Project analysis 90
5 Classification of capital investment projects 91
6 Factors affecting the capital budgeting decision 93
7 Cash flow estimation 94
8 Rules regarding timing of cash flows 99
9 The discount rate 100
10 Capital budgeting techniques 101
11 Summary 101

Study unit 20: Traditional methods/techniques 107
1 Introduction 107
2 The payback period (PB) method 107
2.1 Advantages 108
2.2 Disadvantages 108
2.3 Evaluation criteria 109


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INTRODUCTION