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Colorado Technical University
Final Exam
Dr. Jim Thorpe
FIN 615

By
Dishi Solanki
Denver, Colorado
December – 2017

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Abstract
This is my Final Paper for the the term. This paper will outline all of the course objectives that we had established at the beginning of the term.

1. Discuss the influence of the institutional structure on the form and content of financial statements and describe how financial data are assembled and integrated onto an articulated set of financial statements. 
GAAP is more commonly known as the Generally Accepted Accounting Principles. These are a set of processes that a company abides by when creating their own financial statements. It is a set of the standards that are set by the policy board and used to report as well as record the accounting information thereby bettering and easing the mode of communication of the financial information of a company. These gives a lot of standardization to the financial statements of the company and helps the investors to understand and read the statements better before making any decisions. This also useful when one is looking to compare the different companies across the same domain. GAAP needs to be taken into consideration when a company decides to release the company documents for the public. For the companies that have their stocks as publicly traded are by law supposed to have financial statements that abide by SEC. Although GAAP is used to as a tool to better the transparency in a company it can be safely assumed that it does save itself from being error free. GAAP looks at income statement, cash flow statement and the balance sheet. The income statement is used to reflect the revenue that a company earns against its expense for a given time frame. The balance sheet measures all the assets and sets the equal against the liabilities and the owner’s equity. Finally, the cash flow statement saves all of the cash records that comes in or leaves the company (Ross, Westerfield, Jordan, 2017).
Financial Statements Articulation: This means that a balance sheet and an income sheet are mathematically laid out in such a way that the owner’s equity and the net income equal each other. This happens only if there has not been a period adjustments before. Under the articulation, the balance sheet and income statement have the information flowing between them. This is the very reason as to why the articulation needs to be done accurately else the flow of information can be incorrect. According to this, first we need to curate the income statement. Net Income flows to the Statement of Retained Earnings more commonly known as the Stockholders’ Equity. The ending balance of Retained Earnings flows to the Stockholder’s Equity in the Balance Sheet. The Balance sheet is coherent to the income statement, statement of the cash flows and equity. It gives the information of the assets, liabilities and the equity during both the periods that is the start and end, any changes in the equity, share capital or the dividends that can be found under the shareholder’s equity and finally the change in assets that can be found from the income statement (Ross et al., 2017).
2.  Explain working capital, current assets, short term financing and the process of capital budgeting.
Working capital is nothing but the amount of money that a business has to suffice for its day to day functions. A working capital is used to check the liquidity of the business and it’s overall ability to pay off its liabilities. A working capital takes into consideration cash, short term debts, accounts payables, accounts receivables and inventory management. A positive working capital denotes that a business is healthy enough to pay off its short term debts whereas a negative working capital denotes that the business fail to pay off its short term debts. It is denoted by Current Assets – Current Liabilities (Ross et al., 2017).
Short Term Financing: For smaller companies it is imperative to have influx of extra money to take care of the expenses while the business expands. Short term financing or more commonly known as the Short term loans help manifolds to suffice this need. The companies that have unstable revenue can use short term financing to cover the expenses within a short period of time. These financing options don’t require any large amount of security and are easy to obtain if the company has a positive cash flow. Unfortunately, short term financing options are more expensive as opposed to the secured loans. They have higher interest rates, fees and thus are usually not recommended as an investment solution. There are  a lot of short-term financing options to choose from that can vary from a business line of credit, to the merchant cash advances, all the way to the accounts receivable financing (Krantzow, 2017). 
Process of Capital Budgeting: This is the single most important process that all the managers need to abide by. It consists of 4 main steps:

Assess Opportunities: Any company will have multitudinous options to choose from when considering potential opportunities. The trick is to choose an option that is financially sound and can generate returns in the long run (Capital Budgeting, 2015).
Find out the implementation costs: It is very important to know of the amount that will be spent in making the project a success. Company needs to take into consideration the operational and implementation costs and iterate upon it to reduce any extra spendings (Capital Budgeting, 2015).
Estimate Cash Flow: Considering past projects as a benchmark, manager should evaluate the amount of cash flow that one intends to generate through this and use the techniques to do cost saving as necessary (Capital Budgeting, 2015).
Assess Risk and Implement: Assess all the risks that can lead the project to fail. This can be monetary, political, environmental risks. Finally, create an implementation plan with key milestones to hit during the journey for a successful completion of the project (Capital Budgeting, 2015).

3. Interpret and analyze hurdle rates, return on equity, and project selection.
Hurdle Rates: A hurdle rate is used by companies to be sure if they wish to undertake a given project. Internal Rate of Return is used as a benchmark to assess whether the investment that is going to be made is more than the company’s hurdle rate. Although not a very reliable source companies do use hurdle rates. It is said that if the IRR is higher than a hurdle rate then that is the sign to make an investment. But, suppose a dollar amount for a return is extremely low, the hurdle rate can still show a good sign to invest with a decent rate of return all of which can be superficial (Ross et al., 2017).
Return on Equity: Return on Equity or more commonly known as the ROE is a profitability ratio that is used to calculate the amount of profit that a company can generate for every dollar of the shareholders’ equity.It is a good measure of the company’s efficiency to be able to generate profits without using as less of the capital as possible. It is denoted as Net Income by the Shareholders’ Equity. Higher ROE suggests a healthy financial state of a company (Ross et al., 2017).
Project Selection: One of the most important aspects of project selection is concentrating on its financial needs to ensure that the investment that is being made will generate the satisfactory returns for the company.  One can use profit margin as a good measure to check if investing in the project is the current decision. Opportunity costs should be closely looked at to see if we are ignoring any higher valued projects that would rather require our resources to be profitable. Payback period needs to be calculated to have exact numbers on how long would it take to earn back sufficient returns on the investments.  Finally, use NPV to assess the future value in current dollars pertaining to the project (Ross et al., 2017).
4.  Compare and contrast alternative valuation methodologies and explain how a firm can maximize its value.
There are quite some valuation methodologies when taking Financial Management into consideration.But the two most important methods based on the quantitative and qualitative approach can be listed as Financial ratio analysis and SWOT analysis respectively. The most frequently used method into day to day/quarterly dealings is called the financial ratio analysis. Financial Ratio analysis is a very reliable tool to compare the workings of different kind of company’s financial information. The information usually found on balance sheet and income statement can be used to calculate the financial ratios for the company. This can serve as a good comparison tool to analyse the profitability, liquidity, asset management and debt of a given company.  For the purposes of comparison, it is vital to have the industry ratios against the company’s ratios. By using this ratio analysis, the company’s executives can get a good idea of the standing financial position of the company be able to prioritize on the adjustments that need to be made to fuel the performance of the company. The financial ratios can be broken down into five major categories to assess the different functionings of the company. This can be divided as the liquidity ratios, long term solvency ratios, market ratios, profitability ratios, and turnover ratios.  These different ratios depict different state of the company. The liquidity ratios concentrate on the ability of the company to pay off the short term debts of the company, whereas the debt ratios concentrate on the ability of the company to pay off long term debts.  The turnover ratios usually use the income statement and the balance sheet to determine the ability of the company to rely on its assets in the most useful manner to generate sales. The profitability ratios are used to calculate the ability of the company to make profits by effectively using its existing assets (Ross et al., 2017).
Another method that is commonly used for valuations is the SWOT analysis. Like the acronym suggests, the SWOT analysis is used to look for the strength, weakness, opportunity and threats associated with a company. Investors rely on this to gain in depth understanding of the company’s external factors that are opportunities and threats and company’s internal factors that is strength and weaknesses to better analyze the competitive environment of the given company. This analysis gives a good perspective on what can help the company in aiding its objectives or what are the pain points that need to be addressed in order to be able to increase the chances to get a desired outcome (Ross et al., 2017).
There are a few ways that a company can maximize its values as follows:

One is to have good profit margins. This can be achieved by having a faster end to end turnaround time that means a quick and efficient time from order to delivery to reduce the overhead costs that will be calculated per unit that is produced (Finkel, 2015).
Second is to reduce the working with low margin products and clients. This will not only save our resources in terms of time and money but will also give us a good idea to differentiate the customers and products that are highly profitable or minimal (Finkel, 2015).
Third is to retain your clients. A loyal client that continues to do business with you by buying your products can be of an added value (Finkel, 2015).

5. Assess the cost of capital and marginal cost of capital and their implications for capital budgeting.
There are two different costs of capital. The ones that be controlled and then the ones that the company can’t control. Some of the factors that can be controlled are Capital Structure policies under which the when the debt is issued the cost related to it goes up while the same holds true for equity when that is issued. For dividend policy it is known that the company will have adequate amount of control on its payout ratios making Marginal Cost of Capital schedule change a reality. For the investment policy, the company can make relative decisions based on the risks that are similar. For every tie that this policy changes, the cost of equity and debt will be directly affected. When considering the factors that can’t be controlled, there is the tax rate that can change when the cost of debt increases or decreases. Secondly,  change in interest rates that can leave an impact and change the cost of debt and equity (Ross et al., 2017).
The marginal cost of capital or more commonly known as the MCC is the cost for the final dollar of the capital that is made. This is usually the cost for the unit of the capital that is made. When a company decides to raise the more capital than usual, the company will try to use the needed capital structure but as the options go scarce, more and equity needs to be rolled out. Considering this to be more than any other financing techniques, the cost of capital shoots up when the marginal cost changes. Since the before investing a company should make sure whether the return on the capital is going to be a positive or a negative number. MCC is handy when considering to decide whether the company needs to work on raising more capital in the journey (Ross et al., 2017).
6. Assess the cost of capital and marginal cost of capital and their implications for capital budgeting.
There are three main kinds of risks that can be categorized under the capital budgeting umbrella. These are as follows:

Stand Alone Risks:  Stand alone risks as the name suggests focuses on just one asset and separates it out from the other assets of the company. This kind of a risk does not consider as to what impact would it have on the entire company related risk. The company can use a couple of analysis to measure this risk. They can use the sensitivity analysis to calculate the change in the NPV and checks for its sensitivity to the single variable. Like for example, a company can use the NPV to see if it is sensitive to change when taking into account the expected sales. Based on the sensitivity that is calculated using discount rates, tax rates and operating expenses, it is easy for the company to decide if the change would be favourable or unfavourable (Ross et al., 2017).
Corporate Risks: These kinds of risks unlike the Stand Alone risks concentrates on the larger group of assets of the company as opposed to just one. It is calculated by looking at the impact that a certain project can have over the earnings of the company. This is used to diversify within the company (Ross et al., 2017).
Market Risks: This kind of a risk is considered to be a stockholder’s friend. It gives a holistic overview from the point of stockholders as well as the company as a whole. It is measured by looking at the effect ths it might have when considering the beta of the company. All the factors from changing interest rates, economic conditions, to inflation can be considered to be valid sources of market risks. Due to this, the companies unable to diversify such risks (Ross et al., 2017).

7. Prepare a deliverable that demonstrates the application of financial analysis.
The ratio that I am going to be choosing for the financial analysis of Starbucks for the year 2017 is Current Ratio. Current Ratio is defined as current assets/ current liabilities. Creditors usually like a higher currency ratio as it mirrors the high liquidity. Based on the financial data presented for Starbucks, it’s current assets are worth $5,283,400 and current liabilities are worth $4,220,700. Keeping those in mind, the current ratio would be 1.25. This means that the company has $1.25 times in current asset for each $1 of current liability. It can also be said that the current ratio of Starbucks in 2017 has improved from 2016 when it was 1.05  (How to use, 2016)
8. Explain and illustrate the use of NPV and IRR in project valuation and selection.
An IRR or more commonly known as the Internal rate of return is the interest that an investor uses to compare the investments based on their yields. It is usually denoted in the percentage form and calculates the rate earned over the dollar that is invested for the given period. It gives a good insight whether one should continue with the project that an investment has been made into. Since, IRR can be used to compare the capital budgeting projects, the investors use a higher IRR as an indication of healthy net cash flow. The IRR follows something called the IRR rule to choose a project. According to this rule, if the IRR for the project that we are looking at is more than the minimum rate of return that is required then the company should move forward with the project. The project should be rejected if the cost of capital is more than the IRR (Ross et al., 2017).
NPV is more commonly known as the Net Present Value. It is the one of the capital budgeting methods that are utilized to check the whether the new project that the company wishes to undertake is a sane investment decision or not. The NPV uses a discounted cash flow analysis to make this decision.  To decide whether to use the NPV one needs to differentiate the project based on either independent or mutually exclusive. Cash flows don’t make affect the independent projects. While for mutually exclusive projects you can use the two different sets of methods to get the same result. Net Present Value functions on the two different decision rules. For mutually exclusive projects, one should pursue it only if the NPV of one of the projects is more than the other. If both don’t have a positive NPV, it is advised to reject the projects. For independent projects to be acceptable, the NPV should be more than $0 (Ross et al., 2017).

References
Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2017). Essentials of corporate finance (9th ed.). New York, NY: McGraw-Hill/Irwin.
Krantzow, A. (2017). Short-Term Financing Guide – All You Need to Know. Retrieved from https://www.ondeck.com/blog/short-term-business-financing-all-you-need-to-know
Capital Budgeting. (2015). Capital Budgeting: Features, Process, Factors affecting & Decisions. Retrieved from http://www.edupristine.com/blog/capital-budgeting
Finkel, D. (2015, November 25). 5 Simple Ways to Improve Your Profit Margins. Retrieved from https://www.inc.com/david-finkel/5-simple-ways-to-improve-your-profit-margins.html

Categories: Accounting

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