PART TWO – BASIC CAPITAL INVESTMENT ANALYSIS: APPLICATIONS
Chapters 4-6 introduce the basics of discounted cash flow analysis as a decision
tool. Chapters 7 and 8 introduce the complexities of tax considerations and
inflation. Since the focus is primarily on making sure the students understand the
methodology, expansionary cases are better deferred to chapters 9, 10 and 11.
Unlike the beginning parts of the book, cases can be added to reinforce and
Chapter 10 offers both lengthy exercises and a fertile climate for case usage as it
promotes the notion of qualitative considerations beyond the numbers in realistic
situations.
The Cummins Engine Company: Starting Up “B” Crankshaft Manufacturing at
San Luis Potosi Plant (9-693-121) Involves economic analysis of a proposed
Nova Chemicals (9-290-059) is a complex acquisition situation which generates
the opportunity to discuss long range financial planning and market lending
constraints on a company. I have been able to use this case only on a
piecemeal basis as the students do not have enough financial breadth to handle
it without some handholding. Students must determine a cost of capital (Chapter
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Riverbend Telephone (9-197-104) is a relatively straightforward case involving
lease vs. buy considerations as covered in Chapter 11. Teaching note is 5-177-
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Chapter 17 Options
Eli Lilly and Company: Manufacturing process Technology Strategy (9-692-056)
requires a high level investment analysis of a major shift in technology.
Chapter 18 Activity-Based Costing and Activity-Based Management
The Classic Pen case and the Destin case are useful here if they have not
already been taught along with Chapter 2. The Classic Pen Case is a simple
exposition of ABC while Destin is much more useful in that it develops a
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References
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GLOSSARY OF SELECTED ACCOUNTING / FINANCE
TERMS1
Accounts Payable
Amounts owed to creditors for goods and services bought on credit; generally, they must be paid within 90 days.
Accrued Expenses
The obligation to pay business expenses that were incurred, but not paid, during an accounting period.
Accumulated Depreciation
A deduction from fixed assets to show the total amount of periodic charges to income over the estimated useful lives of those
assets. Also called Reserve for Depreciation.
Additional Paid-in Capital
The total excess of the shareholders’ investment in the company over the par or stated value of its common and preferred stock.
Also called Paid-in Capital.
American Institute of Certified Public Accountants (AICPA)
Amortization
Periodic charges to income to recognize the distribution of the cost of the company’s intangible assets over the estimated useful
lives of the asset.
Bonds
Formal, secured or unsecured debt obligations specifying interest and repayment terms.
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Cash Flows, Statement of
A report showing cash receipts and disbursements compiled and totaled by operating, investing and/or financing activities.
Antidilution (to Earnings perCommon Share)
An increase in earnings (or decrease in loss) per common share that assumes that convertible securities were converted, stock
options and warrants were exercised or other shares were issued upon satisfaction of certain conditions. When antidilution occurs
the per-share amount that it produces is not used as the reported per-share amount.
Asset
Something owned by and having continuing value to its owner or a business.
Cost of Sales
The total cost to purchase and/or manufacture all of the company’s products that were sold during a period.
Current Assets
Cash or other assets that will be converted to cash or consumed within the normal operating cycle, generally one year.
Current Liability
A liability that must be paid within the normal operating cycle, generally one year.
Extraordinary Items
Nonoperating items that are both unusual and occur infrequently.
Fair Market Value
The amount at which an item could be exchanged between willing unrelated parties, other than in a forced liquidation. It is
usually the quoted market price when a market exists for the item.
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Fixed Assets
Another term for the property, plant and equipment, used in the operation of a business.
Footnotes
Additional details and disclosures about the figures and information contained in a company’s financial statements.
Debentures
Formal, unsecured debt obligations (bonds or notes) that are backed only by the general credit of the issuer rather than certain of
its assets.
Deferred Income Taxes
The obligation to pay income taxes in future years generally arising from transactions involving noncurrent assets and/or
liabilities.
Depletion
The process of recognizing, by a charge against income, the reduction in the cost of a natural resource (minerals, oil, gas) due to
its withdrawal and use or sale.
Dividend Yield
The dividend paid on each share of each class of stock as a percentage of the market price of those shares. See also Common
Dividend Yield.
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Goodwill
An intangible asset that represents the excess of the amount paid for an acquired company over the fair market value of the net
assets of that company. Basically, it is the value of the name and reputation of the acquired company.
Gross Margin
The excess of sales over cost of sales or the profit from sales before considering operating, general and other expenses. Also
Impairment (Permanent) of Loans (Investments)
The probability that the lender (investor) will not collect all amounts in accordance with the loan agreement.
Income Statement
Report summarizing the revenues and expenses and reporting the net income (or loss) of a business for an entire accounting
period. Also called the Statement of Earnings, Statement of Profit and Loss, P&L or Operating Statement.
.
Liability (
An obligation to pay for assets or goods or services acquired or to repay borrowed funds.
Long-Term Debt
Borrowed funds due after one from the balance sheet date. See Current Portion of Long-Term Debt and Other Long-Term Debt.
Long-Term Liabilities
See Fair Market Value.
Marketable Securities
Readily liquid securities (debt or equity) that can be converted into cash on very short notice.
Mortgage Bonds
Formal, secured debt obligations that are backed by certain specific assets of the issuer.
Net income expressed as a percentage of sales.
Notes Payable
Short- or long-term obligation, evidenced by a formal borrowing agreement (such as a promissory note), to repay borrowed
funds.
Operating Income or Loss
The nominal or face value of a security assigned by the issuer for balance-sheet reporting. It has no relation to market value.
Preferred Dividend Coverage
The number of times the preferred dividend is covered (earned) by net income.
Preferred Stock
An equity security that entitles its holders to certain preferences over common shareholders, such as dividends, liquidation value
Primary Earnings per Common Share
The amount of earnings attributable to each share of common stock, including common stock equivalents.
Property, Plant and Equipment
Assets not intended for sale that are used to manufacture, display, warehouse and transport the company’s products and house its
employees. See also Fixed Assets.
Shareholders’ Equity
The total of shareholders’ investments in the company and total profits or losses since the start-up of the company, less all
dividends and/or capital distributions, unrealized gain on available-for-sales securities and any foreign currency translation
adjustments since the company’s start-up.
Statement of Cash Flows.
value, with any changes in the value reported in income.
Treasury Stock
The total cost of any of the company’s stock that has been repurchased or otherwise reacquired from shareholders and held in the
company’s treasury.
Unrealized Gain/Loss