Chapter 1

Question 1

Dual - legal/economic nature of a company

Answer 1

A company is a combination of human, materials, and resources and permanently involved in merchant activities and in an organized and centralized way with a profit intent

Question 2

Its environment

Answer 2

partners or shareholders but also other parties directly or indirectly involved in it or stakeholders

Question 3

CFO

Answer 3

• To ensure and perpetuate the company’s necessary financings on an ongoing basis
• And to ensure and maintain an efficient allocation of those financial resources to the company’s needs
• So as to minimize the weighted average cost of capital - cfMIN(WACC) - and thus help maximize the return on equity - cfMAX(ROE)

Question 4

WACC

Answer 4

k * e/(e+d) + i*(1-t) d/(e+d)

Question 5

ROE

Answer 5

Re = (1-t) ra + (1-t) * (ra-i) * (d/e)

Question 6

Balance Sheet

Answer 6

numerical (fixed) picture/ table showing the firms detailed/ itemized corporate wealth at a given point in time – as of 31st Dec – showing all its assets and liabilities at that time, in two distinct columns

Question 7

B/S Spectrum

Answer 7

Spectrum of stock aggregates

Question 8

Assets/Liabilities order

Answer 8

Shows the companies assets by increasing order/ degree of liquidity and its liabilities by increasing order/degree of repayment

Question 9

P&L

Answer 9

a numerical (moving) table showing the firms detailed/ itemized corporate performance over a given period of time – one year – howling all its revenues and expenses during that period, also as a result, the corresponding net profit or loss generated in that period, in two distinct columns with equal totals

Question 10

Spectrum of P/L

Answer 10

flow aggregates

Question 11

Revenue and Expense order

Answer 11

Shows companies revenues and expenses starting with current operations, then financial items, then non-recurring items, and then tac items – with a caveat, so as to isolate the non cash expenses

Question 12

Connection between B/S and P&L

Answer 12

Connection: the financial years bottom line (net profit or loss) is shown on the P&L and then carried forward in the B/S in the Balance Carried Forward Account

Question 13

Retrospect

Answer 13

based on financial statements over the past 2-3 years

Question 14

Prospective

Answer 14

based on projected documents
- medium term
- short term
supervision and monitoring

Question 15

Medium Term

Answer 15

the business plan and the cash flow statement

Question 16

Business plan

Answer 16

is a detailed and comprehensive document, having both a qualitative and quantitative nature, presenting the company in an organized and systematic manner in all its present and future dimensions
- strategy, organizational management

Question 17

Cash Flow Statement

Answer 17

a double entry table showing all the projected stable or recurring uses and sources of funds on a multi-year basis (over 3-5 years)

Question 18

Short term horizion

Answer 18

he budgeting process, in particular concerning the cash projections

Question 19

Budgets

Answer 19

tables drafted function by function – the capex, sales, purchases budget, cash projections, and all forecasted figures over a given short period of time – a year/financial year which is usually divided into shorter sub periods

Question 20

Supervision/ monitoring:

Answer 20

management charts/ control charts

Question 21

The company’s management and control charts

Answer 21

tables drafted function by function for the capex, sales, purchases, sales projections. Comparing all the projected figures with all the recorded figures over a given period of time, to identify and analyze the potential gaps

Question 22

Single Company

Answer 22

use the company or individual statements

Question 23

Group

Answer 23

use the consolidated financial statements – based on the combined financial statements of the company

• The parent company P
• The subsidiaries S
• All strategic or significant affiliates A (typically showing a 20 to 50% interest held by the parent)
• Where 1) + 2) + 3) = the scope of consolidation or consolidation base = P + S + A

Question 24

Reason for consolidation

Answer 24

not a simple addition of all relevant individual financial statements but implies a number of adjustments in various ways essentially to eliminate intra-group or inter-company bookkeeping entries and hence to eliminate undue duplications

Question 25

KPI from Balance sheet

Answer 25

• Working Capital
• Working Captial Requirements

Question 26

Working capital (W.C)

Answer 26

all stable financings - total net fixed assets

Question 27

Working capital requirements (WCR)

Answer 27

operating assets - operating liabilities

Question 28

Company Net Cash Position

Answer 28

Net Cash Position = WC - WCR

Question 29

Key Solvency Test

Answer 29

the debt/equity or D/E ratio

Question 30

P&L KPI

Answer 30

• Intermediate Operating Totals (IOT)
• The operating added value (OAV)
• The earnings before interest, taxes, depreciation, and amortization (EBITDA)
• The earnings before interest and taxes (EBIT)
• The net operating profit after tax (NOPAT)

Question 31

Coverage Ratios

Answer 31

• The debt service coverage ratio = EBITDA/ p+i
• FCF = FCF/p+i
• Interest expense coverage ratio = EBIT/i

Question 32

Operating Income Ratio/ Operating Margin Ratio

Answer 32

EBIT/Sales

Question 33

Net Profit Ratio (NPR) or Net Margin Rate (NMR)

Answer 33

Net Income/Sales

Question 34

Net Return on Equity (ROE)

Answer 34

Net Income / Equity

Question 35

Turnover rate

Answer 35

Showing the company’s ability to turn operating items into cash

Question 36

Inventory turnover rate

Answer 36

inventories / sales

Question 37

Customer turnover rate

Answer 37

client receivables / sales

Question 38

Supplier turnover rate

Answer 38

supplier payables / purchases

Question 39

KPIS rationale

Answer 39

analyzed as a trend rather than only at a given point of time
- comparions with standard values or meansures
- computed statstically as a representation of given indsutry segment of a certain size and age of company
- geographically

Question 40

Meet debt service payments

Answer 40

debt service = (p+i)
through recurring cash flwos

Question 41

Use KPIs internally

Answer 41

• distressed company
• LBO
• finance structure