* 1-800-TEACH-12 1-800-832-2412 The Teaching Company” 705 Alban Saion Coss, A107 Spring Va 2350 3818, ©1996 The aching Campy ined Peep * * Finance and Accounting for the Non-Financial Manager Part IL Jules Schwartz, D.B.A. SUPERSTAR TEACHERS” The Teaching Company® *Jules Schwartz, DBA. Boston University Finance and Accounting for the Non-Financial Manager’ Jules 3. Schvare ea proexor of Managment an roar a Engine, and previa served a Dea othe Schoo of Managetet a Boston UUniveay He eumot his decorate om he Harvard Business School. Medd his undergraat wer in mechanical enginering and abo recived his MBA epee the University of Delaware Hea gaat ofthe Insti College of {he US. Armed Fores snd the US, Air Command and Gora Stal Cllege Before coming to Boston Univenity, he wa ein dean and asecate profesor of management tthe Wharton School of the Univers of ‘Pennsyvanin Pa oa head ec years of program management expevione wi Speny Rand, Westinghowse Eee an Thiokol Chemical Corporation, and wa edited with US. patente ‘chat a boen constant o many’ Sn foreign corpanin and tvernment oats, nd decor of Five companies He la saved umber of tier a a receiver a banupey forthe Federal Disc Cou. Most ‘remy hs brought consumer Finance company scesflly though Chapter {i proceeding. Heise of Tin University, which ard i a honorary doctorate He previously served at deco fa nvestnet banking fin and Governor of the Boston Stock Exchange He isa member ofthe Finacil Exeerives Inst the American Society of Mechanical gine the Army and Navy Cin of Washington, and he Harvard Cn of New York nd Boston Hisysemeh interests ae in hes of busines policy, ecological inovaticn tnd corporate ane. He hs coadused nective programs in nang rowphout the US, Europe and Ast Hi book, Compras Policy pls by Prentice-Hall In 1985 he was sanded Boston Uivesiy's Matc Priz for ditigulsbed teaching Program Overview "The purpose of this progr isto ive you manager’ perspective of both sscotntng an corporate aoe.” You wil lea (1) a working vosbulry; @) Svuderstanding of financial sateen and th liatins: (3) the uso Manca ecisons: and (3) hoo dovelop see option for ©1996 THe Teaching Company inte Pach‘Boal 15) apples tthe afters cost VILCostof Lane Teom Debt “aac ff bode mst Be weighed according tthe il to maturity he tine hey were sed 1B. Yel ovat mre coset than coupon et, bcs the ds hay hawe been st ihe prion ot ison (C.Afltetax ye to mati exuding Formal (13) ‘Vincent uf Deferred tneome Toes ‘A Newest thing oa oe ide youl ge 1% Again anaes pobly retest hs Cost of Pofred Stock if y0 ised any) "a. efered dividers pd ae not ox deductible 1B. Cost th a igen vide bythe pee the shares were righ 0 oe Cost of Common Stsk and Pa Surplas 1a ect this waste money ergy paid fr the shares whe hey were fit sold oho shareholders 1 Disesment om what he cost ofthis egy is {C.Sone arg th he sharers expect return el wha they st oaths goverment Til pls isk rei. 1. The risk promi vores n each invetnet and vais with cone condone 2. Feemomiss ry tet he premio at any the by comparisons vith the mak price the shares ‘Some aoe is shrholdars bya stock with wo objectives in min pprcinon nse vale nd ddd we Unfottly the preference or eins vere divides sere For ppl in ire as brakes 2. The protean lo vale with he sarcholde’ eae 13 The shasholer who ave the retest oie oe te aor ones, svn te wily olderand ier Divider ap on of profits and prot ended i dhe roi that ar pat fo dividend, So perbape he best argument ha ‘hareldes ae satisfied withthe present tu on ther ey. We Tear hove to cll et ety Late I ‘Cost oF Retained Paring wealthiest svestrs ould face dhe problem of loki fo ome er kc to invest hese fds ‘They would only have the aferax wae of the dividend aaa 1. Sota be argc that the in dca ave oer nich on etait ‘og cal something more tha he tir om trey Utes (1 tact. [A Costaf capital a best an approximation 1B. ch pojest shuld probably be assigned a cost based on the kind of funds tha would finance Witt sod sone (See fine the cont of cuent bilities by of sting the gant curt assets and only equring actu o the derece, workin opal ‘A. Creditor nonly demand that fam romain gu enough 0 pay Interest an principal ont debe a tees dae Thc bond contactor indent, may specify that he Seman 3 ret ato, given Formula (16), above cota minim (16) CURRENT RATIO = «CURRENT ASS CURRENT LIABILITIES Like any to the Caren Rata can be od with Some indore ln spi a inn quick rts CASH» ACCOUNTS RECEIVABLE (17) QUICK RATIO (CURRENT LIABILITIES © 1996 Ime Teaching Company Lames Parwerhip "Some indenture ay opi amino coverage ati oir and dt ‘Some indents provide for asking and reiting that he company Felts potion oft dt estore thee tted att ites any indents speci aan ato of debt toe forthe QUESTIONS Which ie normaly more expensive, ded or uty? Why dot finns fn hemes exclsiely wih eb? Wa en has very sal etane emings aso in tee ow can You yu were a hoe pacer, woul you give # superar estomer terms of aint 307 ‘companys the oppor to find is lang db, feet omnes dhe wth ower iret ent, shorten bonds What ae the argent fe a apne option? ANSWERS Generally ety s more expensive; Dutt ives te fm more xi, Sine it doe have tobe epi apd no eres i de st itveducesMexbily, Nex, san ae of bankruptcy to renege on eter Inerst or principal payments wen they come de. Fall, creditors would {etakng al the isk there was tle eq nd would expect he Kinds of ‘evn on the bos ht rally ta 1 share nvestne iter it bast been nese lng enough accumulate much resin mings, ort has bee sng money a eating up Hs previously etaned {1996 the Teasing Company Lined Parership Notify can help. The operating ele fer the mest dares, days reelvbles pls days of ventric, probly ony 3 sy, since it sell ‘ramelltprodt andthe str sil fr cay We wo ona carer ‘omen than 10 days in ay ase nd would ein te by ging diseount The cleaner in fv offing is that woud lower interest cs, ‘AL Thee san underaingcosto fot the new debt ise BL You usually have to pay a remit call a bond ely 6. You have no crim ts wen the new shorter Ronde mtr, revalng interes rates won be igher, costing yo mor si the 1B. Ifyou get a eputtion fr calling your debt erty, creo wl demand Inger nrest ates, Beene they assume thee are not relly goin © ‘cm the frst soon your bond or as lng pari the mat Recommendations for Readings for Leeture 10 fr, Eich A. Techniques of Financial Anais, Irn, ight Eon, 1998, Caper 7 Spit Herbert T- Einans fi the Natasa Manage , Wiley, seoond Van Horns Janes C. tania! Mansstent and Policy, rt Hal ith tio, (980. Chapter 9LECTURE 11 G. Dont conta enor, asc ts, With he Brits te se. Return on Sales, Assets and Equity a (20) RETURNONSALES + TURNOVER + LEVERAGE ~ RETURN ON FOUITY Inti Lectre we wil conser ina ease of coyporte oe perfomance! etry on alesse and uty. You wil lewn hat single Gauss Amer cory” rerio sufi, at alae vched and hat erent standards apply a ‘erent ests inthe company “he Prat with he Botton Lie [AL Altstanyone et takes milon dots 1B. Put S20 millon the bank prcot fora yor {C.Ouestion here da yo gx the 20 ein? 1. Ret sly pressive when you know what investen arsed leverage, since high leverage ans high eb Lo egy, ith high Hae cts of itr, (Remember, Asbets~ Debt * Equity) 1. Suaepie Choees Invern ‘Av How does supermarket play the game achieve high return an equity? (Ay Asst what you have to work eh {Teneo prot mga to get tame ‘BL Pomanent Capita Tong debe pis ogy. Asses caret 2 Araceae eazetlly inventory and bel space Failte ae Ge, 3 Managers speak of ru on set space iy the shreoer vest 1, How does Titty, the jeweler, play he ga? 1. Demand high rat margin and sacrifice trove 2. Younes aot ofacetion (inventory) to sty igh pecs 7 [3 Ferumtly,daniends doa rst, 1. Accept low ROA (ROS and tumor owt mean much, since banks Use average vl, since rt seed vera period of tine utoot Forte AA. Reiter oti on ses aes and ouity B.A mathematical Menity {C.Use ty Sloan to manage General Mots for DuPont Sot ell sel nti) and combine it with high leverage 1D. Its ave worked Soon has sins schoo named ater hi at 2 Uselots of depositors lands and tle ety By fora the eta it components we cn conser strate sporacheso perfomance VL Corporate Perormance ‘A. ROA isa good mene of asst management ROE i what management was ir fOr (19) RETURN ON SALES # TURNOVER ~ RETURN ON ASSETS LViSubontinate Unit Perfomance PATE sALeiee ray 'A.Subidies and divisions dont wily manage cpl acts, the SALES” ASSETS ~ ASSETS. leverage term ROA is probably te est measure wha id manager do with assets Reto sales often called profi o ales, margin, satin, jst provided, osnater how they were Banced? margin, Charge fer working capa sean _