06/11/2023

Revision

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Final exam format

o Date: December, 1st 2023
o Type: closed book exam
o Time allowed: 120 minutes
o Format: There are 4 questions covering the following
topics:
• Q1 - Cash flows: preparation of SOCF and analysis (30
marks)
• Q2 & 3 – Valuation using different approaches;
distress analysis (45 marks)
• Q4 - Financial ratio analysis (25 marks)

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Cash flow preparation – CFO

Net income
Add: non-cash charges (eg. Depreciation, amortization)
Add/(deduct): Loss/ (gain) on sales of non-current assets
Adjustments for deferred taxes, employee benefits
u Add/(deduct): Decrease/(Increase) in Deferred Tax Assets
u Add/(deduct): Increase/(Decrease) in Deferred Tax Liabilities
Adjustments for Working Capital items
u Add/(deduct): Decrease/(Increase) in Operating Assets
(eg. Account receivable, Inventory, Prepaid Expenses)
u Add/(deduct): Increase/(Decrease) in Operating Liabilities
(eg. Account payable, Accrued expenses such as wages payable, tax payable)
Equals: Net cashflows from operating activities

Cash flow preparation – CFI

Cash proceeds from sales of non-current assets
Less: Cash paid to acquired non-current assets
Equals: Net cashflows from investing activities

*Non-current assets: include tangible assets, intangible assets, long-term

investments such as shares of other business or different types of financial
investments

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Cash flow preparation – CFF

Increase in borrowings (short-term and/or long-term)
Less: Repayment of borrowings
Add: Issuance of shares
Less: Repurchase of shares/Dividends paid
Equals: Net cashflows from financing activities.

Final step
Net cashflows from operating activities (1)
Net cashflows from investing activities (2)
Net cashflows from financing activities (3)
Net change in cash & cash equivalents (1) + (2) + (3)
Opening balance of cash & cash equivalents xxxx
Ending balance of cash & cash equivalents xxxx + net change value

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Profitability analysis
o Operating profitability
• ROA (Dupont)
• ROE (breakdowns of common earnings & financial leverage)
• Profit margin
• Total asset turnover
o Asset utilization
• Receivable turnover
• Inventory turnover
• Payable turnover
• Fixed asset turnover

Liquidity analysis
o Understand operating cycle of a firm
o Current ratio
o Quick ratio
o Operating cash flow to current liabilities
o Working capital activity

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Solvency analysis
o Debt ratio
o Interest coverage ratio
o Operating cash flow to total liabilities
o Operating cash flow to capital expenditure ratio

Credit analysis & distress prediction

o Analysing bankruptcy risk
• Financial ratios: liquidity, solvency, profitability
• Cash flows
• External variables
• Corporate strategy
o Financial distress prediction model: Altman Z-score

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Valuation
Dividends based approach
Cash flows based approach
Earnings based approach

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