Finance and value creation assessment 2

Calculate key financial ratios, operating cash flow, and the sustainable growth rate for a hypothetical company and use those calculations to evaluate the firm’s financial condition and performance.

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Note: The assessments in this course build upon each other, so you are strongly encouraged to complete them in sequenceSHOW LESS

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment objectives:

  • Competency 1: Apply the theories, models, and practices of finance to the financial management of the firm. 
    • Demonstrate the ability to complete a balance sheet, income statement, and cash flow statements.
    • Calculate operating cash flow.
    • Explain how operating cash flow compares to free cash flow.
    • Evaluate a firm’s overall financial condition and performance.
  • Competency 4: Integrate financial analyses into general business management planning and decision making. 
    • Demonstrate the ability to accurately calculate key financial ratios, including liquidity, activity, debt, and profitability.
    • Analyze a firm’s performance from both time-series and cross-sectional points of view.

 

Demonstrate your understanding of financial concepts by completing the following calculations related to Jones Inc. and then evaluating the firm’s financial condition and performance.

To complete this assessment, use the information in the Financial Assessments Template, which is linked in the Resources under the Required Resources heading. Review the financial statements for Jones Inc. and the comparative financial ratios for the year-end review. Enter your calculations and written analysis directly into the template, and show or explain your work where appropriate.

Problem 1. Calculate the firm’s 2015 financial ratios for liquidity, activity (asset management), leverage (debt), and profitability.

Problem 2. Analyze the firm’s performance from both time-series and cross-sectional points of view using the key financial ratios provided in the template.

Problem 3. Calculate the operating cash flow based on your review of the firm’s income statement.

  • How does operating cash flow (OCF) compare to free cash flow (FCF)?
  • Why is the free cash flow so meaningful to management and investors?

Problem 4. Calculate the sustainable growth rate based on your calculations of return on equity (ROE) and assuming a 60 percent dividend-payout ratio. How can a company increase its sustainable growth rate?

Problem 5. Evaluate the firm’s overall financial condition and performance based on your analysis and then address these questions:

  • Is the company improving or deteriorating over this three-year period?
  • How does your ratio analysis justify your interpretation?

 

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