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HBA1 FinFun Midterm

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HBA1 FinFun Midterm

Midterm studying for HBA1 FinFun Course.

Qualitative Analysis

Role + Decision

  • Decision Criteria, what are their values?

Internal

  • Corporate Capabilities
  • HR
  • Financials

Summarize into opportunities and risks

External Analysis

Using PEST Framework

What is the industry like?

Competitive Analysis

  • Comparison Chart
  • Strengths / Weaknesses

Consumer Analysis

  • Who are the customers?
  • What do they want?
  • What do they value?

Tools

Contribution Analysis

When to use

  • For short-term decisions, focuses on unit contributions to see the impact of each sale

Components

  • Volume
  • Selling price per unit
  • Total selling price
  • Variable costs
  • Unit variable costs
  • Total variable costs
  • Contribution margin
  • Unit contribution margin

Follow-ups

  • Break-even analysis
  • Margin of safety

Projected Statements

When to use

  • For long-term planning, focuses on overall profitability and financial health
  • Time consuming, so only do when case explicitly asks for it

Assumption priority

  1. As the case tells you
  2. From exception list below
  3. Intuition: same $ or same %
  4. Just guess

PLUG

  • You will need to plug a number in the balance sheet

Income Statement

  • COGS
  • Operating Expenses
  • Interest
  • Tax

Balance Sheet

Linking Between I/S and B/S

  • LOC on B/S gives interest expense on I/S
  • Interest expense on I/S affects net profit
  • Net profit is added to retained earnings/net worth on B/S
  • Retained earnings is used in the line of credit’s PLUG calculation

Discounted Cash Flow

When to Use

  • Long term decision
  • Valuing a project

Follow-ups

Use IRR when comparing two projects and NPV when seeing the value a single project brings

Relevant Costs

  • Initial outlay (purchase _ installation)
  • Operating cash flows (Revenues and operating expenses)
  • Salvage value / Terminal value
    • “What do we have that still has value and can be turned into cash?”
  • Tax effects (PVTS and PVLTS)
  • Opportunity costs (foregone alternatives) isn’t really a cost but should be noted

Notes

Working Capital Investment and Release

  • Where: on the non-operating section of DCFs/NPV models
  • Why: it’s future, cash, and different
  • Prompt: something is changing in our working capital accounts due to an investment
    • You must ALWAYS do a working capital release at the end
  • How:
    • Project $ ending balance using days of inventory/AR/AP for each year
    • Figure out incremental difference between each year’s ending balance
      • These show up as negative outflows in the non-operating section
    • Release working capital as a positive outflow

Various Ending Values

  • Terminal Value (prevent value of perpetuity)?
  • PVLTS?
  • Salvage value?

Cash Budget

When to Use

  • Short-term decision
  • Helps manage liquidity
  • Helps plan for financing needs
  • Look at Cash needs over the months

Break-Even Analysis

A follow up from Contribution Analysis, it helps determine the sales volume needed to cover all costs. Always check to see if you need to perform a break-even analysis as it’s easy to do and easily applicable.

Additional Notes

Ratios

Liquidity

Profitability

Efficiency

Leverage

Market Ratios

ANALYZING RATIOS

  1. Compare trends (year-over-year or vs. competitors)
  2. Identify red flags (declining margins, liquidity issues, rising debt)
  3. Recommend actionable changes, e.g.:
    1. Improve efficiency (reduce COGS, speed up collections)
    2. Adjust financing mix (reduce debt reliance)
    3. Manage inventory better
    4. Increase asset turnover or reduce idle cash

Loans

4Cs of Credit

  • Capacity to repay (ratios, cash flows, working capital (A/R, A/P, inventory), etc.)
  • Character (internal analysis, track record, customers, etc.)
  • Conditions (market, industry)
  • Collateral (Assets to secure/replace loan payments)
    • Use inventory + receivables to determine short-term (line of credit)
    • Use fixed assets to cover long-term loan collateral
  • Need to balance what appeals to both the bank and the client

Loan Structuring Guidelines - Interest Rate

  1. Calculate financial ratios for each important ratio
  2. Circle on the grid the ranges of the ratios
  3. Choose a column which the most coverage
  4. Move to “pricing options” to evaluate the addition of interest on the term loan or operatin line

Credit Ratings / Credit Spread

  • CRAs evaluate companies and see if they can meet their demands
  • To standardize information, they create ratings with letters
  • AAA is the best, D is in default

Note concepts:

Graph View