Topics:

• Analysis of Financial Statements
• Characteristics of Capital Structure
• Corporate Bankruptcy Process (USA)

Learning Objectives:

By the end of this Unit, you will be able to:

1. Evaluate financial statements using Ratio Analyses.
2. Describe the advantages and disadvantages of capital structure
3. Explain how capital structure affects the bankruptcy process of a corporation.
4. Analyze existing deficits in your quantitative skills.

About the Course

Because of the range and scope of the topics in Financial Management, several textbooks are assigned to the course. We will not be reading all of the sections of each of the books, but rather, from selected sections of these books and a variety of other sources. These e-file references will be yours to keep, and therefore you will be able to use them as a refresher and further expand your knowledge over time.  Although finance courses are notorious for being highly quantitative, the subject can be approached without raising undue anxiety. The course requires the performance of several computations. However, the calculations presented will be at a level where knowledge of basic arithmetic and mathematics will be sufficient. You will not need a financial calculator for this course. A basic calculator found on your computer or phone will serve you well in addition to Microsoft Excel and its formulas. Furthermore, answers that require calculations should also reflect justification as to how the answer was solved. New knowledge must be supported by applying the American Psychological Association (APA) standard into your assignment answers.

Unit 1

We will begin by reviewing some accounting skills that you have acquired in previous courses. These skills include being able to read and interpret financial statements and the use of financial ratios. You may recall this is the point from which you left Managerial Accounting, the prerequisite for this course. In addition, the unit will also cover capital structure and how it impacts a business in distress (bankruptcy).

What is financial ratio analysis, and why would I use it?

Financial ratios are comparative measurements, a financial variable from relative values of two or more, which allows an individual to compare information that in its raw form could not be otherwise compared. Financial ratios can be used to identify a firm’s strengths and weaknesses. Bankers, for example, may look at ratios to ascertain whether a firm is bankable.

What is capital structure and why should management be concerned about it?

Capital structure shows the extent to which companies use debt and preferred stock as opposed to common equity.

Bottom lines and market values are impacted by the scale companies finance their assets through debt. A firm’s structure of equity and debt is contained on the right-hand side of the balance sheet (known as capital structure). Companies face heavy risk with their decisions regarding their capital structure when they take on more debt (known as financial risk). An optimal capital structure is management’s primary target for their firm’s continued success, which is different for any particular corporation.

The bottom line is affected by additional risk related to the magnitude of a firm’s operations and its fixed assets. This particular phenomenon gives rise to risk in operations (known as operating risk or operating leverage). The higher fixed assets are on the balance sheet, the greater the risk the firm can realize. During an economic downturn, firms will find it difficult to recover large fixed expenses.

All course textbooks are accessible through the Syllabus or through the course’s “Textbook” page. Any additional, non-textbook Reading Assignments will provide text access/location information below.

1. Finance for Managers. (2012). Licensed under Creative Commons by-nc-sa 3.0.

• Read Chapter 4 – Pages 27-57
• Read Chapter 15 – Pages 241-254

2. SEC.gov | Bankruptcy: What happens when public companies go bankrupt. (2009, February 3). Sec.Gov. https://www.sec.gov/reportspubs/investor-publications/investorpubsbankrupthtm.html
3. Bankruptcy. (2019). United States Courts. https://www.uscourts.gov/services-forms/bankruptcy

                              Discussion Assignment

In the discussion forum, you are expected to engage in deep levels of discourse.

Your Discussion should be a minimum of 250 words in length and not more than 450 words. Please include a word count. Following the APA standard, use references and in-text citations for the textbook and any other sources.

For this discussion use your resources in the Reading Assignments to research the bankruptcy process, capital structure, and legal structure.

• Explain how these structures can impact a firm’s progress through the bankruptcy process.

                                      Written Assignment  

Submit a written paper which is 2-3 pages in length, exclusive of the reference page. Papers should be double spaced in Times New Roman font which is no greater than 12 points in size. The paper should cite at least one source independent of the textbook.

Case Study

Comic book sales have hit record highs due to the volume of comic book-based movies achieving great success. With each new movie and character announcement, collectors and investors feed off the speculation. Many collectors send their books for grading, certification, and encapsulation to protect their investments. The Exceptional Service Grading Company provides those services and wants to expand to assessing other publication formats, such as certifying large magazines and movie posters.What is the company’s financial position? Please refer to the income statement and balance sheet (provided) for the Exceptional Service Grading Company available here. Using the learning resources provided in the Reading Assignment, perform a financial ratio analysis of the company using the following ratios:

• Gross profit margin
• Current ratio
• Debt ratio 

Locate two other ratios to calculate. Define them and explain their purpose and how they add value to your analysis.

Select significant lines from the financial statements and provide an observation of their trends. For example, if the account is increasing or decreasing in value, what would that indicate?

• Draw some conclusions based on your observations. For example:
• Is there any viability for a new project?
• Why do you think the assets of the company went up from 2017 to 2018? 
• What implications does this have? 
• What follow-up questions do you have to ask the company’s management?
• Logically support your observations. Explain the limitations when using ratio analysis of financial statements. 

Submit a 2-3 page written paper following the APA format, exclusive of the title and reference pages. This means 2-3 body pages of the research and include the title page and reference page. The Abstract is not required or needed. Papers should be double spaced in Times New Roman font and 12-point size. The paper should cite at least one other validated (peer-reviewed) source independent of the textbook.

In this paper, please include the following:

• Provide the correct values for the calculations
• Explain your approach to the problem.
• Support your approach with references and execute your approach.
• Provide an answer to the case study questions with a recommendation.

This assignment will be assessed using the Written Assignment (with calculations) rubric.

                        Portfolio Activity Deadline:

The Portfolio entry should be a minimum of 250 words and not more than 750 words. Use APA citations and references if you use ideas from the readings or other sources. For this week’s portfolio activity, please advise the instructor of the following:

• Discuss your strengths and weaknesses regarding your quantitative skills. Are there any quantitative skills that you are struggling with?
• Please let your instructor know how you feel as you begin the course and if you have any concerns as we move forward.

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