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Presentation2

  1. 1. Purpose The financial markets contributed to some pressures with highly volatile interest rates during the beginning of the last decade. The main objective of this study is to investigate how large U.S. Corporations have responded to the challenges in terms of financial analysis tools regarding working capital, capital budgeting and sales forcasting techniques.
  2. 2. Literature Review The study has mainly focussed on capital budgeting process,use of multiple measures of projects,relationship between methods of controlling capital investment,measures of divisional performance and level of organisational autonomy. The survey investigated wide variety of issues ranging from traditional method used in capital budgeting management areas to analytical techniques employed in the areas of dividend policy,mergers ,acquisitions and cost of capital. It is an extension of literature on current practices of financial management among large US corporation
  3. 3. Survey Procedures CFO of corporate listed in Fortune Magazine Directory used 1990 as entry point Proved to be representative of a board cross section Questionnaire was completed by vice president of finance -27.4% , Assistant Treasurer - 16.3% and treasurer – 15.6% Respondents classified the usage of variety of financial technics into three catogories. A) Frequent – Technique is regularly employed as a standard operating procedure B) Seldom – Technique is not regularly used but may be employed at the discretion C) Never - technique is not used. Same questionnaire was conducted in 1980 and 1985 Cricitism about the corporate surveys raised by Aggrawal , Rappaport and Others.
  4. 4. General Financial Management Technique The Coefficient of Variation (CV) of all above techniques is 9%, 43.5%, 26.2%, 13.2% respectively Cash budget is a schedule showing cash flow (receipts, disbursements and cash balance) Important for the all the firms. It shows future cash flow and do forecasted financial statement . almost all (94%) firms use it, therefore its CV is only 9%. Only 38% of the firm uses breakeven analysis because of its limitations. Higher fixed cost does not mean it is bad all the time. Higher fixed cost cause lower variable cost. But break-even analysis do not explain this changes properly so CV is high i.e. 43.5%
  5. 5.  Leverage affect the level and variability of the firms after- tax earning and hence firm`s overall risk and return. So, financial and operating leverage are used moderately (40 to 100 percentages and CV 26%). Cash flow method are used by almost 90% of firms i. e, CV is variation of use of cash flow is only 13.6 % Cash flow statement shows the cash coming from the operation, cash used in the investing activities and financing activities It gives vital information not only about the company’s performance but also about its major activities during the year. A cash flow statement is helpful for planning and managing future financial commitments.
  6. 6. 1991 sample Source and use ofIndustry size proj. cash budget Break-even analysis fin. & oper. Lever. capitalMining, crude oil production 5 100% 40% 80% 100%Food, Beverage, tobacco 14 86 43 77 79Textile, apparel, vinyl floor 6 100 67 83 83Paper 12 92 36 67 100Publishing 7 100 17 86 100Chemicals 17 94 38 69 94Petroleum Refining 14 100 64 50 93Rubber and Plastic 3 100 33 100 100Glass, Concrete, Abrasives 5 80 20 40 100Metal Manufacturing 8 86 33 71 100Metal Product Febrication 5 100 40 60 100Electric and Appliances 14 100 36 71 62Ship building, RR, Trans.Equipment 4 100 25 50 67Scientific and PhotograpchicEquipments 5 80 40 60 80Motor Vehicles 6 100 40 60 100Aerospace 4 75 50 100 100Pharmaceuticals, Soap,Cosmetic 6 100 0 50 83Office Equipment andComputer 5 100 40 40 100Number of Responses 149 144 145 144Coefficient of Variation(CV) 9 43.5 26.2 13.61991 Composite 94 37.5 66.9 89.61991 Level of Ch-squareSignificance 0.78 0.73 0.79 0.211985 Composite 95.2 46.5 63.8 91.2
  7. 7. Survey area Cash Security Accounts Inventory Management Portfolio ReceivableModels Cash budget - - EOQTechniques -Managing -investment in -control of Inventory collections securities with receivables control through -Control of portfolios- through cr policy ABC analysis, disbursements CAPM, elements (cr std,cr Min.- -synchronization arbitrage pricing terms,cr max.analysis,Re of cash flows theory, modern period,cash d line,JIT etc portfolio theory discount,discount period)
  8. 8. Survey Cash Management Security Portfolio Accounts Inventoryarea ReceivableHigh Mining,crude oil,Ship Food Metal Aerospace,offiusage building,trans.equipment beverage,aerospace manufacturing,offi ce equipment s,Aerospace,Off.equip. ce equipmentLow Publishing,Food Industrial Metal Publishing,rubusage beverage,Industrial farm,textiles,paper production,fabricat ber,pharmaceu equipment ion,shipbuilding ticalsNo usage Publishing,metal Shipbuilding,trans fabric.,electric,moto portation r,pharmacy,off.eqAverage 70 20 59 59usage %CV 28 96 29 49Significa .16 .20 .83 .46nce
  9. 9. Component Cash Management Security Accounts Invent Conclusions Portfolio Receivable oryviz.1991 More than 2/3rd of the Usage is Average Averag 1. Most big UScomposite companies found to very low usage e usage companies were using use this model cash management tech. the most & Sec. portfolioviz.CV There is consistency in Inconsistent consistenc Averag the least while other among the companies usage y e models were used in for usage averageviz.chi- There is not much Not much Significanc Averag 2.Trend of usingsquare significance in significance e e Accounts Receivable industry data tools highly increased at difference 10yrs periodTrend of Increase not NA Significant Notusage(1980 significant (i.e.14%) increase significvs 1990) (500%) ant (3%)
  10. 10. Accound Receivable Inventory ManagementIndustry Cash Management Security portfolio Models ModelsMining, crude oil production 100% 20% 60% 60%Food, Beverage, tobacco 46 83 43 46Textile, apparel, vinyl floor 67 17 67 50Paper 67 17 67 54Publishing 33 0 67 33Chemicals 75 27 67 69Petroleum Refining 86 31 57 43Rubber and Plastic 67 33 67 33Glass, Concrete, Abrasives 60 20 40 60Metal Manufacturing 83 0 100 50Metal Product Febrication 60 0 25 75Electric and Appliances 86 36 64 79Ship building, RR, Trans.Equipment 100 33 33 0Scientific and PhotograpchicEquipments 80 50 50 60Motor Vehicles 50 0 50 50Aerospace 100 75 75 100Pharmaceuticals, Soap,Cosmetic 67 0 50 33Office Equipment andComputer 100 0 80 100Industrial and Farm Equipment 46 10 55 64Number of Responses 145 138 143 143Coefficient of Variation(CV) 28.2 96.7 29.6 49.61991 Composite 70.3 20.3 59.4 59.41991 Level of Ch-squareSignificance 0.16 0.207 0.83 0.461985 Composite 71 23.5 53.8 60.3
  11. 11. Analysis of Capital Budgeting Technique The table below depict the usage of capital budget techniques like ARR, PBP, NPV, IRR and NPV or IRR. The CV of above techniques is 50%, 29.7%, 24.7%, 28%, 20.3% respectively. Lower CV indicates the greater use of the techniques and vice versa. Use of Average ROR decreased from 59% to 46% because it does not consider time value of money and uses profit rather than cash flow. The uses of Payback as capital budgeting technique is also decreasing from nearly 76% to 63%. It also do not consider time value of money and profitability. It ignore cash flow after payback period.
  12. 12.  The discounting techniques like NPV, IRR and NPV or IRR became popular. Net Present Value (NPV) and Internal Rate of Return (IRR) have become more widespread and have significantly increased during the decade. 85% of firms use NPV while 82% calculate IRR & 91% of the firms use either of two. NPV method takes all cash flow into account. NPV is only capital budgeting technique that is always consistent with shareholders wealth maximization.
  13. 13. Industry Average ROR Payback NPV(DCF) IRR 1991 NPV or IRR 1991Mining, Crude Oil Production 50 75 100 100 100Food, Beverage, Tobacco 62 71 86 70 93Textiles, Apparel, Vinyl Floor 60 83 83 33 83Paper 58 75 83 92 92Publishing 43 57 100 100 100Chemicals 63 77 88 88 88Petroleum Refining 36 50 86 93 100Rubber & Plastics 67 67 100 100 100Glass, Concrete, Abrasivers 40 60 80 100 100Metal Manufacturing 0 50 88 88 88Metal Products Fabrication 40 60 100 100 100Electric & Appliances 43 50 86 79 86Shipbuilding, RR, Trans.Equipment 25 25 25 25 25Scientific & Photographic Eqipment 80 60 100 100 100Motor Vehicles 0 33 50 67 67Aerospace 75 100 75 100 100Pharmaceuticals, Soap, Cosmetic 50 67 100 67 100Office Equpment & Computers 20 40 50 60 80Industrial & Farm Equipment 36 82 91 82 100Number of Responses 144 150 150 150 151Coefficient of Variation(CV) 50 29.7 24.7 28 20.31991 Composite 45.8a 63.3a 84.7 81.8b 90.7c1991 Level of Chi-squareSignificance 0.27 0.55 0.082 0.018 0.0161985 Composite 59.3 75.9 82.8 79.6 89.51980 Composite 59.1 79.9 68.1 66.4 86.2
  14. 14. Use of Future market for riskhedging Dipsh n Kiran plz….
  15. 15. Industry Raw Material Output Prices Foreign ExchangeMining, Crude Oil Production 20 40 40Food, Beverage, Tobacco 54 33 46Textiles, Apparel, Vinyl Floor 33 0 50Paper 17 8 33Publishing 0 0 43Chemicals 44 25 59Petroleum Refining 79 64 50Rubber & Plastics 0 0 67Glass, Concrete, Abrasivers 0 0 40Metal Manufacturing 13 0 13Metal Products Fabrication 40 25 40Electric & Appliances 36 14 71Shipbuilding, RR, Trans.Equipment 25 0 50Scientific & Photographic Eqipment 0 0 80Motor Vehicles 40 0 17Aerospace 50 0 75Pharmaceuticals, Soap, Cosmetic 20 20 67Office Equpment & Computers 20 2 60Industrial & Farm Equipment 20 10 82Number of Responses 146 143 150Coefficient of Variation(CV) 79 130.2 37.61991 Composite 32.2 18.2 521991 Level of Chi-square Significance 0.019 0.008 0.31985 Composite 24.4 13.1 51
  16. 16. Project Analysis
  17. 17. Industry Expected Return Variance of Return Correlation of ReturnsMining, Crude Oil Production 100 40 50Food, Beverage, Tobacco 71 15 39Textiles, Apparel, Vinyl Floor 100 0 67Paper 75 17 58Publishing 100 17 33Chemicals 82 33 40Petroleum Refining 92 42 25Rubber & Plastics 67 67 67Glass, Concrete, Abrasivers 60 0 0Metal Manufacturing 86 17 43Metal Products Fabrication 80 20 60Electric & Appliances 71 43 50Shipbuilding, RR, Trans.Equipment 100 25 50Scientific & Photographic Eqipment 100 20 80Motor Vehicles 80 20 40Aerospace 100 0 50Pharmaceuticals, Soap, Cosmetic 67 0 60Office Equpment & Computers 80 0 0Industrial & Farm Equipment 82 0 27Number of Responses 148 140 140Coefficient of Variation(CV) 16 94.3 47.71991 Composite 82.4 21.4 42.91991 Level of Chi-square Significance 0.75 0.196 0.481985 Composite 88.7 21.2 44.7
  18. 18. Conclusion Popular financial techniques: Cash budget, sources and uses of funds, NPV, IRR, project expected return and sale forecasting models. NPV and IRR is emerging as most popular financial tool. Increase of Future market analysis to control borrowing cost as well as raw material prices. Avg. ROR and payback period are declining Aerospace industry – consistent user of financial analysis techniques . Shipbuilding, railroad, and transportation equipment industry- least user of financial analysis techniques.

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