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Financial statement analysis is like a company's health check-up. It uses financial data to see how well a business is doing. Let's look at the key reasons and see them with clear examples. 1. Knowing Where the Company Stands (Current Position) The Goal: To ...

1. Common Size Statements Concept: Presents all items in a financial statement as a percentage of a common base figure. This allows for easier comparison across different time periods or companies of different sizes. It neutralizes the impact of size differenc...

Material Cost Variance (MCV) The Material Cost Variance (MCV) measures the difference between the standard cost of direct materials allowed for the actual output achieved and the actual cost of direct materials used. Essentially, it tells you how much more or...

Labour Cost Variance (LCV) The Labour Cost Variance (LCV) measures the difference between the STANDARD COST of direct labor allowed for the ACTUAL OUTPUT achieved and the ACTUAL COST of direct labor incurred. In simpler terms, it shows how much more or less yo...

The Modigliani-Miller (MM) approach provides a fundamental framework for understanding how capital structure impacts firm value. It challenges conventional wisdom and offers insights into the trade-offs involved in financing decisions. It provides 3 propositio...

Determining the "optimal" capital structure (the ideal mix of debt and equity financing) is a complex process that requires understanding different theories and considering the specific circumstances of a company. There's no one-size-fits-all solution, but by ...

Leverage is a financial strategy where a company uses fixed costs to potentially amplify returns for its shareholders. These fixed costs can stem from operations (like rent) or financing (like debt interest). The basic concept: Leverage: Using assets or fund...

Operating leverage arises when a company has fixed operating expenses that remain constant regardless of sales volume. It essentially amplifies the impact of changes in sales on a company's earnings before interest and taxes (EBIT), also known as operating pro...

Financial leverage focuses on how a company's financing decisions impact its earnings available to shareholders. It arises from the use of fixed financial charges in the firm's income stream, such as interest payments on debt or preferred dividends. Core Conce...

EBIT-EPS analysis is a tool to help companies compare different financing options (equity, debt, preference shares) and their impact on earnings per share (EPS) under various EBIT scenarios. The goal is to identify the financing plan that maximizes EPS for the...

Combined leverage examines the total effect of both operating and financial leverage on a company's risk and potential returns. It provides a comprehensive view of how changes in sales translate into changes in earnings per share (EPS). Core Concepts Operati...

Distributing Profits vs. Reinvesting in the Business Dividends represent a portion of a company's net earnings that are paid out to its shareholders. This section focuses on dividends paid to ordinary shareholders in widely-held public companies. Core Concepts...

Balancing Profits and Shareholder Value A company's dividend policy – the decisions it makes about how much of its earnings to distribute to shareholders versus retain for reinvestment – is influenced by a variety of factors. Here's a breakdown of key consider...

Dividend Policy Theories: Relevance vs. Irrelevance The impact of dividend policy on a firm's valuation is a topic of ongoing debate. This section explores two contrasting viewpoints: those who believe dividends are relevant and those who argue they are irrele...

Walter's Model, proposed by Professor James E. Walter, argues that dividend policy always affects the value of a firm. It emphasizes the relationship between a company's internal rate of return (r) and its cost of capital (k) in determining the optimal dividen...

I. Modigliani and Miller (MM) Approach: Dividend Irrelevance Revisited Modigliani and Miller (MM) strongly support the dividend irrelevance theory. They argue that under ideal conditions, dividend policy has no impact on a firm's market value. MM's Central Arg...

Dividends as a Message to Investors Signaling Theory recognizes that corporate actions, including dividend decisions, convey information to investors. It suggests that dividend changes can serve as a powerful signal of a company's financial health and future p...

Companies have several options for distributing value to shareholders, with cash dividends being the most common. This section explores different forms of dividends and a related action – stock splits – and their implications. 1. Cash Dividend Description: T...

Ensuring Short-Term Financial Health Working Capital Management (WCM) is a vital aspect of financial management focused on ensuring a company has enough short-term assets to cover its short-term liabilities. Effective WCM helps maintain liquidity, operational ...

Finding the Right Mix of Short-Term and Long-Term Funds A key decision in working capital management is determining the appropriate mix of short-term and long-term financing to support a company's short-term asset needs. Different approaches offer varying leve...