BUS 600 - Week 6 Assignment # 2 -> QA Def & Tools

Week 6 Assignment 2: Find other definitions and tools of quantitative analysis

Search for other tools and definitions of quantitative analysis on the internet. Find at least two of each that are easy to understand. Quote them and insert links to them on your blog.

Quantitative Analysis Definitions:

1)    Quantitative analysis (finance), an analysis technic applying mathematics stochastic calculus to finance. Link: http://en.wikipedia.org/wiki/Quantitative_analysis.

2)    The process of determining the value of a security by examining its numerical, measurable characteristics such as revenues, earnings, margins, and market share.
Link: http://www.investorwords.com/4001/quantitative_analysis.html#ixzz13LTD3AEE

Quantitative Analysis Tools:

1)   Discounted Cash Flow (DCF),

http://financial-dictionary.thefreedictionary.com/discounted+cash+flow

What Does Discounted Cash Flow (DCF) Mean?

A valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future free cash flow projections and discounts them (most often by using the weighted average cost of capital method) to arrive at a present value, which is used to evaluate the investment's potential. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one. It is calculated as follows:

2)   Free Cash Flow (FCF)

http://financial-dictionary.thefreedictionary.com/Free+Cash+Flow

What Does Free Cash Flow (FCF) Mean?

A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it is tough to develop new products, make acquisitions, pay dividends, and reduce debt. FCF is calculated as follows:

It also can be calculated by taking operating cash flow and subtracting capital expenditures.

BUS 600 - Week 6 Assignment # 1 -> Chapter 5 QA

3 - 6 ideas from Chapter 5 - Quantitative Analysis

This chapter has described different tools to help MBA to make business decisions. (Information from link: http://encyclopedia.thefreedictionary.com  - this is easier to understand than the ones in the book). To understand the following popular tools is important:

1)      Decision Trees

A decision tree is a decision support tool that uses a tree-like graph or model of decisions and their possible consequences, including chance event outcomes, resource costs, and utility. It is one way to display an algorithm. Decision trees are commonly used in operations research, specifically in decision analysis, to help identify a strategy most likely to reach a goal. Another use of decision trees is as a descriptive means for calculating conditional probabilities.

Example from http://encyclopedia.thefreedictionary.com/Decision+trees:

Example

Decision trees can be used to optimize an investment portfolio. The following example shows a portfolio of 7 investment options (projects). The organization has $10,000,000 available for the total investment. Bold lines mark the best selection 1, 3, 5, 6, and 7, which will cost $9,750,000 and create a payoff of 16,175,000. All other combinations would either exceed the budget or yield a lower payoff.

2)      Net Present Value (NPV) – The total present value of all cash flows “discounted” to today’s dollars.

Net present value (NPV) is a standard method for the financial appraisal of long-term projects. Used for capital budgeting, and widely throughout economics, it measures the excess or shortfall of cash flows, in present value (PV) terms, once financing charges are met. It is also called net present worth (NPW)^[1]. By definition,

NPV = Present value of net cash flows. For its expression, see the formula section below.

Formula

Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore

Where

t - the time of the cash flow

N - the total time of the project

r - the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.)

C_t - the net cash flow (the amount of cash) at time t (for educational purposes, C₀ is commonly placed to the left of the sum to emphasize its role as the initial investment.).

The following sums up the NPVs in various situations.

If...	It means...	Then...
NPV > 0	the investment would add value to the firm	the project may be accepted
NPV < 0	the investment would subtract value from the firm	the project should be rejected
NPV = 0	the investment would neither gain nor lose value for the firm	We should be indifferent in the decision whether to accept or reject the project. This project adds no monetary value. Decision should be based on other criteria, e.g. strategic positioning or other factors not explicitly included in the calculation.

3)      Internal Rate of Return (IRR) – The discount rate that makes the net present value of the cash flows equal zero in today’s dollars.

The internal rate of return (IRR) is a capital budgeting metric used by firms to decide whether they should make investments. It is an indicator of the efficiency of an investment, as opposed to net present value (NPV), which indicates value or magnitude.

The IRR is the annualized effective compounded return rate which can be earned on the invested capital, i.e., the yield on the investment.

A project is a good investment proposition if its IRR is greater than the rate of return that could be earned by alternate investments (investing in other projects, buying bonds, even putting the money in a bank account). Thus, the IRR should be compared to any alternate costs of capital including an appropriate risk premium.

Mathematically the IRR is defined as any discount rate that results in a net present value of zero of a series of cash flows.

In general, if the IRR is greater than the project's cost of capital, or hurdle rate, the project will add value for the company.

To find the internal rate of return, find the value(s) of r that satisfies the following equation:

t - the time of the cash flow

N - the total time of the project

r - the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.)

C_t - the net cash flow (the amount of cash) at time t (for educational purposes, C₀ is commonly placed to the left of the sum to emphasize its role as the initial investment.).

Example

Calculate the internal rate of return for an investment of 100 value in the first year followed by returns over the following 4 years, as shown below:

Year	Cash Flow
0	-100
1	39
2	59
3	55
4	20

Solution:

We use an iterative solver to determine the value of r that solves the following equation:

The result from the numerical iteration is                        .  

BUS 600 - Week 4 Assignment # 2 -> Financial Statements

Week 4 Assignment 2: How to read financial statement

Required: read http://www.sec.gov/investor/pubs/begfinstmtguide.htm
Optional: use the knowledge you have learned from this chapter and the above website, analyze Apple Inc's financial statement from the third quarter of last year at http://images.apple.com/pr/pdf/q308fin_statements.pdf. Then read Apple's own analysis at http://www.apple.com/pr/library/2008/07/21results.html. Do you agree with apple? why or why not.

The three basic financial statements are (1) balance sheet, which shows firm’s assets, liabilities, and net worth on a stated date; (2) income statement (also called profit and loss account), which shows how the net income of the firm is arrived at over a stated period, and (3) cash flow statement, which shows the inflows and outflows of cash caused by the firm’s activities during a stated period.

The statements show the financial status as of June 28, 2008. The numbers are in millions. Apple’s fiscal year starts every October.

Income Statements

The first page is the income statement. From the Net sales minus the Cost of Sales gets the Gross margin ($2600). It’s considered ‘gross’ because there are certain expenses that haven’t been deducted from it yet. Gross margin increases compare with previous year. The total operating expenses ($1208) increases from previous year. The cost of sales and operating expenses includes stock-based compensation expense as described as the bottom part of page 1. After total operating expenses deducted from gross margin, $2600 - $1208 = $1392, this is the operating income.  The Net income which has deducted the income taxes is $1072, this is the net profit. Apple makes more profit in 2008 than previous year. The Earnings per share (EPS) tells you how much money shareholders would receive for each share of stock they own if the company distributed all of its net income for the period. To calculate EPS, take the total net income and divide it by the number of outstanding shares of the company. The diluted EPS is $1.19 which is also better than previous year. Apple makes better profit than previous year.

Balance Sheets

Assets = Liabilities + Shareholder’s equity

This Apple’s balance sheet records as of June 28, 2008; it shows also the beginning of the fiscal year which is September 29, 2007. Assets are things that a company own that have value. All cash, investments and physical properties are assets. The total assets value has increased compares with previous year. Liabilities are amount of money that company owns to others. The shareholder’s equity is sometimes called capital or net worth. It’s the money (belongs to shareholders or the owner) that would be left if a company sold all of its assets and paid off all of its liabilities. The equity has increased over $5000 compares with previous year. This is a very good sign.

Cash Flow Statements

The Apple’s cash flow statements show nine months ended June 28, 2008 and June 30, 2007. Cash flow statements report a company’s inflows and outflows of cash. A cash flow statement can tell you whether the company generated cash. It uses and reorders the information from the balance sheet and income statement. The bottom line of the cash flow statement shows the net increases or decrease in cash for the period. Each part reviews the cash flow from (1) operating activities $5301; (2) investing activities $(6196); and (3) financing activities $916. Cash used in investing activities has almost doubled than previous year which makes the ‘increase in cash and cash equivalents’ to be $21 which is much less than the previous year which is $726. The end of the period cash still higher than previous year since the beginning period cash is much higher than the previous year.

The last page of the statement shows the schedule of deferred revenue from iPhone and Apple TV and AppleCare.

From my above analysis, I do agree with Apple regarding their best quarter for both revenue and earnings in Apple’s history.

 

BUS 600 - Week 4 Assignment #1 -> Chap 3 Accounting

3-6 ideas learn from Chapter 3 Accounting

1) Accounting Rules
Accounting rules set the standards so that financial reports of companies may be compared on an equal basis. Accounting’s governing rules are called ‘Generally Accepted Accounting Principles’ (GAAP). These rules have been developed over the years and are analogous to the precedents in the legal profession.

2) Accounting Concepts
There are seven concepts which is a guiding set of policies that underlie all accounting rules and reporting:
a. The Entity – A reporting entity can be a single grocery store, a production plant, an entire business, or a conglomerate.
b. Cash and Accrual Accounting
Using ‘cash basis’ accounting, transactions are recorded only when cash changes hands; but it doesn’t try to match the cost of conducting business with their related sales.
‘Accrual accounting’ recognizes the financial effect of an activity when the activity takes place without regard to the movement of cash. Accrual accounting raises two related issues, ‘allocation’ and ‘matching’, because activity and cash movement most often do not occur at the same time.
Without established policies for allocation and matching, accountant could easily manipulate financial report by choosing when to record sales or expenses in order to cover up or delay bad results.
c. Objectivity
Accounting records only contain transactions that have been “completed” and that have a “quantifiable” monetary value. Accountants also have an objectivity rule to guide them when in doubt. There must be reasonable and verifiable evidence to support the transaction, or else it does not get recorded.
d. Conservatism
Accounting conservatism governs the preparation of financial statements. Accounting records contain only measurable verifiable properties, debts, sales, and costs.
Conservatism also dictates that transactions be recorded at their ‘historical costs’.
e. Going Concern
Financial statements describe businesses as operating entities. The values assigned to items in the accounting records assume that the business is a going concern. Accountants presume that companies will continue to operate in the foreseeable future; they use historical costs.
f. Consistency
Accounting rules demand that an entity use the same accounting rules year after year. That enables an analyst to compare past with current results. Consistency requires that the same accounting method be used from year to year.
g. Materiality
Financial statements are only materially correct so that a reader can get a fairly stated view of where and entity stands; so that a reasonable person can make informed decisions based on the report.

3) The Financial Statements : Assets = Liabilities + Owner’s Equity
To know a company, you must be able to read and understand three major financial statements:
a) The Balance Sheet
b) The Income Statement
c) The Statement of Cash Flows

4) Ratio Analysis
Ratios are used to compare performances among companies within an industry and against a company’s own historical performance.
For major categories of ratios:
a) Liquidity ratios > 1 shows liquidity
It is to show whether a company is able to pay its bills
Current ratio = Current Assets / Current Liabilities
b) Capitalization measures
(i)Financial Leverage = (Total Liabilities + Owner’s Equity) / Owner’s Equity
Ratio > 2 show an extensive use of debt
(ii)Long-Term Debt to Capital = Long-Term Debt / (Liabilities + Owner’s Equity)
Ratio > 50% shows a high level of debt
c) Activity measures
Assets Turnover per Period = Sales / Total Assets
The ratio tells how actively the firm uses all of its assets. A firm generates more sales in a given set of assets is said have managed its assets efficiently. Ratios are industry-specific.
d) Profitability measures
Return on Equity (ROE) = Net Income / Owner’s Equity
If a company has a high level of debt and a small amount of equity, the return of ROE can be affected. That is called financial leverage. The choice of lower equity level can ‘leverage’ the ROE to extremely high levels.

5) Managerial Accounting
Managerial accounting focuses on operations. Instead of ratios, managerial accounting uses standards, budgets, and variances to run the business and explain operational results.

BUS 600 - Week 5 Assignment #1 -> Chap 4 OB

3 - 6 ideas from Chapter 4 Oranizational Behavior

(1) The Organizational Behavior (OB) Problem-Solving Model
OB provides a three-step technique to solve organizational problems:
a) Problem Definition
The first step to solving an organizational problem is to know the source of the difficulty. The goal of an effective MBA is to find the most important problems and solve those first. Those are called the source problems. Eliminate the source, eliminate the symptoms.
b) Analysis
After defining the gaps and using causal chains, then link the problems to their causes and try to understand the causes. If one problem is insurmountable, different solutions have to be tried.
c) Action Planning
After a thorough analysis, a plan is formulated. The action plan has six important steps:
- Set specific goals.
- Define activities, resources needed and responsibilities.
- Set a timetable for action.
- Forecast outcomes, develop contingencies.
- Formulated a detailed plan of action in time sequence.
- Implement, supervise execution, and evaluate based on goals in step one.

2) Individual and Organizational Level OB Topics
The MBA psychology lesson, the APCFB model – This model attempts to explain the cognitive process of linking external events to employee behavior. Assumptions affect the Perceptions people have. Those perceptions affect the Conclusions. And those conclusions prompt Feelings. Ultimately those feelings drive Behavior that managers observe. By trying to understand this process, MBAs may have a chance to influence positive behavior in themselves as well as in their coworkers.

It is important to have motivation in the organizations. Expectancy theory outlines the factors that produce motivation with individuals.
Motivation = Expectation of Work will lead to performance
X Expectation Performance will lead to Reward
X Value of Reward


Another way to understand and affect employee motivation is to investigate the job design. Each job has certain core job dimensions (example: skills, autonomy) that describes the duties performed. The duties lead to critical psychological states (example: responsibility for outcomes of work) within employees that result in a variety of outcomes (example: high quality work performances).

There are some interpersonal skills that would help us to succeed on the job, for example learn how to be active listening, how to do performance appraisals, how to balance reprimands with praise and how to manage your boss.

3) Organizational Level Topics
Organizations are networks of related parts. Each element works together to support efficient operations. There are six elements define organizations:
(a) Strategy
Strategy describes an explicit or implicit plan for success in the marketplace.

(b) Policies and Procedures
Policies are formal rules that are captured in a handbook while procedures are the ways in which a company conducts business.

(c) Structure
Structures describe the hierarchy of authority and accountability in an organization. These formal relationships are frequently diagrammed in organization charts.

(d) Systems
Each organization develops systems for allocating, controlling, and monitoring money, things, and people. Systems also perform informational activities by gathering information and channeling it to interested users.

(e) Climate
It is an unclear term that refers to the emotional state of an organization’s members.

(f) Culture
Culture is the mix of behaviors, thoughts, beliefs, symbols, and artifacts that are conveyed to people throughout an organization over time.

By using ‘The Human Talent Flow Pyramid’ diagram, it helps to point out graphically the ‘leakages’ and ‘blockages’ of people flows within the organization. We can clearly identify turnover problems, skill deficiencies and entrenched management.

Systems theory is a concept that likens organizations to living organisms. For example, management subsystem that sets goals, adaptive subsystem makes sure products and services are appropriate to ensure survival, boundary spanning in subsystem recruits people and raising money, production subsystem converts inputs into goods and services. Systems theory provides another way of analyzing the health of the organization.

Organizations go through a series of growth (evolution) and crisis (revolution) periods during their lifetimes that is called ‘The evolution and revolution Pattern’.

BUS 600 - Week 5 Assignment #2 -> VCM Model

What kind of leader are you "using VCM Model"?

VCM Leadership Model has three characteristics of leader’s personal profile – vision, commitment and management.

My vision, commitment and management skills are equally important. The company gives us the ‘vision’ of the company every year, everyone in the company has to know about the vision. I am not in the top management position in the company but have to manage junior technical persons; management skills play a role there. Projects due on time, I have to have commitment to do that. From all these characteristics, I would think that OTHER people will characterize me as a ‘Balanced’ VCM leader.