Managerial Finance: Cash Flow Statement, Quality of Earnings Ratio, Capital Acquisitions Ratio, Systematic and Unsystematic Risk, CAPM

This article discusses the importance of cash flow statement, quality of earnings ratio, capital acquisitions ratio, systematic and unsystematic risk, and CAPM in managerial finance. It also provides answers to specific questions related to these topics.

Running head: MANAGERIAL FINANCE
Managerial Finance
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
Answer to Question 1:................................................................................................................2
Part 1:.....................................................................................................................................2
Part 2:.....................................................................................................................................2
Part 3:.....................................................................................................................................3
Question a:.........................................................................................................................3
Question b:.........................................................................................................................3
Question c:.........................................................................................................................4
Question d:.........................................................................................................................4
Answer to Question 6:................................................................................................................4
Part 1:.....................................................................................................................................4
Part 2:.....................................................................................................................................5
Part 3:.....................................................................................................................................5
Part 4:.....................................................................................................................................5
References:.................................................................................................................................7

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Answer to Question 1:
Part 1:
The cash flow statement provides information regarding the total cash available in an
organisation after carrying out all the business activities. Historical information could be
obtained as well from the cash flow statement. The primary aim of this statement is to
evaluate and obtain information regarding the variations in the cash and cash equivalents of
an organisation over a specific timeframe (Gordon et al., 2017). In addition, the investors and
management could determine whether the business cash is generated due to extraordinary
activities or compound sources. In a similar fashion, the cash outflows could be streamlined
appropriately for deriving positive results from the same. As a result, it enables in the
decision-making process of the organisation in terms of controlling excessive cash outflow as
well as increasing cash inflow.
Part 2:
There are certain questions that could be used for addressing the contents of the cash
flow statement, some of which are enumerated as follows:
Which activity does the organisation need to improve initially for improving its cash
flow?
Is the organisation in a position of repaying its short-term and long-term obligations?
What is the maximum debt amount that the organisation could raise to maintain its
positive cash flow?
What is the amount of investment of the shareholders in the organisation?
What are the activities that increase and decrease the cash flow of the organisation?
Does the profitability of the organisation generate cash?

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Part 3:
Question a:
Question b:
It has been pointed out by Miao, Teoh & Zhu (2016) that quality of earnings ratio
separates the income, which an organisation obtains via its real operations in contrast to other
sources of revenue such as sale of assets. It could be observed from the above table that the
ratio has declined significantly for Woodside Petroleum Limited to 2.66 in 2015 from 21.90
in 2014 and the same trend is followed in 2017 to 2.14 (Woodside.com.au, 2018). On the
contrary, the ratio could be observed as negative for Origin Energy. If the figure is below 1,
significant part of net profit is generated due to adjustments in accounting rather than actual
sales of products or services and vice-versa. Origin Energy has suffered net loss and hence, it
could be said that its earnings are not manipulated to assure reliability (Annualreports.com,
2018). In this case, Woodside Petroleum generates most of its product sales by selling
products in the operating market.

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Question c:
Question d:
With the help of capital acquisitions ratio, it is possible to ascertain the capability of a
company for financing capital expenditure from internal sources. If the ratio is below 1, it
would to lead to outflow of too much cash, instead of revenue generation. For Woodside
Petroleum, the ratio is observed to increase to 2.79 in 2016 from 0.61 in 2015; however, it
has not incurred any capital expenditure in 2017. On the contrary, the ratio for Origin Energy
has increased significantly over the three-year period. This implies that the capital
expenditures of both the organisations are reduced in order to retain higher cash. The primary
aim is to use them in the current business operations so that the total sales revenue is
increased.
Answer to Question 6:
Part 1:
Systematic risk is termed as the market risk that would have direct impact on the
overall market or a particular market segment. It is not possible to diversify this risk, since
the overall market would be affected; however, its effects differ from organisation to
organisation. Such risk could be in the form of industrial recession and changes in tax rates
(Barillas & Shanken, 2018). Unsystematic risk is a company-specific risk, which could be

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diversified and the entire market would not be affected. This might arise in the form of
company strike. Beta gauges the systematic risk that could not be diversified. This denotes
the pattern of the changes of a stock in the market. As a result, the investors could seek
insight regarding the share movement in relation to the movements in the market.
Part 2:
The portfolio beta measures the entire systematic risk related to it in the way that a
particular stock measures systematic risk. An individual beta of a stock is necessary for
calculating the portfolio beta. It seems the weighted average of the betas with regard to
separate investments within the portfolio. This average of the beta indicates the portfolio
fraction invested in the same consisted in the portfolio (Zabarankin, Pavlikov & Uryasev,
2014). Thus, there is strong correlation between the beta of a portfolio and beta of an
individual stock. Hence, if the beta of a specific stock is not derived, the portfolio beta could
not be calculated. As a result, the investors might not be able to obtain a complete overview
of the risk and return of the stock market.
Part 3:
The relationship between beta and expected return could be termed as the Security
Market Line (SML). The x-axis contains the beta and the y-axis is denoted by expected return
(Suntraruk, 2018). It could be calculated through the ratio of change related to the expected
rate of return measured in the vertical axis. The result is divided by the corresponding change
in beta of a portfolio coupled with the two estimated returns. The risk-free rate is denoted via
the intercept of SML present in the market.
Part 4:
The normal level of risk could be gauged with the help of CAPM and the relationship
between risk and return is explained through CAPM as well. For instance, assumption is

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made that Mr. Gilchrist has a business dealing with gold jewelleries. However, it has been
observed that the gold prices swing in the market. More precisely, it could be stated that the
gold prices decline considerably in the market and after this; the prices tend to rise again. It is
necessary for Mr. Gilchrist to carry the risk pertaining to the swings in the prices of gold.
Such rise would rely entire on the price of the market and sale could be carried out at a higher
price with few multiples of 0.5 or 1 higher than the price of the market. Henceforth, based on
the above evaluation, it is found that CAPM considers the risk of the market and the
estimated rate of return on investment (Domian, Wolf & Yang, 2015).

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References:
Gordon, E. A., Henry, E., Jorgensen, B. N., & Linthicum, C. L. (2017). Flexibility in cash-
flow classification under IFRS: determinants and consequences. Review of Accounting
Studies, 22(2), 839-872.
Miao, B., Teoh, S. H., & Zhu, Z. (2016). Limited attention, statement of cash flow disclosure,
and the valuation of accruals. Review of Accounting Studies, 21(2), 473-515.
Annualreports.com. (2018). Retrieved 21 April 2018, from
http://www.annualreports.com/Company/Origin-Energy-Ltd
Woodside.com.au. (2018). Retrieved 21 April 2018, from
http://www.woodside.com.au/Investors-Media/Pages/default.aspx
Barillas, F., & Shanken, J. (2018). Comparing asset pricing models. The Journal of
Finance, 73(2), 715-754.
Zabarankin, M., Pavlikov, K., & Uryasev, S. (2014). Capital asset pricing model (CAPM)
with drawdown measure. European Journal of Operational Research, 234(2), 508-
517.
Suntraruk, P. (2018). A simple test pf the CAPM Model under Bull and Bear market
conditions. AU Journal of Management, 6(1), 62-70.
Domian, D., Wolf, R., & Yang, H. F. (2015). An assessment of the risk and return of
residential real estate. Managerial Finance, 41(6), 591-599.