ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM

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ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM 2018-12-06

ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM E-mail: erasmus.MICHALSKI@gmail.com www: HTTP://MICHALSKIG.UE.WROC.PL/ Mobile: +48503452860 5 lectures + 1 exam (individual homework sent via email + test) Next lecture: 11th March. Michalski G., Prediction cooperator future condition using financial statements (In Polish: Ocena kontrahenta na podstawie sprawozdań finansowych), ODDK, Gdańsk, 2008. D.R.Harrington, B.D. Wilson, Corporate Financial Analysis, Irwin.

Wilcox-Gambler Model Wilcox's Gambler's-Ruin Formula: This model can be used to estimate the liquidation value of a company. It's likely to be significantly less than the book value because of the "fire sale" nature. Most current assets are valued at 70% of their balance sheet values; fixed and other assets at 50% of book value. Real estate should generally be valued separately. Cash plus marketable securities at market value + Inventory, accounts receivable, prepaid expenses, at 70% of book value + Fixed and other assets at 50% of book value - Current liabilities - Long-term liabilities = Liquidation Value 2018-12-062018-12-06

Example: Firm has assets with the following book values: Cash on hand = $26,000 Accounts receivable = $80,000 Inventory = $20,000 Prepaid insurance = $5,000 Equipment, office furniture, and trucks = $150,000 Accounts payable and accrued expenses = $40,000 Long-term liabilites = $60,000 Here's the computation: Cash $26,000 Accounts receivable $80,000 x .7 Inventory $20,000 x .7 Prepaid insurance $5,000 x .7 Equipment, etc. $150,000 X .5 Accounts payable and accruals -40,000 Long-term liabilities -60,000 Liquidation Value = ?

Example: calculate Wilcox-Gambler liquidation value for Chemical and for Tobbaco company

If kd = 5% for Chemical and kd = 7% for Tobbaco Calculate ROA for them and compare with kd and sector/branch ROA = (NI+INT)/(Total_Assets) NI = net income, INT = interests (financial costs of debt)

Basic financial aim of the firm Firm value maximization: Where: FCFn = free cash flows, CC = cost of capital financing the firm (WACC) n = period in which FCFn will be generated

FCF – how to calculate? CC – cost of capital (cost of money), how to value?