CF Winter 2014

07 Winter Corporate Finance 1.Capital Budgeting  Long-term investments which ones? 2.Capital Structure  Long-term financing where? 3.Working Capital Management  Ongoing financial activities how?

07 Winter Prufrock Corporation Statement of Cash Flows [A]  Operating activities  Investment activities  Financing activities

07 Winter Prufrock Corporation Statement of Cash Flows [A] Operating activities Net income$363+ plus: Depreciation276+ Change in accounts payable32+ less: Change in accounts receivable23- Change in inventory29- Net cash from operating activity$619

07 Winter Prufrock Corporation Statement of Cash Flows [A] Investment activities Fixed asset acquisition$425- Net cash from investment activity$-425

07 Winter Prufrock Corporation Statement of Cash Flows [A] Financing activities Change in notes payable$-35+ Change in long-term debt-74+ Dividends paid121- Change in common stock50+ Net cash from financing activity$-180

07 Winter Comparing apples to apples  size  time  one-to-many

07 Winter Comparing 3 basic ways 1. common size 2. base year 3. ratios

07 Winter Comparing 1.common size 3,373 2,880 2,731Net, P & E 3,588Total assets Fixed assets Total Inventory A/R 98$ 84Cash Current assets Change Prufrock Balance Sheets

07 Winter Comparing 1.common size % Change Prufrock Balance Sheets + Net, P & E Total assets Fixed assets Total Inventory A/R Cash Current assets

07 Winter Comparing 2.base year 3, , $ Prufrock Balance Sheets 2,880 3, Net, P & E Total assets Fixed assets Total Inventory A/R Cash Current assets

07 Winter Comparing 2.base year , , $ Prufrock Balance Sheets Net, P & E Total assets Fixed assets Total Inventory A/R Cash Current assets

07 Winter Comparing 1.common size 2.base year 3.ratios “crunching the numbers”

07 Winter Crunching The Numbers short-term  Liquidity ratios longer-term  Solvency ratios  Financial leverage asset use  Turnover ratios  Activity ratios Profitability  Performance ratios Market value

07 Winter Crunching The Numbers Liquidity 1.Current ratio 2.Quick ratio  acid test ratio 3.Cash ratio 4.Net working capital 5.Interval measure

07 Winter Current Ratio ratios$ current liabilities current assets current ratio =

07 Winter Quick Ratio ratios$ current liabilities current assets - inventory quick ratio =

07 Winter Interval Measure days$ = average daily operating costs 192 current assets interval measure = total costs – (depreciation + interest) average daily operating costs = COGS

07 Winter Assignment 1  Mini Case from end of ch 3 pg 84

07 Winter Crunching The Numbers short-term  liquidity ratios longer-term  solvency ratios  financial leverage asset use  turnover ratios  activity ratios profitability  performance ratios market value

07 Winter Crunching The Numbers Solvency 6.Total debt ratio 7.Debt/equity ratio 8.Equity multiplier 9.Long-term debt ratio 10.Times interest earned ratio 11.Cash coverage

07 Winter Total Debt Ratio ratio$ 3,588 3,588 – 2, total assets.28 total assets – total equity total debt ratio = 2011

07 Winter Debt/Equity Ratio ratio$ 2, total equity.38 current liabilities + long-term debt debt/equity ratio = 2011

07 Winter Long-term Debt Ratio ratio$ , long-term debt + total equity.15 long-term debt long-term debt ratio = 2011 long-term capitalization

07 Winter Cash Coverage ratio$ interest 6.9 EBIT + depreciation cash coverage = 2011

07 Winter Crunching The Numbers short-term  liquidity ratios longer-term  solvency ratios  financial leverage asset use  turnover ratios  activity ratios profitability  performance ratios market value

07 Winter Crunching The Numbers Turnover 12.Inventory turnover 13.Day’s sales in inventory 14.Receivables turnover 15.Days’ sales in receivables 16.NWC turnover 17.Fixed asset turnover 18.Total asset turnover

07 Winter Inventory Turnover times$ 422 1, inventory 3.2 COGS inventory turnover = 2011

07 Winter Days Sales in Receivables days$ 2, x sales 30 A/R x 365 days sales in receivables = 2011 “collection ratio”

07 Winter net working capital NWC Turnover times$ , current assets – current liabilities 13.8 sales NWC turnover = 2011

07 Winter Crunching The Numbers short-term  liquidity ratios longer-term  solvency ratios  financial leverage asset use  turnover ratios  activity ratios profitability  performance ratios market value

07 Winter Crunching The Numbers Profitability 19.Cash flow to total assets 20.Profit margin 21.Gross profit margin 22.Operating profit margin 23.ROA 24.ROE 25.Du Pont Identity

07 Winter Profit Margin rate$ 2, sales 16% net income profit margin = 2011

07 Winter Return On Assets rate$ 3, total assets 10% net income ROA = 2011 Return on Investment ROI

07 Winter Return on Equity rate$ 2, total equity 14% net income ROE = 2011 Return on shareholders’ investment Return on net worth

07 Winter Du Pont Identity du pont identity: ROE =profit margin x asset turnover x equity multiplier

07 Winter Du Pont Identity profit margin x asset turnover x equity multiplierdu pont identity: ROE = operating efficiency asset use efficiency financial leverage

07 Winter Du Pont Identity du pont identity: ROE = net income sales assets salesassetsequity operating efficiency asset use efficiency financial leverage

07 Winter Du Pont Identity -6% equity assets 35% = 14.0% = 10.4% +6%+35%change: x.64x15.7%2011: x.61x11.6%2010: x sales net income x assets sales du pont identity: ROE = operating efficiency asset use efficiency financial leverage

07 Winter Crunching The Numbers short-term  liquidity ratios longer-term  solvency ratios  financial leverage asset use  turnover ratios  activity ratios profitability  performance ratios market value

07 Winter Crunching The Numbers Market value measures 26.Price/Earnings ratio 27.Market-to-book ratio 28.Earnings Per Share

07 Winter Price/Earnings Ratio P/E ratio = share price x shares outstanding net income P/E shares sell for ____ times earnings shares carry a P/E multiple of ____ ratio$ x

07 Winter Market-to-Book Ratio $ratio 2011 market-to-book ratio = share price x shares outstanding157 x 33 2 total equity2,591 Book value per share Market capitalization to balance sheet equity

07 Winter Uses Internal  Performance compensation comparison  Planning future cash flows External  Creditors  Stockholders

07 Winter Problems apples to apples?  diversified firms  different accounting methods  different fiscal years  extraordinary events  no underlying theory (except duPont)

07 Winter Smolira Golf Corp.  pg  q Performance Plus pp.nsf/eng/h_pm00000.html

07 Winter Short-term solvency current quick cash Asset utilization total asset turnover1.22 inventory turnover3.90 receivables turnover13.30 Smolira Golf Corp.

07 Winter Long-term solvency total debt ratio debt/equity ratio equity multiplier1.32 time interest earned ratio14.55 cash coverage ratio16.73 Profitability profit margin30.83% ROA32.72% ROE43.10% Smolira Golf Corp.

07 Winter Smolira Golf Corp. Performance Plus pp.nsf/eng/h_pm00000.html