1.  Financial Analysis and Planning Principles of Corporate Finance Brealey and Myers Sixth Edition Slides by Matthew Will Chapter 28 © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill

2. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 2 Topics Covered  Executive Paper Corporation  Financial Ratios  The DuPont System  Financial Planning  Growth and External Financing

3. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 3 Executive Paper

4. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 4 Executive Paper

5. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 5 Executive Paper

6. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 6 Executive Paper

7. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 7 Executive Paper

8. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 8 Leverage Ratios

9. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 9 Leverage Ratios Total debt ratio= total liabilities total assets Times interest earned= EBIT interest payments Cash coverage ratio= EBIT+depreciation interest payments

10. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 10 Liquidity Ratios

11. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 11 Liquidity Ratios

12. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 12 Efficiency Ratios

13. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 13 Efficiency Ratios

14. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 14 Profitability Ratios

15. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 15 Profitability Ratios

16. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 16 Market Value Ratios

17. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 17 Market Value Ratios

18. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 18 The DuPont System  A breakdown of ROE and ROA into component ratios:

19. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 19 The DuPont System

20. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 20 The DuPont System asset turnover profit margin

21. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 21 The DuPont System

22. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 22 The DuPont System leverage ratio asset turnover profit margin debt burden

23.  Short Term Financial Planning Principles of Corporate Finance Brealey and Myers Sixth Edition Slides by Matthew Will Chapter 29 © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill

24. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 24 Topics Covered  Working Capital  Links Between Long-Term and Short-Term Financing  Tracing Changes in Cash and Working Capital  Cash Budgeting  A Short-Term Financing Plan

25. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 25 Working Capital Net Working Capital - Current assets minus current liabilities. Often called working capital. Cash Conversion Cycle - Period between firm’s payment for materials and collection on its sales. Carrying Costs - Costs of maintaining current assets, including opportunity cost of capital. Shortage Costs - Costs incurred from shortages in current assets.

26. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 26 Firm’s Cumulative Capital Requirement Lines A, B, and C show alternative amounts of long-term finance. Strategy A: A permanent cash surplus Strategy B: Short-term lender for part of year and borrower for remainder Strategy C: A permanent short-term borrower A B C Year 2Year 1 Dollars Cumulative capital requirement Time

27. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 27 Working Capital Simple Cycle of operations Cash

28. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 28 Working Capital Simple Cycle of operations Cash Raw materials inventory

29. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 29 Working Capital Simple Cycle of operations Cash Finished goods inventory Raw materials inventory

30. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 30 Working Capital Simple Cycle of operations Cash Finished goods inventory Receivables Raw materials inventory

31. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 31 Working Capital Simple Cycle of operations Cash Finished goods inventory Receivables Raw materials inventory

32. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 32 Changes in Cash & W.C. Example - Dynamic Mattress Company

33. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 33 Changes in Cash & W.C. Example - Dynamic Mattress Company Assume dividend = $1 mil R.E.=$11 mil

34. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 34 Changes in Cash & W.C. Example - Dynamic Mattress Company

35. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 35 Changes in Cash & W.C. Example - Dynamic Mattress Company Dynamic used cash as follows:  Paid $1 mil dividend.  Repaid $5 mil short term bank loan.  Invested $14 mil.  Purchased $5 mil of marketable securities.  Accounts receivable expanded by $5 mil.

36. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 36 Cash Budgeting Steps to preparing a cash budget Step 1 - Forecast the sources of cash. Step 2 - Forecast uses of cash. Step 3 - Calculate whether the firm is facing a cash shortage or surplus.

37. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 37 Cash Budgeting Example - Dynamic Mattress Company Dynamic forecasted sources of cash AR ending balance = AR beginning balance + sales - collections

38. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 38 Cash Budgeting Example - Dynamic Mattress Company Dynamic collections on AR

39. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 39 Cash Budgeting Example - Dynamic Mattress Company Dynamic forecasted uses of cash  Payment of accounts payable  Labor, administration, and other expenses  Capital expenditures  Taxes, interest, and dividend payments

40. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 40 Cash Budgeting Example - Dynamic Mattress Company Dynamic cash budget

41. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 41 Cash Budgeting Example - Dynamic Mattress Company Dynamic short term financing requirements

42. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 42 A Short Term Financing Plan Example - Dynamic Mattress Company Dynamic forecasted deferrable expenses

43. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 28- 43 A Short Term Financing Plan Example - Dynamic Mattress Company- Financing Plan