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CF 473.32 3 Winter 2014. 07 Winter472.422 Corporate Finance 1.Capital Budgeting  Long-term investments which ones? 2.Capital Structure  Long-term financing.

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Presentation on theme: "CF 473.32 3 Winter 2014. 07 Winter472.422 Corporate Finance 1.Capital Budgeting  Long-term investments which ones? 2.Capital Structure  Long-term financing."— Presentation transcript:

1 CF 473.32 3 Winter 2014

2 07 Winter472.422 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?

3 07 Winter472.422 Prufrock Corporation Statement of Cash Flows [A]  Operating activities  Investment activities  Financing activities

4 07 Winter472.422 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

5 07 Winter472.422 Prufrock Corporation Statement of Cash Flows [A] Investment activities Fixed asset acquisition$425- Net cash from investment activity$-425

6 07 Winter472.422 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

7 07 Winter472.422 Comparing apples to apples  size  time  one-to-many

8 07 Winter472.422 Comparing 3 basic ways 1. common size 2. base year 3. ratios

9 07 Winter472.422 Comparing 1.common size 3,373 2,880 2,731Net, P & E 3,588Total assets Fixed assets 708642Total 422393Inventory 188165A/R 98$ 84Cash Current assets Change20062005 Prufrock Balance Sheets

10 07 Winter472.422 Comparing 1.common size 0100.0.7-80.381.0 100.0%.719.719.0.1+11.811.7.3+5.24.9.2+2.72.5 Change20062005 Prufrock Balance Sheets + Net, P & E Total assets Fixed assets Total Inventory A/R Cash Current assets

11 07 Winter472.422 Comparing 2.base year 3,373 1.05 2,731 1.06 1.10642 1.07393 1.14165 1.17$ 84 2005 Prufrock Balance Sheets 2,880 3,588 708 422 188 98 20062005 Net, P & E Total assets Fixed assets Total Inventory A/R Cash Current assets

12 07 Winter472.422 Comparing 2.base year 2007 3,373 1.05 2,731 1.06 1.10 642 1.07393 1.14165 1.17$ 84 2008 Prufrock Balance Sheets 20062005 Net, P & E Total assets Fixed assets Total Inventory A/R Cash Current assets

13 07 Winter472.422 Comparing 1.common size 2.base year 3.ratios “crunching the numbers”

14 07 Winter472.422 Crunching The Numbers short-term  Liquidity ratios longer-term  Solvency ratios  Financial leverage asset use  Turnover ratios  Activity ratios Profitability  Performance ratios Market value

15 07 Winter472.422 Crunching The Numbers Liquidity 1.Current ratio 2.Quick ratio  acid test ratio 3.Cash ratio 4.Net working capital 5.Interval measure

16 07 Winter472.422 Current Ratio ratios$ 540 708 2011 543current liabilities 1.311.18 642current assets current ratio = 20112010

17 07 Winter472.422 Quick Ratio ratios$ 540 708 - 422 2011 543current liabilities 0.530.46 642 - 393current assets - inventory quick ratio = 20112010

18 07 Winter472.422 Interval Measure days$ = 3.68 708 2011 average daily operating costs 192 current assets interval measure = 2011 365 total costs – (depreciation + interest) average daily operating costs = COGS

19 07 Winter472.422 Assignment 1  Mini Case from end of ch 3 pg 84

20 07 Winter472.422 Crunching The Numbers short-term  liquidity ratios longer-term  solvency ratios  financial leverage asset use  turnover ratios  activity ratios profitability  performance ratios market value

21 07 Winter472.422 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

22 07 Winter472.422 Total Debt Ratio ratio$ 3,588 3,588 – 2,519 2011 total assets.28 total assets – total equity total debt ratio = 2011

23 07 Winter472.422 Debt/Equity Ratio ratio$ 2,591 540 + 457 2011 total equity.38 current liabilities + long-term debt debt/equity ratio = 2011

24 07 Winter472.422 Long-term Debt Ratio ratio$ 457 + 2,591 457 2011 long-term debt + total equity.15 long-term debt long-term debt ratio = 2011 long-term capitalization

25 07 Winter472.422 Cash Coverage ratio$ 141 691 + 276 2011 interest 6.9 EBIT + depreciation cash coverage = 2011

26 07 Winter472.422 Crunching The Numbers short-term  liquidity ratios longer-term  solvency ratios  financial leverage asset use  turnover ratios  activity ratios profitability  performance ratios market value

27 07 Winter472.422 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

28 07 Winter472.422 Inventory Turnover times$ 422 1,344 2011 inventory 3.2 COGS inventory turnover = 2011

29 07 Winter472.422 Days Sales in Receivables days$ 2,311 188 x 365 2011 sales 30 A/R x 365 days sales in receivables = 2011 “collection ratio”

30 07 Winter472.422 net working capital NWC Turnover times$ 708 - 540 2,311 2011 current assets – current liabilities 13.8 sales NWC turnover = 2011

31 07 Winter472.422 Crunching The Numbers short-term  liquidity ratios longer-term  solvency ratios  financial leverage asset use  turnover ratios  activity ratios profitability  performance ratios market value

32 07 Winter472.422 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

33 07 Winter472.422 Profit Margin rate$ 2,311 363 2011 sales 16% net income profit margin = 2011

34 07 Winter472.422 Return On Assets rate$ 3,588 363 2011 total assets 10% net income ROA = 2011 Return on Investment ROI

35 07 Winter472.422 Return on Equity rate$ 2,591 363 2011 total equity 14% net income ROE = 2011 Return on shareholders’ investment Return on net worth

36 07 Winter472.422 Du Pont Identity du pont identity: ROE =profit margin x asset turnover x equity multiplier

37 07 Winter472.422 Du Pont Identity profit margin x asset turnover x equity multiplierdu pont identity: ROE = operating efficiency asset use efficiency financial leverage

38 07 Winter472.422 Du Pont Identity du pont identity: ROE = net income sales assets salesassetsequity operating efficiency asset use efficiency financial leverage

39 07 Winter472.422 Du Pont Identity -6% 1.39 1.47 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

40 07 Winter472.422 Crunching The Numbers short-term  liquidity ratios longer-term  solvency ratios  financial leverage asset use  turnover ratios  activity ratios profitability  performance ratios market value

41 07 Winter472.422 Crunching The Numbers Market value measures 26.Price/Earnings ratio 27.Market-to-book ratio 28.Earnings Per Share

42 07 Winter472.422 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$ 363 157 x 33 2011 14.27 2011

43 07 Winter472.422 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

44 07 Winter472.422 Uses Internal  Performance compensation comparison  Planning future cash flows External  Creditors  Stockholders

45 07 Winter472.422 Problems apples to apples?  diversified firms  different accounting methods  different fiscal years  extraordinary events  no underlying theory (except duPont)

46 07 Winter472.422 Smolira Golf Corp.  pg 82-83  q 26 - 30 Performance Plus http://www.ic.gc.ca/eic/site/pp- pp.nsf/eng/h_pm00000.html

47 07 Winter472.422 Short-term solvency20052006 current4.333.59 quick1.781.47 cash0.450.39 Asset utilization total asset turnover1.22 inventory turnover3.90 receivables turnover13.30 Smolira Golf Corp.

48 07 Winter472.422 Long-term solvency20052006 total debt ratio0.280.24 debt/equity ratio0.390.32 equity multiplier1.32 time interest earned ratio14.55 cash coverage ratio16.73 Profitability profit margin30.83% ROA32.72% ROE43.10% Smolira Golf Corp.

49 07 Winter472.422 Smolira Golf Corp. Performance Plus http://www.ic.gc.ca/eic/site/pp- pp.nsf/eng/h_pm00000.html

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