1. MT 217 Unit 3 Seminar

2. Financial Statements Cash Flows Taxes
Chapter 3
Financial Statements Cash Flows Taxes

3. Balance Sheet Income Statement Statement of Cash Flows
Financial Statements
Balance Sheet Income Statement Statement of Cash Flows

4. Example
Net Income + non cash charges (depreciation and amortization) = Cash Flow $5,200, ,000 = $5,800,000
Shop-Til-You-Drop Inc. recently reported net income of $5.2 million and depreciation of $600,000.  What is was net cash flow?  Assume it has no amortization expense.

5. Modifying Accounting Data for Investor and Managerial Decisions
Operating Assets and Operating Capital Net Operating Working Capital NOWC = (All current assets required in operations) – (All non-interest bearing current liabilities) Operating Cash Flows Operating cash flow NOPAT Depreciation and amortization Free Cash Flow FCF Operating cash flow Investment in operating capital

6. MVA and EVA
Market Value Added (MVA): The excess of the market value of equity over its book value.
Economic Value Added (EVA): Excess of NOPAT over capital costs.

7. Analysis of Financial Statements
Chapter 4
Analysis of Financial Statements

8. Ratios standardize numbers and facilitate comparisons.
Why are Ratios Useful?
Ratios standardize numbers and facilitate comparisons.
Ratios are used to highlight weaknesses and strengths.
Ratio comparisons should be made through time and with competitors
Trend analysis
Peer (or Industry) analysis

9. 5 Categories of Ratios Liquidity Asset Management Debt Management
Profitability
Market Value
Current
Inventory Turnover
Total debt to Total Assets
Profit Margin
P/E
Quick
Day Sales Outstanding
TIE
ROA
Price/Cash Flow
Fixed Asset Turnover
EBITDA coverage
ROE
Total Asset Turnover
BEP

10. Example
Superior Medical System's 2005 balance sheet showed total common equity of $2,050,000.  The company had 100,000 shares of stock outstanding which sold at a price of $57.25 per share.  By how much did the firm's market value and book value per share differ?
Balance sheet:  market value vs. book value Shares Outstanding                                    100,000
Price per share                                             $57.25
Total common equity                              $2,050,000
Book value per share                                    $20.50
Difference between book and market value      $36.75 

11. Example
McDonald Inc. paid out $25,000 common dividends during 2005, and it ended the year with $150,000 of retained earnings. The prior year’s retained earnings were $145,000. What was the firm's 2005 net income? Current RE = Prior RE + NI – dividends paid $150,000 = $145,000 + NI - $25,000 $5,000 = NI - $25,000 NI = $30,000

12. Example
Raleigh Corp's total common equity at the end of last year was $300,000 and its net income after taxes was $55,000. What was its ROE? ROE = NI /Common equity ROE = $55,000 / $300,000 = or 18.33%

13. Example
Puritan Corp's stock price at the end of last year was $30.25 and its earnings per share for the year were $2.35. What was its P/E ratio? P/E = current stock price / earnings per share = $30.25 / $2.35 P/E = 12.87

14. Example
Cooper Inc's latest EPS was $4.00, its book value per share was $20.00, it had 200,000 shares outstanding, and its debt ratio was 40%. How much debt was outstanding? First, we need to calculate the total equity: Book value per share X number of shares = total equity $20 * 200,000 = $4,000,000 Next we need to calculate the total assets. We know the debt ratio is 40%. This tells us the equity ratio is 60%. D + E = TA $4,000,000 / .60 = $6,666,667 Now we can calculate the total debt outstanding: $6,666,667 - $4,000,000 = $2,666,667

15. Example
Burger Corp has $500,000 of assets, and it uses only common equity capital (zero debt).  Its sales for the last year were $600,000, and its net income after taxes was $25,000.   Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%.  What profit margin would Burger need in order to achieve the 15% ROE, holding everything else constant?

16. Answer
We need to calculate what income level is needed to provide a 15% ROE. 
Since there is zero debt, and D + E = TA, we know that E = TA so, equity = $500,000
ROE = net income / stockholders equity
.15 = NI / $500,000
NI = $75,000
This represents a profit margin of:
$75,000 / $600,000 = or 12.50%