1. 4- 1 McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved Fundamentals of Corporate Finance Sixth Edition Richard A. Brealey Stewart C. Myers Alan J. Marcus Slides by Matthew Will Chapter 4 McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved Measuring Corporate Performance

2. 4- 2 Topics Covered  Value and Value Added  Measuring Profitability  Measuring Efficiency  Analyzing the Return on Assets: The Du Pont System  Measuring Leverage  Measuring Liquidity  Calculating Sustainable Growth  Interpreting Financial Ratios  The Role of Financial Ratios–and a Final Note on Transparency

3. 4- 3 Value and Value Added PepsiCo Balance Sheet (December 31, 2006) $Millions

4. 4- 4 Value and Value Added Pepsico Income Statement (year end 2006) Net Sales 35,753 COGS 15,762 Selling, G&A expenses 11,530 Depreciation expense 1,406 EBIT7,055 Net interest expense 66 Taxable Income6,989 Income Taxes1,347 Net Income5,642

5. 4- 5 Value and Value Added  Market Capitalization  Total market value of equity, equal to share price times number of shares outstanding.  Market Value Added  Market capitalization minus book value of equity.

6. 4- 6 Value and Value Added  Stock market measures of company performance, 2006. Companies are ranked by market value added. (dollar values in millions)

7. 4- 7 Value and Value Added  Market-to-Book Ratio  Ratio of market value of equity to book value of equity.

8. 4- 8 Measuring Profitability  Economic Value Added (EVA)  Net income minus a charge for the cost of capital employed. Also called residual income.  Residual Income  Net Dollar return after deducting the cost of capital

9. 4- 9 Measuring Profitability  Economic Value Added (EVA) of PepsiCo

10. 4- 10 Measuring Profitability  Accounting measures of company performance, 2006. Companies are ranked by return on equity.

11. 4- 11 Measuring Profitability  Return on Equity (ROE)  Net income as a percentage of shareholders’ equity  Return on Capital (ROC)  Net income plus Interest as a percentage of long- term capital.  Return on Assets (ROA)  Net income plus interest as a percentage of total assets

12. 4- 12 Measuring Profitability PepsiCo Profitability Measurements

13. 4- 13 Measuring Efficiency OR For PepsiCo

14. 4- 14 Measuring Efficiency

15. 4- 15 The DuPont System  A breakdown of ROE and ROA into component ratios

16. 4- 16 The DuPont System asset turnover Operating profit margin

17. 4- 17 Measuring Leverage

18. 4- 18 Measuring Leverage

19. 4- 19 Measuring Leverage leverage ratio asset turnover Operating profit margin debt burden

20. 4- 20 Measuring Liquidity

21. 4- 21 Liquidity Ratios

22. 4- 22 Sustainable Growth

23. 4- 23 Interpreting Financial Ratios  PepsiCo Ratios

24. 4- 24 Interpreting Financial Ratios  PepsiCo Ratios (continued)

25. 4- 25 Interpreting Financial Ratios  Selected 2006 financial ratios for industry groups in Standard & Poor’s Composite Index

26. 4- 26 The Role of Financial Ratios

27. 4- 27 Web Resources