1. Chapter 17 Fundamentals of Corporate Finance Fifth Edition Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved Financial Statement Analysis

2. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 2 Topics Covered  Financial Ratios  DuPont System  Using Financial ratios  Measuring Company Performance  The Role of Financial Ratios

3. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 3 Type of Financial Ratios  Leverage ratios show how heavily the company is in debt.  Liquidity ratios measure how easily the firm can lay its hands on cash.  Efficiency or turnover ratios measure how productively the firm is using its assets.  Profitability ratios are used to measure the firm’s return on its investments.

4. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 4 Financial Statements  Income Statement - Financial statement that shows the revenues, expenses, and net income of a firm over a period of time.  Common-Size Income - Statement Income statement that presents items as a percentage of revenues.  Balance Sheet - Financial statement that shows the value of the firm’s assets and liabilities at a particular time.  Common-Size Balance Sheet - Balance sheet that presents items as a percentage of total assets.

5. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 5 Leverage Ratios

6. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 6 Leverage Ratios

7. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 7 Liquidity Ratios

8. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 8 Liquidity Ratios

9. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 9 Efficiency Ratios

10. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 10 Efficiency Ratios

11. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 11 Profitability Ratios

12. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 12 Profitability Ratios

13. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 13 Market Value Ratios

14. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 14 Market Value Ratios

15. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 15 The DuPont System  A breakdown of ROE and ROA into component ratios

16. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 16 The DuPont System asset turnover Operating profit margin

17. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 17 The DuPont System leverage ratio asset turnover Operating profit margin debt burden

18. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 18 Using Financial Ratios Source: U.S. Department of Commerce, Quarterly Financial Report for Manufacturing, Mining and Trade Corporations, December 2004.

19. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 19 MVA & Economic Profit Economic Profit = capital invested multiplied by the spread between return on investment and the cost of capital. Market Value Added = The difference between the market value of common stock and its book value

20. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 20 Residual Income & EVA Residual Income or EVA = Net Dollar return after deducting the cost of capital © EVA is copyrighted by Stern-Stewart Consulting Firm and used with permission.

21. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 21 Measuring Performance

22. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 22 Measuring Performance Note: Economic value added is the rate of return on capital less the cost of capital times the amount of capital invested; e.g., for Microsoft, EVA = (.329 –.177) × $204,168 million Source: Data provided by Stern Stewart & Co.

23. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 23 Financial Ratios and Default Risk Note: EBITDA is earnings before interest, taxes, depreciation, and amortization. Sources: Default rates from “Statement of Standard & Poor’s on Credit Rating Agencies to SEC,” Public Hearing, November 2002; all other data from Standard & Poor’s.

24. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 24 Web Resources www.reportgallery.com www.prars.com www.corporateinformation.com www.jaxworks.com http://finance.yahoo.com http://edgarscan.pwcglobal.com www.sternstewart.com www.ibm.com/investor/financialguide Click to access web sites Internet connection required