CF

473.32

3

Winter 2014

07 Winter 472.42 2

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?

07 Winter 472.42 2

Comparing

apples to apples size time one-to-many

07 Winter 472.42 2

Comparing

3 basic ways1. common size

2. base year

3. ratios

07 Winter 472.42 2

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

PrufrockBalance Sheets

07 Winter 472.42 2

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

PrufrockBalance Sheets

+

Net, P & E

Total assets

Fixed assets

Total

Inventory

A/R

Cash

Current assets

07 Winter 472.42 2

Comparing

2. base year

3,373

1.05 2,731

1.06

1.10642

1.07393

1.14165

1.17$ 84

2005

PrufrockBalance Sheets

2,880

3,588

708

422

188

98

20062005

Net, P & E

Total assets

Fixed assets

Total

Inventory

A/R

Cash

Current assets

07 Winter 472.42 2

Comparing

2. base year

2007

3,373

1.05 2,731

1.06

1.10 642

1.07393

1.14165

1.17$ 84

2008

PrufrockBalance Sheets

20062005

Net, P & E

Total assets

Fixed assets

Total

Inventory

A/R

Cash

Current assets

07 Winter 472.42 2

Comparing

1. common size

2. base year

3. ratios

“crunching the numbers”

07 Winter 472.42 2

Crunching The Numbers

short-term Liquidity ratios

longer-term Solvency ratios Financial leverage

asset use Turnover ratios Activity ratios

Profitability Performance ratios

Market value

07 Winter 472.42 2

Crunching The Numbers

Liquidity1. Current ratio

2. Quick ratio acid test ratio

3. Cash ratio

4. Net working capital

5. Interval measure

07 Winter 472.42 2

Current Ratio

ratios$

540

708

2011

543current liabilities1.311.18

642current assetscurrent ratio =

201120102010

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Quick Ratio

ratios$

540

708 - 422

2011

543current liabilities0.530.46

642 - 393current assets - inventoryquick ratio =

201120102010

07 Winter 472.42 2

Interval Measure

days$

=3.68

708

2011

average daily operating costs192

current assetsinterval measure =

2011

365

total costs – (depreciation + interest)average daily operating costs =

COGS

07 Winter 472.42 2

Assignment 1

Mini Case from end of ch 3• pg 84

07 Winter 472.42 2

Crunching The Numbers

short-term liquidity ratios

longer-term solvency ratios financial leverage

asset use turnover ratios activity ratios

profitability performance ratios

market value

07 Winter 472.42 2

Crunching The Numbers

Solvency6. Total debt ratio

7. Debt/equity ratio

8. Equity multiplier

9. Long-term debt ratio

10. Times interest earned ratio

11. Cash coverage

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Total Debt Ratio

ratio$

3,588

3,588 – 2,519

2011

total assets.28

total assets – total equitytotal debt ratio =

2011

07 Winter 472.42 2

Debt/Equity Ratio

ratio$

2,591

540 + 457

2011

total equity.38

current liabilities + long-term debtdebt/equity ratio =

2011

07 Winter 472.42 2

Long-term Debt Ratio

ratio$

457 + 2,591

457

2011

long-term debt + total equity.15

long-term debtlong-term debt ratio =

2011

long-term capitalization

07 Winter 472.42 2

Cash Coverage

ratio$

141

691 + 276

2011

interest6.9

EBIT + depreciationcash coverage =

2011

07 Winter 472.42 2

Crunching The Numbers

short-term liquidity ratios

longer-term solvency ratios financial leverage

asset use turnover ratios activity ratios

profitability performance ratios

market value

07 Winter 472.42 2

Crunching The Numbers

Turnover12. 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

07 Winter 472.42 2

Inventory Turnover

times$

422

1,344

2011

inventory3.2

COGSinventory turnover =

2011

07 Winter 472.42 2

Days Sales in Receivables

days$

2,311

188 x 365

2011

sales30

A/R x 365days sales in receivables =

2011

“collection ratio”

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net working capital

NWC Turnover

times$

708 - 540

2,311

2011

current assets – current liabilities13.8

salesNWC turnover =

2011

07 Winter 472.42 2

Crunching The Numbers

short-term liquidity ratios

longer-term solvency ratios financial leverage

asset use turnover ratios activity ratios

profitability performance ratios

market value

07 Winter 472.42 2

Crunching The Numbers

Profitability19. Cash flow to total assets

20. Profit margin

21. Gross profit margin

22. Operating profit margin

23. ROA

24. ROE

25. Du Pont Identity

07 Winter 472.42 2

Profit Margin

rate$

2,311

363

2011

sales16%

net incomeprofit margin =

2011

07 Winter 472.42 2

Return On Assets

rate$

3,588

363

2011

total assets10%

net incomeROA =

2011

Return on InvestmentROI

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Return on Equity

rate$

2,591

363

2011

total equity14%

net incomeROE =

2011

Return on shareholders’ investmentReturn on net worth

07 Winter 472.42 2

Du Pont Identity

du pont identity: ROE = profit margin x asset turnover x equity multiplier

07 Winter 472.42 2

Du Pont Identity

profit margin x asset turnover x equity multiplierdu pont identity: ROE =

operatingefficiency

asset use

efficiency

financial leverag

e

07 Winter 472.42 2

Du Pont Identity

du pont identity: ROE =net income

•sales

•assets

sales assets equity

operatingefficiency

asset use

efficiency

financial leverag

e

07 Winter 472.42 2

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:

xsales

net incomex

assets

salesdu pont identity: ROE =

operatingefficiency

asset use

efficiency

financial leverag

e

07 Winter 472.42 2

Crunching The Numbers

short-term liquidity ratios

longer-term solvency ratios financial leverage

asset use turnover ratios activity ratios

profitability performance ratios

market value

07 Winter 472.42 2

Crunching The Numbers

Market value measures26. Price/Earnings ratio

27. Market-to-book ratio

28. Earnings Per Share

07 Winter 472.42 2

Price/Earnings Ratio

P/E ratio =share price x shares outstanding

net income

P/Eshares sell for ____ times earningsshares carry a P/E multiple of ____

ratio$

363

157 x 33

2011

14.27

2011

07 Winter 472.42 2

Market-to-Book Ratio

$ ratio

2011 2011

market-to-book ratio =share price x shares outstanding 157 x 33

2total equity 2,591

Book value per shareMarket capitalization to balance sheet equity

07 Winter 472.42 2

Uses

Internal Performance

• compensation

• comparison

Planning • future cash flows

External Creditors Stockholders

07 Winter 472.42 2

Problems

apples to apples? diversified firms different accounting methods different fiscal years extraordinary events

no underlying theory (except duPont)

07 Winter 472.42 2

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