fundamentals of corporate finance chapter 3 financial analysis and planning
TRANSCRIPT
Fundamentals of Corporate Finance
Chapter 3
Financial Analysis and Planning
Overview of Lecture
Corporate Finance in the News
Insert a current news story here to frame the material you will cover in the lecture.
The Annual Report
The Statement of Financial Position
Figure 3.1The Statement of Financial Position
The Balance Sheet Equation
Example 3.1Building the Statement of Financial Position
Example 3.1Building the Statement of Financial Position
Net Working Capital
Market vs Book Value
Example 3.2Market Value versus Book Value
Example 3.2Market Value versus Book Value
The Income Statement
The Income Statement
The Income Statement
Taxes
Which Tax Rate Should You Use in Financial Decisions?
Cash Flow
Work the Web
Now is a good time to download a set of company accounts and look through them in detail.
Financial Statement Analysis
Ratio Analysis
Liquidity or Short-Term Solvency Ratios
Short-Term Solvency Ratios
Current assets Current ratio =
Current liabilities
Current assets – Inventory Quick ratio =
Current liabilities
Cash and Cash EquivalentsCash ratio =
Current liabilities
Financial Leverage or Long-Term Solvency Ratios
Long-Term Solvency Ratios
Total assets – Total equity Total debt ratio =
Total assets
Debt–equity ratio = Total debt /Total equity
Equity multiplier = Total assets/Total equity
EBITTimes interest earned ratio =
Interest
EBIT Depreciation Cash coverage ratio
Interest
Asset Management or Turnover Ratios
Asset Management Ratios
Cost of goods sold Inventory turnover =
Inventory
365 days Days’ sales in inventory =
Inventory turnover
Sales Receivables turnover =
Trade receivables
365 days Days’ sales in receivables =
Receivables turnover
Sales Total asset turnover =
Total assets
Profitability Ratios
Profitability Ratios
Net income Profit margin =
Sales
Net income Return on assets =
Total assets
Net income Return on equity =
Total equity
Market Value Ratios
Market Value Ratios
Net income EPS =
Shares outstanding
Price per share PE ratio =
Earnings per share
Market value per share Market-to-book-ratio =
Book value per share
The Du Pont Identity
The Du Pont Identity: Proof
Net income Net income AssetsReturn on equity = = ×
Total equity Total equity Assets
Net income Assets= ×
Assets Total equity
Sales Net income AssetsROE = × ×
Sales Assets Total equity
Net income Sales AssetsROE = × ×
Sales Assets Total equityReturn on assets
= Profit margin × Total asset turnover × Equity multiplier
Using Financial Statement Information: Choose a Benchmark
Financial Statement Analysis: Some Issues
Financial Planning
Example: Chute SA
Income Statement Statement of Financial Position
Sales €1,000
Assets €500 Debt €250
Costs 800
Equity 250
Net income € 200
Total €500
Total €500
What happens if sales grow by 20 percent?
Assume that all variables are a constant percentage of sales
Example: Chute SA
Income StatementSales €1,200Costs 960Net income € 240
Statement of Financial Position
Assets €600 (+100) Debt €300 (+50)Equity 300 (+50)
Total €600 (+100) Total €600
(+100)
How can net income be €240 but equity only increases by €50?
The Percentage of Sales Approach
Example: Bogle plc
Bogle plcIncome Statement
Sales £1,000Costs 800Taxable income £ 200Taxes(28%) 56Net income £ 144Dividends £48Addition to retained earnings 96
Costs are a constant percentage of sales (i.e. Constant profit margin)Dividend payout ratio is constantWhat happens with a 25 percent increase in sales?
Example: Bogle plc (25% increase in Sales)
Bogle plcPro Forma Income Statement
Sales (projected) £1,250Costs (80% of sales) 1,000Taxable income £ 250Taxes (28%) 70Net income £ 180
Dividend payout ratio = Cash dividends / Net income = £48/£144 = 1/3
Projected dividends paid to shareholders = £180 1/3 = £ 60Projected addition to retained earnings = €180 2/3 = 120
£180
Example: Bogle plcStatement of Financial Position
Example: Bogle plcNew Statement of Financial Position
External Financing Needed
Assets Spontaneous liabilities = × Δ Sales × Δ Sales
Sales Sales× Projected sales × (1 )
EFN PM
d
For Bogle plc:
Bogle plcPossible Scenario
External Financing and Growth: Hoffman AG
Income StatementSales €500Costs 400Taxable income €100Taxes (34%) 34Net income €66Dividends €22Addition to retained earnings 44
External Financing and Growth: Hoffman AG
Financing and Growth: Hoffman AG
You forecast sales of €600 next year. What will be the new debt-equity ratio?
Sales (projected) €600.0
Costs (80% of sales) 480.0
Taxable income €120.0
Taxes (34%) 40.8
Net income € 79.2
Dividends €26.4
Addition to retained earnings
52.8
Financing and Growth: Hoffman AG
Assume Hoffman borrows €47.2, New DE Ratio is £297.2/£302.8 = .98
Growth and Projected EFN for Hoffman AG
Growth and Financing Requirements for Hoffman AG
Financial Policy and Growth
The Internal Growth Rate
For Paradise plc:
ROA ×Internal growth rate =
1 ROA ×
b
b
ROA ×Internal growth rate =
1 ROA ×
.144 × 2/3=
1 .144 × 2/3
= 10.62%
b
b
The Sustainable Growth Rate
For Paradise plc:
ROE × Sustainable growth rate =
1 ROE ×
b
b
ROE ×Sustainable growth rate =
1 ROE ×
.288 2 / 3
1 .288 2 / 3
= 23.76%
b
b
Determinants of Growth
ROE × Sustainable growth rate =
1 ROE ×
b
b
Financial Policy and Growth
Financial Planning Models: Some Caveats
Overview of Lecture
Activities for this Lecture
Thank You