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473.32 3 Winter 2014

CF. 473.32 3 Winter 2014. Corporate Finance. Capital Budgeting Long-term investments which ones? Capital Structure Long-term financing where? Working Capital Management Ongoing financial activities how?. Comparing. apples to apples size time one-to-many. Comparing.

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473.32 3 Winter 2014

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  1. CF 473.32 3 Winter 2014

  2. Corporate Finance • Capital Budgeting • Long-term investments • which ones? • Capital Structure • Long-term financing • where? • Working Capital Management • Ongoing financial activities • how?

  3. Comparing • apples to apples • size • time • one-to-many

  4. Comparing • 3 basic ways • common size • base year • ratios

  5. Comparing • Prufrock • Balance Sheets • common size • 2005 • 2006 • Change • Current assets • Cash • $ 84 • 98 • A/R • 165 • 188 • Inventory • 393 • 422 • Total • 642 • 708 • Fixed assets • Net, P & E • 2,731 • 2,880 • Total assets • 3,373 • 3,588

  6. Comparing • Prufrock • Balance Sheets • common size • 2005 • 2006 • Change • Current assets • Cash • 2.5 • 2.7 • + • .2 • A/R • 4.9 • 5.2 • + • .3 • Inventory • 11.7 • 11.8 • + • .1 • Total • 19.0 • 19.7 • .7 • + • Fixed assets • Net, P & E • 81.0 • 80.3 • - • .7 • Total assets • 100.0 • % • 100.0 • 0

  7. Comparing • Prufrock • Balance Sheets • base year • 2005 • 2005 • 2006 • Current assets • Cash • $ 84 • 98 • 1.17 • A/R • 165 • 188 • 1.14 • Inventory • 393 • 422 • 1.07 • Total • 642 • 708 • 1.10 • Fixed assets • Net, P & E • 2,731 • 2,880 • 1.05 • Total assets • 3,373 • 3,588 • 1.06

  8. Comparing • Prufrock • Balance Sheets • base year • 2005 • 2006 • 2007 • 2008 • Current assets • Cash • $ 84 • 1.17 • A/R • 165 • 1.14 • Inventory • 393 • 1.07 • Total • 642 • 1.10 • Fixed assets • Net, P & E • 2,731 • 1.05 • Total assets • 3,373 • 1.06

  9. Comparing • common size • base year • ratios • “crunching the numbers”

  10. short-term Liquidity ratios longer-term Solvency ratios Financial leverage asset use Turnover ratios Activity ratios Profitability Performance ratios Market value Crunching The Numbers

  11. Crunching The Numbers • Liquidity • Current ratio • Quick ratio • acid test ratio • Cash ratio • Net working capital • Interval measure

  12. Current Ratio • $ • ratios • 2010 • 2011 • 2010 • 2011 • current ratio = • current assets • 642 • 708 • 1.18 • 1.31 • current liabilities • 543 • 540

  13. Quick Ratio • $ • ratios • 2010 • 2011 • 2010 • 2011 • quick ratio = • current assets - inventory • 642 - 393 • 708 - 422 • 0.46 • 0.53 • current liabilities • 543 • 540

  14. Interval Measure • $ • days • 2011 • 2011 • interval measure = • current assets • 708 • = • 192 • average daily operating costs • 3.68 • COGS • average daily operating costs = • total costs – (depreciation + interest) • 365

  15. Assignment 1 • Mini Case from end of ch 3 • pg 84

  16. short-term liquidity ratios longer-term solvency ratios financial leverage asset use turnover ratios activity ratios profitability performance ratios market value Crunching The Numbers

  17. Crunching The Numbers • Solvency • Total debt ratio • Debt/equity ratio • Equity multiplier • Long-term debt ratio • Times interest earned ratio • Cash coverage

  18. Total Debt Ratio • $ • ratio • 2011 • 2011 • total debt ratio = • total assets – total equity • 3,588 – 2,519 • .28 • total assets • 3,588

  19. Debt/Equity Ratio • $ • ratio • 2011 • 2011 • debt/equity ratio = • current liabilities + long-term debt • 540 + 457 • .38 • total equity • 2,591

  20. Long-term Debt Ratio • $ • ratio • 2011 • 2011 • long-term debt ratio = • long-term debt • 457 • .15 • 457 + 2,591 • long-term debt + total equity • long-term capitalization

  21. Cash Coverage • $ • ratio • 2011 • 2011 • cash coverage = • EBIT + depreciation • 691 + 276 • 6.9 • interest • 141

  22. short-term liquidity ratios longer-term solvency ratios financial leverage asset use turnover ratios activity ratios profitability performance ratios market value Crunching The Numbers

  23. Crunching The Numbers • Turnover • Inventory turnover • Day’s sales in inventory • Receivables turnover • Days’ sales in receivables • NWC turnover • Fixed asset turnover • Total asset turnover

  24. Inventory Turnover • $ • times • 2011 • 2011 • inventory turnover = • COGS • 1,344 • 3.2 • inventory • 422

  25. Days Sales in Receivables • “collection ratio” • $ • days • 2011 • 2011 • days sales in receivables = • A/R x 365 • 188 x 365 • 30 • sales • 2,311

  26. NWC Turnover • $ • times • 2011 • 2011 • NWC turnover = • sales • 2,311 • 13.8 • current assets – current liabilities • 708 - 540 • net working capital

  27. short-term liquidity ratios longer-term solvency ratios financial leverage asset use turnover ratios activity ratios profitability performance ratios market value Crunching The Numbers

  28. Crunching The Numbers • Profitability • Cash flow to total assets • Profit margin • Gross profit margin • Operating profit margin • ROA • ROE • Du Pont Identity

  29. Profit Margin • $ • rate • 2011 • 2011 • profit margin = • net income • 363 • 16% • sales • 2,311

  30. Return On Assets • $ • rate • 2011 • 2011 • ROA = • net income • 363 • 10% • total assets • 3,588 • Return on Investment • ROI

  31. Return on Equity • $ • rate • 2011 • 2011 • ROE = • net income • 363 • 14% • total equity • 2,591 • Return on shareholders’ investment • Return on net worth

  32. Du Pont Identity

  33. Du Pont Identity • asset use • efficiency • financial leverage • operating • efficiency • du pont identity: ROE = • profit margin x asset turnover x equity multiplier

  34. Du Pont Identity • asset use • efficiency • financial leverage • operating • efficiency

  35. Du Pont Identity • asset use • efficiency • financial leverage • operating • efficiency • du pont identity: ROE = • net income • x • sales • x • assets • sales • assets • equity • 2010: • 11.6% • x • .61 • x • 1.47 • = 10.4% • 2011: • 15.7% • x • .64 • x • 1.39 • = 14.0% • change: • +35% • +6% • -6% • 35%

  36. short-term liquidity ratios longer-term solvency ratios financial leverage asset use turnover ratios activity ratios profitability performance ratios market value Crunching The Numbers

  37. Crunching The Numbers • Market value measures • Price/Earnings ratio • Market-to-book ratio • Earnings Per Share

  38. Price/Earnings Ratio • $ • ratio • 2011 • 2011 • 157 x 33 • 14.27 • 363 • P/E • shares sell for ____ times earnings • shares carry a P/E multiple of ____

  39. Market-to-Book Ratio • Book value per share • Market capitalization to balance sheet equity

  40. Internal Performance compensation comparison Planning future cash flows External Creditors Stockholders Uses

  41. Problems • apples to apples? • diversified firms • different accounting methods • different fiscal years • extraordinary events • no underlying theory (except duPont)

  42. 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

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