MT 217 Unit 3 Seminar

Chapter 3

Financial StatementsCash Flows

Taxes

Financial Statements

Balance SheetIncome Statement

Statement of Cash Flows

Example

Net Income + non cash charges (depreciation and amortization) = Cash Flow

$5,200,000 + 600,000 = $5,800,000

Shop-Til-You-Drop Inc. recently reported net income of $5.2 million and depreciation of $600,000. What is was net cash flow? Assume it has no amortization expense.

Modifying Accounting Data for Investor and Managerial Decisions

Operating Assets and Operating CapitalNet Operating Working Capital

NOWC = (All current assets required in operations) – (All non-interest bearing current liabilities)

Operating Cash FlowsOperating cash flow NOPAT Depreciation and amortization

Free Cash FlowFCF Operating cash flow Investment in operating capital

MVA and EVA

• Market Value Added (MVA): The excess of the market value of equity over its book value.

• Economic Value Added (EVA): Excess of NOPAT over capital costs.

Chapter 4

Analysis of Financial Statements

Why are Ratios Useful?

• Ratios standardize numbers and facilitate comparisons.

• Ratios are used to highlight weaknesses and strengths.

• Ratio comparisons should be made through time and with competitors– Trend analysis– Peer (or Industry) analysis

5 Categories of Ratios

Liquidity Asset Management

Debt Management

Profitability Market Value

Current Inventory Turnover

Total debt to Total Assets

Profit Margin P/E

Quick Day Sales Outstanding

TIE ROA Price/Cash Flow

Fixed Asset Turnover

EBITDA coverage

ROE

Total Asset Turnover

BEP

Example

• Balance sheet: market value vs. book value Shares Outstanding 100,000

• Price per share $57.25 • Total common equity $2,050,000• Book value per share $20.50• Difference between book and market value

$36.75

Superior Medical System's 2005 balance sheet showed total common equity of $2,050,000. The company had 100,000 shares of stock outstanding which sold at a price of $57.25 per share. By how much did the firm's market value and book value per share differ?

Example

McDonald Inc. paid out $25,000 common dividends during 2005, and it ended the year with $150,000 of retained earnings. The prior year’s retained earnings were $145,000. What was the firm's 2005 net income?

Current RE = Prior RE + NI – dividends paid$150,000 = $145,000 + NI - $25,000$5,000 = NI - $25,000NI = $30,000

Example

Raleigh Corp's total common equity at the end of last year was $300,000 and its net income after taxes was $55,000. What was its ROE?

ROE = NI /Common equity ROE = $55,000 / $300,000 = .1833 or 18.33%

Example

Puritan Corp's stock price at the end of last year was $30.25 and its earnings per share for the year were $2.35. What was its P/E ratio?

P/E = current stock price / earnings per share = $30.25 / $2.35

P/E = 12.87

Example

Cooper Inc's latest EPS was $4.00, its book value per share was $20.00, it had 200,000 shares outstanding, and its debt ratio was 40%. How much debt was outstanding?

First, we need to calculate the total equity:Book value per share X number of shares = total equity$20 * 200,000 = $4,000,000Next we need to calculate the total assets. We know the debt

ratio is 40%. This tells us the equity ratio is 60%. D + E = TA$4,000,000 / .60 = $6,666,667Now we can calculate the total debt outstanding:$6,666,667 - $4,000,000 = $2,666,667

Example

Burger Corp has $500,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $600,000, and its net income after taxes was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would Burger need in order to achieve the 15% ROE, holding everything else constant?

Answer

• We need to calculate what income level is needed to provide a 15% ROE.

• Since there is zero debt, and D + E = TA, we know that E = TA so, equity = $500,000

• ROE = net income / stockholders equity.15 = NI / $500,000NI = $75,000This represents a profit margin of:$75,000 / $600,000 = .1250 or 12.50%