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Fundamentals Of Corporate Finance Standard Ed. 11
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FINANCIAL STATEMENTS ANALYSIS AND FINANCIAL MODELS
Chapter 3
Copyright 2014 McGraw-Hill Education. All rights rsr!d. "o rproduction or distri#ution without th prior writtn consnt o$ McGraw-Hill Education.
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KEY CONCEPTS AND SKILLS
Standardize financial stateents f!r c!paris!np"rp!ses
C!p"te and interpret ip!rtant financial rati!s
incl"din# the fa!"s D"P!nt Identit$ De%el!p a financial plan "sin# the percenta#e !f
sales appr!ach
Discern h!& capital str"ct"re and di%idend
p!licies affect a fir's a(ilit$ t! #r!&
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C)APTE* O+TLINE
3,- Financial Stateents Anal$sis
3,. *ati! Anal$sis
3,3 The D" P!nt Identit$
3,/ Financial M!dels
3,0 E1ternal Financin# and 2r!&th
3, S!e Ca%eats *e#ardin# Financial Plannin#
M!dels
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3,- FINANCIAL STATEMENTSANALYSIS
M"st de%el!p a #!!d &!r4in# 4n!&led#e!f financial stateents
Ma4in# financial stateents "sef"l f!r"sers is !ne finance r!le
In !rder t! a4e eanin#f"l c!paris!ns!f c!panies !f different size financial
pr!fessi!nals "se t&! 4e$ techni5"es6 C!!n7Size Stateents
Financial *ati!s
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COMMON7SI8E FINANCIALSTATEMENTS
Common-Size Balance Sheets Compute all accounts as a percent of total assets
Common-Size Income Statements
Compute all line items as a percent of sales
Standardized statements make it easier to comparenancial information, particularly as the companygrows.
They are also useful for comparing companies ofdierent sizes, particularly within the same industry.
!ractice "int# $ou may ha%e round percentages inCommon-Size Statements
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3-&3-&
P*+F*OCK CO*PO*ATIONCOMPA*ISON6 FINANCIAL 9 COMMON SI8E
:ALANCE S)EET
Balance Sheet Common Size BalanceSheet
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Pr"fr!c4 C!rp!rati!nC!paris!n6 Financial 9 C!!n Size Inc!e
Stateent
Inc!e Stateent
C!!n Size Inc!eStateent
3-'
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3,. *ATIO ANALYSIS
*ati!s c!plient c!!n size anal$sis andall!& f!r deeper c!paris!n thr!"#h tie !r(et&een dissiilar c!panies
N!t al&a$s c!p"ted precisel$ the sae;d!c"ent $!"r appr!ach As &e l!!4 at each rati!< as4 $!"rself6
)!& is the rati! c!p"ted= >hat is the rati! tr$in# t! eas"re and &h$= >hat is the "nit !f eas"reent= >hat d!es the %al"e indicate= )!& can &e ipr!%e the c!pan$'s rati!=
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CATE2O*IES OF FINANCIAL *ATIOS
Sh!rt7ter s!l%enc$ !r li5"idit$ rati!s
L!n#7ter s!l%enc$ !r financial le%era#e rati!s
Asset ana#eent !r t"rn!%er rati!s
Pr!fita(ilit$ rati!s
Mar4et %al"e rati!s
F!ll!&in# e1aples all (ased !n Ta(les 3,- 9 3,/
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COMP+TIN2 LI?+IDITY *ATIOS
C"rrent *ati! @ CA CL B 0/ @ -,3- ties
?"ic4 *ati! @ CA In%ent!r$G CL
B 7 /..G 0/ @ ,03 ties Cash *ati! @ Cash CL
H 0/ @ ,- ties
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COMP+TIN2 LEE*A2E *ATIOS
T!tal De(t *ati! @ TA TEG TA 30 7 .0H-G 30 @ .J
De(tE5"it$ @ TD TE
30 .0H-G .0H- @ 3,0J E5"it$ M"ltiplier @ TA TE @ - DE
- ,30 @ -,30
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COMP+TIN2 COE*A2E *ATIOS
Ties Interest Earned @ E:IT Interest H- -/- @ /,H ties
Cash C!%era#e @ E:IT Depreciati!n
A!rtizati!nG Interest H- .BG -/- @ ,H ties
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COMP+TIN2 INENTO*Y *ATIOS
In%ent!r$ T"rn!%er @ C!st !f 2!!ds S!ld In%ent!r$ -3// /.. @ 3,. ties
Da$s' Sales in In%ent!r$ @ 30 In%ent!r$T"rn!%er 30 3,. @ --/ da$s
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COMP+TIN2 *ECEIA:LES *ATIOS
*ecei%a(les T"rn!%er @ Sales Acc!"nts*ecei%a(le .3-- - @ -.,3 ties
Da$s' Sales in *ecei%a(les @ 30 *ecei%a(lesT"rn!%er 30 -.,3 @ 3 da$s
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3-1%
COMP+TIN2 TOTAL ASSET T+*NOE*
T!tal Asset T"rn!%er @ Sales T!tal Assets .3-- 30 @ ,/ ties
It is n!t "n"s"al f!r TAT -< especiall$ if a fir has alar#e a!"nt !f fi1ed assets,
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COMP+TIN2 P*OFITA:ILITYMEAS+*ES
Pr!fit Mar#in @ Net Inc!e Sales 33 .3-- @ -0,BJ
*et"rn !n Assets *OAG @ Net Inc!e
T!tal Assets 33 30 @ -,-.J
*et"rn !n E5"it$ *OEG @ Net Inc!e T!tal E5"it$ 33 .0H- @ -/,-J
E:ITDA Mar#in @ E:ITDA Sales HB .3-- @ /-,J
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COMP+TIN2 MA*KET AL+EMEAS+*ES
Mar4et Capitalizati!n @ per share 1 33illi!n shares @ .H/ illi!n
PE *ati! @ Price per share Earnin#s per share
-- @ ties Mar4et7t!7(!!4 rati! @ Mar4et %al"e per share
:!!4 %al"e per share .0H- 33G @ -,-. ties
Enterprise al"e EG @ Mar4et capitalizati!n Mar4et %al"e !f interest (earin# de(t Cash .H/ -H /0BG H @ 3/0H illi!n
E M"ltiple @ E E:ITDA 3/0H HB @ 3, ties
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3-1(3-1(
S+MMA*Y OF *ATIO FO*M+LAE
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3-1)
+SIN2 FINANCIAL *ATIOS
*ati!s are n!t %er$ helpf"l ($ thesel%es6the$ need t! (e c!pared t! s!ethin#
Tie7Trend Anal$sis
+sed t! see h!& the fir's perf!rance ischan#in# thr!"#h tie
Peer 2r!"p Anal$sis
C!pare t! siilar c!panies !r &ithin
ind"stries 2! t! &&&,re"ters,c!financest!c4s
+se the Financials lin4 t! #et c!parati%e rati!s f!ran$ c!panies
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3,3 T)E D+PONT IDENTITY
P!p"larized ($ the D"P!nt C!rp!rati!n
A !re s!phisticated eth!d !f e%al"atin#ret"rn
Ill"strates the interacti!n (et&een pr!fit
3-30
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PE*CENT OF SALES AND EFN
E1ternal Financin# Needed EFNG can als! (ecalc"lated as6 ...
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3,0 ETE*NAL FINANCIN2 AND2*O>T)
At l!& #r!&th le%els< internal financin# retainedearnin#sG a$ e1ceed the re5"ired in%estent inassets,
As the #r!&th rate increases< the internal
financin# &ill n!t (e en!"#h< and the fir &illha%e t! #! t! the capital ar4ets f!r financin#,
E1ainin# the relati!nship (et&een #r!&th ande1ternal financin# re5"ired is a "sef"l t!!l in
financial plannin#,
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T)E INTE*NAL 2*O>T) *ATE
The internal #r!&th rate is the a1i" #r!&th
rate "sin# retained earnin#s as the !nl$ s!"rce!f financin#
In !ther &!rds< the I2* is the a1i" #r!&thrate &ith n! EFN !f an$ 4ind,
+sin# the inf!rati!n fr! the )!ffan C!,
*OA @ 0 @ ,-3.
( @ // @ ,B ....
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T)E S+STAINA:LE 2*O>T) *ATE
The s"staina(le #r!&th rate tells "s h!& "chthe fir can #r!& ($ "sin# internall$ #eneratedf"nds and iss"in# de(t t! aintain a c!nstantde(t rati!,
+sin# the )!ffan C!, *OE @ .0 @ ,./
( @ ,B ....
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3-3%
DETE*MINANTS OF 2*O>T)
Pr!fit ar#in !peratin# efficienc$
T!tal asset t"rn!%er asset "se efficienc$
Financial le%era#e ch!ice !f !ptial de(t rati!
Di%idend p!lic$ ch!ice !f h!& "ch t! pa$ t!shareh!lders %ers"s rein%estin# in the fir
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3, SOME CAEATS
Financial plannin# !dels d! n!t indicate &hichfinancial p!lices are the (est,
M!dels are siplificati!ns !f realit$< and the &!rld
can chan#e in "ne1pected &a$s, >ith!"t s!e s!rt !f plan< the fir a$ find itself
adrift in a sea !f chan#e &ith!"t a r"dder f!r#"idance,
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3-3'
?+ICK ?+I8
)!& d! $!" standardize (alance sheetsand inc!e stateents=
>h$ is standardizati!n "sef"l= >hat are the a!r cate#!ries !f
financial rati!s= )!& d! $!" c!p"te the rati!s &ithin
each cate#!r$=
>hat are s!e !f the pr!(lesass!ciated &ith financial stateentanal$sis=
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?+ICK ?+I8
>hat is the p"rp!se !f financial plannin#= >hat are the a!r decisi!n areas in%!l%ed
in de%el!pin# a plan=
>hat is the percenta#e !f sales appr!ach= >hat is the internal #r!&th rate=
>hat is the s"staina(le #r!&th rate=
>hat are the a!r deterinants !f
#r!&th=