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
07 Winter 472.42 2
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
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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
07 Winter 472.42 2
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
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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