Principles of corporate finance 6th brealey myers chapter 28

Principles of Corporate Finance Brealey and Myers  Sixth Edition Financial Analysis and Planning Slides by Matthew Will Irwin/McGraw Hill Chapter 28 ©The McGraw-Hill Companies, Inc., 200 28- Topics Covered  Executive Paper Corporation  Financial Ratios  The DuPont System  Financial Planning  Growth and External Financing Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 28- Executive Paper Executive Paper Balance Sheet Dec 1998 Dec 1999 diff Assets Current Assets Cash & Securities Receivables Inventory Total 100.0 433.1 339.9 873.0 110.0 440.0 350.0 900.0 10.0 6.9 10.1 27.0 Fixed Assets P, P, E accum Depr Net Fixed Assets 929.8 396.7 533.1 100.0 450.0 550.0 -829.8 53.3 16.9 1,406.1 1,450.0 43.9 Total Assets Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 28- Executive Paper Dec 1998 Dec 1999 diff Liabilities and Equity Current Liabilities Debt due in year Payable Total current liabilities 96.6 349.9 446.5 100.0 360.0 460.0 3.4 10.1 13.5 Long term debt 400.0 400.0 0.0 Shareholders equity 559.6 590.0 30.4 1,406.1 1,450.0 43.9 Total liabilities and equity Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 28- Executive Paper Executive Paper - Other Data 1998 1999 Estimated repalcement cost of assets 1110 1231 598 708 Average number of shares, millions 14.16 14.16 Share price, dollars 42.25 50 Market value of equity Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 28- Executive Paper Executive Paper Income Statement (1999) Revenues Costs Depreciation EBIT Interest Tax Net income Dividend Retained earnings Earnings per share, dollars Dividend per share, dollars Irwin/McGraw Hill $ millions 2,200.00 1,980.00 53.30 166.70 40.00 50.70 76.00 45.60 30.40 5.37 3.22 ©The McGraw-Hill Companies, Inc., 200 28- Executive Paper Executive Paper Sources and Uses of Funds (1999) Sources: Net Income Depreciation Operating cash flow Borrowing Stock issues Total sources Uses: Increase in net working capital Investment Dividends Total uses Irwin/McGraw Hill $ millions 76.00 53.30 129.30 129.30 13.50 70.20 45.60 129.30 ©The McGraw-Hill Companies, Inc., 200 28- Leverage Ratios lo n g te rm d e b t L o n g te rm d e b t tio = lo n g te rm d e b t + e q u ity lo n g te rm d e b t + v a lu e o f le a s e s D e b t e q u ity r a tio = e q u ity Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 28- Leverage Ratios total liabilities Total debt ratio = total assets Times interest earned EBIT = interest payments EBIT + depreciation Cash cover age ratio = interest payments Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 28- 10 Liquidity Ratios Net working capital to total assets ratio Net working capital = Total assets current assets Current ratio = current liabilities Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 28- 11 Liquidity Ratios cash + m arketable securities + receivables Quick ratio = current liabilities cash + m arketable securities Cash ratio = current liabilities Interval m easure = Irwin/McGraw Hill cash + m arketable securities + receivables average daily expenditures from operations ©The McGraw-Hill Companies, Inc., 200 28- 12 Efficiency Ratios Asset turnover ratio Sales = Average total assets sales NW Cturnover = average net working capital Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 28- 13 Efficiency Ratios cost of goods sold Inventory turnover ratio = average inventory average inventory Days' sales in inventory = cost of goods sold / 365 Average collection period = Irwin/McGraw Hill average receivables average daily sales ©The McGraw-Hill Companies, Inc., 200 28- 14 Profitability Ratios N et profit m argin = EBIT - tax sales EBIT - tax Return on assets = average total assets earnings available for com m on stock Return on equity = average equity Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 28- 15 Profitability Ratios dividends Payout ratio = earnings earnings - dividends Plowback ratio = earnings = - payout ratio earnings - dividends G row th in equity from plow back = earnings Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 28- 16 Market Value Ratios stock price PE Ratio = earnings per share P0 Di v 1 Forecasted PE ratio = = x aveEPS EPS1 r - g dividend per share Dividend yield = stock price Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 28- 17 Market Value Ratios Price per share = P0 Div = r - g stock price M arket to book ratio = book value per share market value of assets Tobins Q = estimated replcement cost Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 28- 18 The DuPont System  A breakdown of ROE and ROA into component ratios: EBIT - taxes ROA = assets earnings available for common stock ROE = equity Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 28- 19 The DuPont System sales EBIT - taxes ROA = x assets sales Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 28- 20 The DuPont System sales EBIT - taxes ROA = x assets sales asset turnover Irwin/McGraw Hill profit margin ©The McGraw-Hill Companies, Inc., 200 28- 21 ROE = The DuPont System assets sales EBIT - taxes EBIT - taxes - interest x x x equity assets sales EBIT - taxes Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 28- 22 The DuPont System ROE = assets sales EBIT - taxes EBIT - taxes - interest x x x equity assets sales EBIT - taxes leverage asset ratio turnover Irwin/McGraw Hill profit margin debt burden ©The McGraw-Hill Companies, Inc., 200 ... McGraw-Hill Companies, Inc., 200 28- Executive Paper Executive Paper - Other Data 1998 1999 Estimated repalcement cost of assets 1110 1231 598 708 Average number of shares, millions 14.16 14.16... average receivables average daily sales ©The McGraw-Hill Companies, Inc., 200 28- 14 Profitability Ratios N et profit m argin = EBIT - tax sales EBIT - tax Return on assets = average total assets... 50.70 76.00 45.60 30.40 5.37 3.22 ©The McGraw-Hill Companies, Inc., 200 28- Executive Paper Executive Paper Sources and Uses of Funds (1999) Sources: Net Income Depreciation Operating cash flow