In These Spreadsheets, You Will Learn How To Use The Following Excel Functions

Ross, Westerfield, Jaffe, and Jordan's Excel Master
Corporate Finance, 12th edition

by Brad Jordan and Joe Smolira
Version 12.0
Chapter 3
Absolute references
IF
In these spreadsheets, you will learn how to use the follow
SUMIF
Conditional formatting
Text boxes
Shapes and lines
Data tables
Graphing
Iterative calculations
The following conventions are used in these spreadsheets
1) Given data in blue

2) Calculations in red
NOTE: Some functions used in these spreadsheets may require that

the "Analysis ToolPak" or "Solver Add-In" be installed in Excel.
To install these, click on the File tab
then "Excel Options," "Add-Ins" and select
"Go." Check "Analysis ToolPak" and
"Solver Add-In," then click "OK."
ow to use the following Excel functions:
these spreadsheets:
heets may require that

installed in Excel.
Chapter 3 - Section 1
Financial Statements Analysis
Below, we have the balance sheets for Prufrock Corporation. Each account also has a calculation column
Prufrock Corporat
2018 and 2019 Balance
($ millions)
2018 2019 Change
Current assets
Cash $ 84 $ 98 $ 14
Accounts receivable 165 188 23
Inventory 393 422 29
Total $ 642 $ 708 $ 66
Fixed assets
Net plant and equipment $ 2,731 $ 2,880 $ 149
Total assets $ 3,373 $ 3,588 $ 215
To construct a common-size balance sheet in Excel we need to divide all the asset accounts by Total Asse
Equity. A time saving shortcut in Excel is to use an absolute reference.
Prufrock
2018 and 2019 CorporatB
Common-Size
2018 2019 Change

Current assets
Cash 2.5% 2.7% 0.2%
Accounts receivable 4.9% 5.2% 0.3%
Inventory 11.7% 11.8% 0.1%
Total 19.0% 19.7% 0.7%
Fixed assets
Net plant and equipment 81.0% 80.3% -0.7%
Total assets 100.0% 100.0% 0.0%

RWJ Excel Tip
Use an absolute reference whenever you want to reference the same cell, column, or row. In this case, we
accomplish this more efficiently, we entered the equation in cell D30 as D11/D21, then put $ signs in front
quick way to do this is when the cursor is on the cell you want to make an absolute reference, hit the F4 ke
can copy and paste the equation to other cells and it will always divide by the value in cell D21. If you want
and not the column letter (D$21). To use an absolute column reference, put the dollar sign in front of the ce
We would like to construct a sources and uses statement to show which accounts created cash and which
is problematic. Each account can be a source or use, so we would end up with a lot of empty rows in both
sources and uses in one table below. An increase in an asset is a use of cash, a decrease in an asset is a
decrease in a liability is a use of cash. We will use negative signs to denote a use of cash and positive num
show the account name and whether there was an increase or decrease in that account.
RWJ Excel Tip
IF statements are used for a logical test. The IF function is located under Logical. The basic format of an IF
IF statement, we determine the possible conditions first, then determine what value we want if the test is tr
case, our possible conditions are that each account will be a source of funds or a use of funds (we will igno
neither a source or use of funds in this example.) If an asset account increases in value, it is a use of funds
So, for each account we will test if each account increased in value or not. If it did increase in value, we wi
it as a source of funds. To have an IF statement return text, put the text in quotes. The format for the inven
Account
Increase in accounts receivable is a use of cash:
Increase in inventory is a use of cash:
Increase in fixed assets receivable is a use of cash:
Increase in accounts payable is a source of cash:
Decrease in notes payable is a use of cash:
Decrease in long-term debt is a use of cash:
Increase in common stock is a source of cash:
Increase in retained earnings is a source of cash:
We would also like a total of the sources and uses of cash. A simple SUM will not work, but SUMIF will acc
RWJ Excel Tip

To sum only the positive numbers and sum only the negative numbers, we used the SUMIF function. The S
input box we used for the sources of cash we used looks like this:
Sources of cash:
Uses of cash:
Net additions to cash:
The income statement and common-size income statement for Prufrock are:
Tax rate 21%
Prufrock Corporation
2019 Income Statement
Sales $ 2,311
Cost of goods sold 1,435
Depreciation 276
Earnings before interest and taxes $ 600
Interest paid 141
Taxable income $ 459
Taxes (21%) 96
Net income $ 363
Dividends $ 121
Addition to retained earnings 242
2019 Common-Size Income Statement Than Industry
Sales 100.0%
Cost of goods sold 62.1% Better
Depreciation 11.9%
Earnings before interest and taxes 26.0% better
Interest paid 6.1% Higher
Taxable income 19.9%
Taxes (21%) 4.2%
Net income 15.7%
Dividends 5.2%
Addition to retained earnings 10.5%
has a calculation column to show the change in that account.
2018 and 2019 Balance Sheets
($ millions)
2018 2019
Current liabilities
Accounts payable $ 312 $ 344
Notes payable 231 196
Total $ 543 $ 540
Long-term debt $ 531 $ 457
Owners' equity
Common stock and
paid-in surplus $ 500 $ 550
Retained earnings 1,799 2,041
Total $ 2,299 $ 2,591
Total liabilities and equity $ 3,373 $ 3,588
set accounts by Total Assets and all liabilities and equity accounts by Total Liabilities and
Prufrock
and 2019 Corporation
Common-Size Balance Sheets
($ millions)
2018 2019
Current liabilities
Accounts payable 9.2% 9.6%
Notes payable 6.8% 5.5%
Total 16.1% 15.1%
Long-term debt 15.7% 12.7%
Owners' equity
Common stock and
paid-in surplus 14.8% 15.3%
Retained earnings 53.3% 56.9%
Total 68.2% 72.2%
Total liabilities and equity 100.0% 100.0%

mn, or row. In this case, we wanted to divide every asset account in 2018 by cell D21. To
1, then put $ signs in front of the D and the 21 in the denominator like this: $D$21. (Note, a
ute reference, hit the F4 key.) Once we entered this equation with an absolute reference, we
lue in cell D21. If you want to reference an absolute row, put a $ in front of the cell number
dollar sign in front of the cell letter and not the number of the cell ($D21).
ts created cash and which accounts used cash; however, a strict sources and uses statement
a lot of empty rows in both the sources and uses sections. Instead, we will calculate the
a decrease in an asset is a source of cash, an increase in a liability is a source of cash, and a
se of cash and positive numbers to denote sources of cash. The column labeled "Account" will
account.
l. The basic format of an IF statement is =IF(logical_test,[value_if_true],[value_if_false]). In an

lue we want if the test is true, or else the value in the cell will be false. For example, in this
a use of funds (we will ignore the possibility that the accounts are unchanged, and therefore
n value, it is a use of funds and if an asset account decreases in value it is a source of funds.
id increase in value, we will label it as a use of funds and if it decreased in value we will label
s. The format for the inventory account is:
Cash flow
$ (23)
(29)
(149)
32
(35)
(74)
50
242
ot work, but SUMIF will accomplish our goal.
the SUMIF function. The SUMIF function is located under the Math & Trig functions. The
$ 324
(310)
$ 14
than competitor Industry (ExamplCompetitor (Ex)
better 65.00% 67.00%

10.00% 11.00%
better 24.00% 23.00%
Higher 5.00% 4.00%
Change
$ 32
(35)
$ (3)
$ (74)
$ 50
242
$ 292
$ 215
Change
0.3%
-1.4%
-1.0%
-3.0%
0.5%
3.5%
4.1%
0.0%
Ratio Analysis
To compare the performance of companies, rather than compare the financial statements, financial ratios a
each ratio measures. Below, we calculate some basic financial ratios for Prufrock for 2019:
Short-Term Solvency, or Liquidity, Measures FORMULA

Current ratio: 1.31 times CA/CL
Quick ratio: 0.53 times (CA - INVENTOR
Cash ratio: 0.18 times CASH/CL
NWC ratio: 4.68%
Interval measure: 180.08 days
Long-Term Solvency Measures

Total debt ratio: 0.28 times TD/TA
Debt-equity ratio: 0.38 times TD/TE

Equity multiplier: 1.38 times TA/TE or 1+DER
Long-term debt ratio: 0.15 times
Times interest earned: 4.26 times EBIT/INT
Cash coverage: 6.21 times EBITDA/INT
Asset Management, or Turnover, Measures

Inventory turnover:(ITR) 3.40 times COGS/INVENTO
Days' sales in inventory:(DSI) 107.34 days 365/ITR
Receivables turnover: 12.29 times S/RECEIVABLE
Days' sales in receivables: 29.69 days 365/RTR
NWC turnover: 13.76 times S/WC
Fixed asset turnover: 0.80 times S/FA
Total asset turnover: 0.64 times S/TA
Profitability Measures
Profit margin: 15.69% NI/S
EBITDA margin 37.91% EBITDA/S
Return on assets (ROA): 10.11% NI/TA
Return on equity (ROE): 13.99% NI/TE
Since ROA and ROE are intended to measure performance over a prior period, often the average as
The ROA and ROE using averages in the denominator are:
ROA with average assets: 10.42%
ROE with average equity: 14.83%
Market Value Measures

Market value ratios use other numbers such as shares outstanding and share price that are not found
Shares outstanding: 33.00 (in millions)

Price per share: $ 88.00
Earnings per share (EPS): $ 10.99

Price-earnings ratio (PE): 8.01 times
Price-sales ratio: 1.26 times
Market-to-book ratio: 1.12 times
RWJ Excel Tip
We used a "trick" in the calculation of ROA, ROE, and the price-earnings ratio. You can always mathemati
denominator is negative? While this is very unlikely to happen with ratios such as the current ratio, it does
the equity is negative. In this case, these ratios are often reported as "NMF" for "No meaningful figure." Ex
negative, Excel will report "#DIV/0" to let you know you have tried to divide by zero. We prefer to see "NMF
negative. Do you see any of these other ratios which could be negative?
Financial ratio analysis is very much a management by exception tool. When you are analyzing ratios, a nu
above or below some level, it tells us that something is different. It is up to us to determine if that difference
average, or some ratio target, but looking through columns of numbers can be difficult. Excel has a conditio
for numbers within a specified range or outside a specified range. In this case, we have a range in mind, so
well as the cell color if the company's ratio is outside a specified range. Additionally, we used a basic IF sta
low, or within the acceptable range.
While we used factors of 0.75 and 1.25, these factors could be higher or lower depending on the industry.
automatically change the graphics to match the new calculations.
RWJ Excel Tip
In our conditional formatting, on the Home tab, we selected Conditional Formatting, and New Rule. This al
"Format only cells that contain" and then used the pulldown menu to choose "not between." The next two c
multiply the industry ratio by the lower bound and the industry ratio by the upper bound. Next, we selected
window that allows you to specify the font color, cell color fill, and more. We made the font color white and
in the 3rd and 4th inputs. Below, you will see our inputs for the current ratio cell.
Lower range: 0.75
Upper range: 1.25
Short-Term Solvency, or Liquidity, Measures

Current ratio: 1.31
Quick ratio: 0.53
Cash ratio: 0.18
Long-Term Solvency Measures

Total debt ratio: 0.28
Debt-equity ratio: 0.38
Equity multiplier: 1.38
Times interest earned: 4.26
Cash coverage: 6.21
Asset Management, or Turnover, Measures

Inventory turnover: 3.40
Days' sales in inventory: 107.34
Receivables turnover: 12.29
Days' sales in receivables: 29.69
Fixed asset turnover: 0.80
Total asset turnover: 0.64
Profitability Measures
Profit margin: 15.69%
Return on assets (ROA): 10.11%
Return on equity (ROE): 13.99%
A quick glance indicates that Prufrock's liquidity ratios and long-term solvency ratios are generally outside
ratios appear to be similar to the industry average for all of the ratios in these two categories. This means w
ratios and long-term solvency ratios.
atements, financial ratios are often used. Ratios are divided into categories based on what
k for 2019:
STANDARD
1.5-2
1-1.5
0.5
DUPONT
or 1+DER
roe NI
HIGH IS BETTER TE
HIGH IS BETTER
NI
TA
HIGH IS BETTER ROA
LOW IS BETTER NI
HIGH IS BETTER S
LOW IS BETTER PM
HIGH IS BETTER
HIGH IS BETTER
HIGH IS BETTER
HIGH IS BETTER
HIGH IS BETTER
HIGH IS BETTER
HIGH IS BETTER
eriod, often the average assets and average equity, respectively, are used in the calculation.
are price that are not found on the balance sheet. The other numbers we need are:
You can always mathematically calculate a ratio, however what happens when the
s the current ratio, it does happen in these three ratios when the net income is negative, or if
"No meaningful figure." Excel will try to calculate the ratio, as since the denominator is
ero. We prefer to see "NMF," so we used an IF statement to display "NMF" if these ratios are
u are analyzing ratios, a number by itself tells you very little. However, whenever a ratio is
determine if that difference is good or bad. We can always compare each ratio to the industry
ifficult. Excel has a conditional formatting function which will allow you to change the display
we have a range in mind, so we want to change the font color of the calculated number, as
ally, we used a basic IF statement to tell us specifically if the ratio appears to be too high, too
epending on the industry. If you change these factors in the spreadsheet, Excel will
ng, and New Rule. This allows us to create a rule for the conditional formatting. We selected
ot between." The next two cells allow us to enter the calculations, so we entered a formula to
bound. Next, we selected "Format.." on this window. The "Format.." option took us to another
de the font color white and the cell fill red if the company's ratio is outside the range specified
Average
1.39 Looks OK.
0.85 Too low?
0.35 Too low?
0.19 Too high?

0.29 Too high?
1.29 Looks OK.
3.80 Looks OK.
4.15 Too high?
2.95 Looks OK.

123.73 Looks OK.
14.15 Looks OK.
25.80 Looks OK.
0.93 Looks OK.
0.71 Looks OK.
17.83% Looks OK.

12.18% Looks OK.
15.83% Looks OK.
atios are generally outside the ranges we set, while the asset management and profitability
o categories. This means we should investigate the causes of the differences in the liquidity
TA NI
TA TE
TA S NI
TE S TE
EM 1
S TA NI
TA TE TE
TAT EM
The DuPont Identity
The three-factor DuPont equation separates the ROE into 3 components. For Prufrock, the three-factor Du
ROE = Profit margin ´ Total asset turnover ´ Equity multiplier

ROE = 15.69% ´ 0.64 ´ 1.38
ROE = 13.99%
This is exactly the same as the ROE we previously calculated, but it breaks ROE into its components. Of c
next. The abbreviated financial statements for E.I. DuPont de Nemours & Co. for 2018 were:
DuPont Income Statement DuPont Balance She

12 months ending Dec 31, 2018 12 months ending Dec 31
($ in millions) ($ in millions)
Sales $ 35,553 Assets
CoGS 22,109 Current assets
Gross profit $ 13,444 Cash $ 7,034
SG&A expenses 6,411 Accounts receivable 6,594
Depreciation 2,067 Inventory 8,120
EBIT $ 4,966 Total $ 21,748
Interest 377
EBT $ 4,589
Taxes 964
Net income $ 3,625 Fixed assets $ 28,128
Total assets $ 49,876
Now we can show an expanded DuPont analysis, which is:
Return
on equity
27.21%
Equity
ROA Multiplied multiplier
by
7.27% 3.74
Profit Total asset
margin Multiplied turnover
10.20% by 0.71
Net Divided
income by Sales Sales
$ 3,625 $ 35,553 $ 35,553
Total Subtract-
costs ted from Sales
$31,928 $ 35,553
Cost
of goods
sold Dep.
$22,109 $2,067
Selling,
general,
& admin.
expense Interest
$6,411 $377
Taxes
$964
RWJ Excel Tip

To insert the mathematical instructions, we used text boxes. To insert a text box, go to "Insert" and select "
"linked" to the position in which you put the box. Although we could have entered the text in a cell, text box
and/or columns, which can often look more professional. Text boxes are also very useful in graphing, whic
boxes, we went to "Insert" and selected "Shapes." We chose the straight line, although many other choices
ufrock, the three-factor DuPont equation is:
E into its components. Of course, ROE can be further subdivided, which we will do
2018 were:
DuPont Balance Sheet

12 months ending Dec 31, 2018
($ in millions)
Liabilities and Owner's Equity
Current liabilities
Accounts payable $ 11,217
Notes payable 1,423
Total $ 12,640
Long-term debt $ 23,916
Total equity $ 13,320
Total liabilities and

owner's equity $ 49,876
Divided
Total
by assets
$ 49,876
Fixed Plus Current

assets assets
$ 28,128 $21,748
Cash
$7,034
Accounts
receivable Inventory
$6,594 $8,120
go to "Insert" and select "Text Box." Text boxes allow you to enter text that is
d the text in a cell, text boxes in this case allow the text to go across multiple rows
ry useful in graphing, which we will show later. To draw the lines between the
hough many other choices are available.
1774 1347
427
Financial Models
A Simple Financial Planning Model

A financial plan begins with the current financial statements. The income statement and balance sheet for
COMPUTERFIELD CORPORATION COMPUT

Income Statement
Costs 800
Net income $ 200 Total
To find the funds the company will need to raise next year to funds its sales growth, we begin with the fore
growth for the next year will be:
Sales growth: 20%
If sales grow by this amount, we can construct the pro forma, or projected financial statements. Under the
rate, the pro forma statements will be:
COMPUTERFIELD CORPORATION COMPUT

Pro forma
Income Statement
Costs 960
The advantage of financial planning is that it allows us to see what could happen in the future and the optio
occurred:
Debt increased by: $ 50

Net income was: $ 240
So, dividends paid must have been: $ 190
Of course, that is not the only option available to Computerfield. The company could also keep all of the ne
need to repurchase debt in order to keep the balance sheet in balance. The pro forma balance sheet unde
COMPUT
Assets
Total
Remember, the purpose of financial planning is not to tell us what to do, but rather allow us to see what mi
The Percentage of Sales Approach
Below, we have the financial statements for Rosengarten Corporation. Notice, we have an input cell for the
Tax rate: 21%
ROSENGARTEN CORPORATION R
Income Statement
Sales $ 1,000 Current assets
Costs 833 Cash
Taxable income $ 167 Accounts receivable
Taxes (21%) 35 Inventory
Dividends $ 44 Fixed assets

Addition to Net plant and equipment
retained earnings $ 88
Total assets
In its financial planning, Rosengarten has projected that sales for the next year will be:
Next years' sales: $ 1,250
The percentage increase in sales and the costs as a percentage of sales for Rosengarten are:
Percentage sales increase: 25%

Costs as a percentage of sales: 83%
The pro forma income statement will be:
ROSENGARTEN CORPORATION
Pro forma
Income Statement
Sales $ 1,250
Costs 1,041
Taxable income $ 209
Taxes 44
Net income $ 165
Next, we need to calculate the pro forma dividend. Of course, this amount is up to company management,
income. We can calculate the dividend payout ratio by dividing the dividend payment by net income.
Dividend payout ratio: 33.33%
The retention ratio is the ratio of additions to retained earnings divided by net income or one minus the divi
Retention ratio: 66.67%
For the next year, the pro forma dividends and additions to retained earnings will be:
Dividends: $ 55
Addition to retained earnings: $ 110
One characteristic of the percentage of sales approach is that most accounts are assumed to be a constan
ratio of total assets to sales. In Rosengarten's case, the capital intensity ratio is:
Capital intensity ratio: 3 or 300%
In the percentage of sales approach, several accounts on the liabilities side of the balance sheet are assum
we use n/a to indicate they do not vary directly with sales.
ROSENGARTEN
PercentageCORPORATION
of sales
Balance Sheet
Current assets Current liabilities
Cash 16% Accounts payable
Accounts receivable 44% Notes payable
Inventory 60% Total
Total 120% Long-term debt
Owners' equity
Fixed assets Common stock and
Net plant and equipment 180% paid-in surplus
Retained earnings
Total
Total assets 300% Total liabilities and equity
Now we can construct a pro forma balance sheet for Rosengarten. Each of the items on the pro forma bala
the pro forma sales. The balance sheet items that do not vary directly with sales are held constant, except
to retained earnings from the pro forma income statement.
Pro forma
Balance Sheet
Cash $ 200 Accounts payable
Accounts receivable 550 Notes payable
Inventory 750 Total
Total $ 1,500 Long-term debt
Owners' equity
Net plant and equipment $ 2,250 paid-in surplus
Retained earnings
Total
Total assets $ 3,750 Total liabilities and equity
Notice that the balance sheet does not balance. Since the total assets are higher than the total liabilities an
order to support its growth. These funds are called external financing needed, and in this case will be:
External financing needed: $ 565
Now Rosengarten must fund the necessary EFN in order to grow its sales at the projected amount. How th
would be to increase debt. We will assume that the company increases current liabilities by the same amo
assets and current liabilities will increase by:
Current asset increase: $ 300

Accounts payable increase: $ 75
Rosengarten will also be able to raise funds from notes payable and long-term debt. The amount raised fro
Increase in notes payable: $ 225

Increase in long-term debt: $ 340
With these assumptions, the new pro forma balance sheet will be:
Pro forma
Balance Sheet
Inventory 750 Total
Owners' equity
Retained earnings
Total
Of course, other possibilities exist in financial planning. Suppose for example that Rosengarten is not oper
Operating capacity: 90%
In this case, we can calculate the full-capacity sales for the company as:
Current sales = Capacity utilization ´ Full-capacity sales

Full-capacity sales = $ 1,111.11
Next, we need to calculate the maximum increase in sales which could occur without the addition of new fi
Maximum sales increase with current fixed assets: 11.11%
In this case, the pro forma balance sheet will be:
Pro forma
Balance Sheet
Inventory 750 Total
Owners' equity
Retained earnings
Total
Since the company is not at full capacity, the EFN is only:
EFN: $ 115
Of course, in Excel we could set up one spreadsheet that would calculate the EFN whether or not the firm
intensity ratio at full-capacity sales.
Fixed assets/Sales at full capacity: 1.620
At the projected level of sales, the fixed asset requirement for the company is:
If the company will not operate at full capacity, we need to include current level of fixed assets in the balan
capacity, the fixed assets will be the number we calculated. Using an IF statement to test these parameter
Pro forma
Balance Sheet
Inventory 750 Total
Owners' equity
Retained earnings
Total
The EFN is: $ 340

ent and balance sheet for Computerfield Corporation are:
COMPUTERFIELD CORPORATION
Balance Sheet
$ 500 Debt $ 250
Equity 250
$ 500 Total $ 500
wth, we begin with the forecasted sales growth. In this case, we will assume that the sales
cial statements. Under the assumption that all of the variables will grow by the sales growth
Pro forma
Balance Sheet
$ 600 Debt $ 300
Equity 300
$ 600 Total $ 600
n in the future and the options available. For example, in this case the following must have
ould also keep all of the net income as retained earnings. If this happens, the company will
forma balance sheet under this scenario will be:
Pro forma
Balance Sheet
$ 600 Debt $ 110
Equity 490
$ 600 Total $ 600
her allow us to see what might happen and plan for any contingencies.
we have an input cell for the tax rate since it is possible that the tax rate will change over time.
Balance Sheet
Current liabilities
$ 160 Accounts payable $ 300
unts receivable 440 Notes payable 100
600 Total $ 400
$ 1,200 Long-term debt $ 800
Owners' equity
Common stock and
ant and equipment $ 1,800 paid-in surplus $ 800
Retained earnings 1,000
Total $ 1,800
$ 3,000 Total liabilities and equity $ 3,000
will be:
sengarten are:
to company management, but we will assume that dividends are a constant percentage of net
ment by net income.
come or one minus the dividend payout ratio.
l be:
e assumed to be a constant percentage of sales. For example, the capital intensity ratio is the
he balance sheet are assumed to not be a constant percentage of sales. For these accounts,
ON
t liabilities
unts payable 30%
N/A
N/A
N/A
mon stock and

d-in surplus N/A
ned earnings N/A
N/A
abilities and equity N/A
tems on the pro forma balance sheet that varies with sales is calculated as the percentage of
are held constant, except for the retained earnings account, which increases by the addition
ON
t liabilities
unts payable $ 375
100
$ 475
$ 800
mon stock and

d-in surplus $ 800
ned earnings 1,110
$ 1,910
abilities and equity $ 3,185
r than the total liabilities and equity, we know that Rosengarten must raise additional funds in
nd in this case will be:
projected amount. How the company does this is a management decision, but one possibility
iabilities by the same amount as the current assets. Under this assumption, the current
debt. The amount raised from these sources will be:
ON
t liabilities
unts payable $ 375
325
$ 700
$ 1,140
mon stock and

d-in surplus $ 800
ned earnings 1,110
$ 1,910
at Rosengarten is not operating at full capacity, but rather is operating at a capacity of:
thout the addition of new fixed assets, which is:
ON
t liabilities
unts payable $ 375
100
$ 475
$ 800
mon stock and

d-in surplus $ 800
ned earnings 1,110
$ 1,910
FN whether or not the firm is operating at full capacity. First, we need to calculate the capital
$ 2,025
of fixed assets in the balance sheet. However, if the company will end up operating at full
ent to test these parameters, we get the following pro forma balance sheet.
ON
t liabilities
unts payable $ 375
100
$ 475
$ 800
mon stock and

d-in surplus $ 800
ned earnings 1,110
$ 1,910

External Financing and Growth
External financing needed and growth are related, but we would like to examine that relationship. Below w
Tax rate: 21%
HOFFMAN COMPANY
Income Statement
Sales $ 500 Current assets
Costs 416 Net fixed assets
Taxable income $ 84 Total assets
Taxes 18
Net income $ 66
Dividends $ 22
Addition to
retained earnings $ 44
So what is the EFN? Using the input cell below for the projected sales increase, we can construct the pro f
Projected sales increase: 20%

Dividend payout ratio: 33%
Retention ratio: 67%
HOFFMAN COMPANY
Pro forma
Income Statement
Sales $ 600.0 Current assets
Costs 499.2 Net fixed assets
Taxable income $ 100.8 Total assets
Taxes 21.2
Net income $ 79.6
Dividends $ 26.4
Addition to
retained earnings $ 53.2
So the EFN is:
The increase in assets is:
Assuming Hoffman wishes to issue no new equity, the new total debt is:
And the new debt-equity ratio will be:
RWJ Excel Tip
Suppose we want to examine what will happen to Hoffman for different growth rates? One way to accompl
way data table in Excel. The first column, which shows the growth rates we would like to examine, are all in
equal to the cells containing the output we would like, namely the increase in assets, addition to retained e
recalculates all of the numbers based on the values in the projected growth rate column and puts them in t
go to the cells, the values in the cell will be displayed. From an aesthetic point of view, we didn't like this ro
under the "Custom" option, we entered a semicolon ( ; ). This formatting hides what is in the cells from the
you to see what is entered in the cell only when you select that cell.
Addition
to
Increase retained
in assets earnings
0%
5%
10%
15%
20%
25%
Suppose we wanted to graph the projected retained earnings and increased fixed assets for different grow
which replicates Figure 3.1 in the textbook:
Internal growth rate

RWJ Excel Tip
To create this graph, we selected the three columns of data we wanted to graph (growth rate, increase in a
and went to "Insert" and then selected the "Line" option for a line graph. Excel automatically uses the head
decided to make the graph more presentable using some of the various options available. For example, to
selected "Format Plot Area," and then selected "Gradient fill." We then used one of the preset colors to put
the "Insert" menu we used "Text Box" and inserted a text box. Right-clicking on the text box itself brings up
the text box. Finally, the lines pointing to the internal growth rate on the graph were created under the "Inse
make graphs look better. Try some out for yourself and remember that if you try something that you don't li
ribbon.
We decided to create a graph of the company's EFN as well. Below is the graph showing the EFN for diffe
text boxes.
External Financing Needed (EFN)

$80
$60
$40 Internal growth rate
$20
$-
0% 5% 10% 1
$(20)
$(40)
$(60)
RWJ Excel Tip
Creating this graph is a little more difficult since the data we want to graph is not in side-by-side columns. T
then clicked and held "Ctrl." This will allow you to select another column to graph. Also, notice that the edg
the chart itself, selected "Format plot area," and then selected "3-D Format."
In long-range financial planning, two growth rates that are of particular interest are the internal growth rate
maximum growth rate that can be achieved without external financing of any type. For the Hoffman Compa
ROA: 13.27%
Internal growth rate: 9.74%
The sustainable growth rate is the maximum growth rate a company can achieve while maintaining a cons
growth rate is:
ROE: 26.54%
Sustainable growth rate: 21.57%
that relationship. Below we have the financial statements for the Hoffman Company:
HOFFMAN COMPANY
Balance Sheet
$ 200 Total debt $ 250
300 Owners' equity 250
$ 500 Total liabilities and equity $ 500
we can construct the pro forma financial statements as well as the EFN.
HOFFMAN COMPANY
Pro forma
Balance Sheet
$ 240.0 Total debt $ 250.0
360.0 Owners' equity 303.2
$ 600.0 Total liabilities and equity $ 553.2
$ 46.77
$ 100.0
$ 296.77
0.98
ates? One way to accomplish this is to use a data table. Below we have constructed a one-
ld like to examine, are all inputs. In the row above the first growth rate, we made the cells
sets, addition to retained earnings, EFN, and projected debt-equity ratio. Excel automatically
column and puts them in the table. Notice that the row below the headers is blank. But, if you
f view, we didn't like this row showing in the data table, so we went to "Format Cells" and
what is in the cells from the display, but leaves any formulas or values in the cell and allows
External
financing Projected
needed debt-equity
(EFN) ratio
$ (44.36) 0.70
(21.58) 0.77
1.20 0.84
23.99 0.91
46.77 0.98
69.55 1.05
ed assets for different growth rates. Using the graphing function, we get the following graph,
ate
r e t a in e d e a r n in g s
$12
Growth and Related Financing Needed
$10
A s s e t s n e e d e d a n d r e t a in e d e a r n in g s
$12
Growth and Related Financing Needed
$10
$8
Increase
EFN > 0 in a ssets
(deficit)
$6
Addition
to
retai ned
earnings
$4
EFN < 0
(surplus)
$2
$-
0% 5% 10% 15% 20% 25%
Projected growth rate in sales
steve:
The undo icon isn't in the
(growth rate, increase in assets, and addition to retained earnings), including the headers, right place on my screen
utomatically uses the headers as the legend on the right hand side of the graph. We then
available. For example, to get the colored background, we right clicked on the chart itself,
e of the preset colors to put the background color in the chart. To create the text boxes, under
the text box itself brings up a menu which gives you choices such as the background color of
ere created under the "Insert" menu by choosing "Shapes." Excel has options available to
something that you don't like, you can always undo it by clicking the undo arrow on the
showing the EFN for different sales growth rates. Again, we applied background color and
ncing Needed (EFN)
External
financing
needed
(EFN)
10% 15% 20% 25%

in side-by-side columns. To select the columns we wanted, we highlighted the growth rates,
h. Also, notice that the edges of the graph are beveled. For this option, we right clicked on
re the internal growth rate and the sustainable growth rate. The internal growth rate is the
e. For the Hoffman Company, the internal growth rate is:
e while maintaining a constant debt-equity ratio. For the Hoffman Company, the sustainable
steve:
The undo icon isn't in the
right place on my screen
External
financing
needed
(EFN)
Chapter 3 - Master It!
Financial planning can be more complex than the percentage of sales approach. Often, the assumptions behin
amount of fixed assets increases, then depreciation will increase. A more sophisticated model allows these inp
This model uses new borrowing as the plug variable by setting total liabilities and owners’ equity equal to tota
beginning amount plus the additions to retained earnings. The difference between these amounts is the total
The main difference between this model and the percentage of sales approach is that we have separated out
beginning fixed assets, and the amount of interest depends on the amount of debt. However, since depreciati
margin is no longer constant.
The model parameters can be based on a percentage of sales model, or they can be determined by o
might be based on average values for the last several years, industry standards, subjective estimates
techniques can be used to estimate them.
The parameter estimates used in this calculation of pro forma financial statements are:
Cost percentage = Costs/Sales

Depreciation rate = Depreciation/Beginning fixed assets
Interest rate = Interest paid/Total debt
Tax rate = Taxes/Net income
Payout ratio = Dividends/Net income
Capital intensity ratio = Fixed assets/Sales
The Yasmin Company is preparing its pro forma financial statements for the next year using this mod
Sales growth 20%

Tax rate 21%
Income Statement
Sales $ 780,000.00
Costs 441,658.23
Depreciation 135,000.00
Interest 68,000.00
Taxable income $ 135,341.77
Taxes 28,421.77
Net income $ 106,920.00
Dividends $ 30,000.00
Additions to
retained earnings $ 76,920.00
Balance Sheet
Assets Liabilities and Eq
Current assets $ 240,000.00 Total debt
Net fixed assets 1,350,000.00 Owners' equity
Total assets $ 1,590,000.00 Total debt and equity
a. Calculate each of the parameters necessary to construct the pro forma balance sheet.
b. Construct the pro forma balance sheet. What is the total debt necessary to balance the pro forma bal
c. In this financial planning model, show that it is possible to solve algebraically for the amount of new b
RWJ Excel Tip
Notice that the solution to this problem requires the use of circular logic. The addition to retained earnings
which depends on the level of debt, which depends on the addition to retained earnings. When you enter th
error. However, Excel can often solve problems that contain circular references. Click the File tab then "Op
box that says "Enable iterative calculation." Clicking this box will cause Excel to recalculate the formulas un
in the value of the final answer is less than the "Maximum Change" you set. Note that the preset in Excel is
when you save the spreadsheet, it will save this option with the spreadsheet, so you should not have to res
can only do calculations iteratively or one time simultaneously. What this means is that if you open a sprea
iterative calculations, the dominant spreadsheet is the one opened without iterative calculations. In other w
handle calculations.
ften, the assumptions behind the percentage of sales approach may be incorrect. For example, if the
ated model allows these input variables to vary rather than being a strict percentage of sales.
owners’ equity equal to total assets. Next, the ending amount of owners’ equity is calculated as the
n these amounts is the total debt necessary to balance the balance sheet.
hat we have separated out depreciation and interest. Depreciation is calculated as a percentage of
t. However, since depreciation and interest now do not necessarily vary directly with sales, the profit
ey can be determined by other means the company deems appropriate. For example, they
ards, subjective estimates, or even company targets. Alternatively, sophisticated statistical
ements are:
e next year using this model. The abbreviated financial statements are presented below.
Liabilities and Equity
$ 880,000.00
710,000.00
debt and equity $ 1,590,000.00
nce sheet.
balance the pro forma balance sheet?
y for the amount of new borrowing.
ition to retained earnings depends on the net income, which depends on the interest rate,
arnings. When you enter the formulas in the spreadsheet, you will get a "Circular Reference"
Click the File tab then "Options", then "Formulas." On the right hand side, you should see a
ecalculate the formulas until the number of iterations set by you are completed, or the change
that the preset in Excel is 0.001, which is 0.1%. Two notes about iterative calculations: First,
you should not have to reset this option later when you reopen the spreadsheet. Second, Excel
is that if you open a spreadsheet without iterative calculations, then open a spreadsheet with
ve calculations. In other words, whichever spreadsheet is opened first tells Excel how to
Master It! Solution
a. Calculate the following ratios for financial planning:
Cost percentage 0.57

Depreciation percentage 0.10
Interest rate 0.08
Tax rate 0.21
Payout ratio 0.28
Fixed assets/Total assets 0.85
Capital intensity ratio 1.73
b. Construct the pro forma financial statements using the parameters you calculated. Your pro forma ba
Yasmin Company
Pro forma
Income Statement
Sales $ 936,000.00
Costs 529,989.87
Depreciation 162,000.00
Interest 85,616.54
Taxable income $ 158,393.59
Taxes 33,262.65
Net income $ 125,130.93
Dividends $ 35,109.69
Additions to
retained earnings $ 90,021.24
Yasmin Company
Pro forma
Balance Sheet
Assets Liabilities and Equity
Current assets $ 288,000.00 Total debt
Net fixed assets 1,620,000.00 Owners' equity
Total assets $ 1,908,000.00 Total debt and equity
. Your pro forma balance sheet should balance.
ies and Equity

$ 1,107,978.76
800,021.24
$ 1,908,000.00

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Ross, Westerfield, Jaffe, and Jordan's Excel Master

Corporate Finance, 12th edition

The following conventions are used in these spreadsheets

1) Given data in blue

NOTE: Some functions used in these spreadsheets may require that

heets may require that

Total assets $ 3,373 $ 3,588 $ 215

2018 2019 Change

Total assets 100.0% 100.0% 0.0%

RWJ Excel Tip

RWJ Excel Tip

Tax rate 21%

Total liabilities and equity $ 3,373 $ 3,588

Total liabilities and equity 100.0% 100.0%

l. The basic format of an IF statement is =IF(logical_test,[value_if_true],[value_if_false]). In an

ot work, but SUMIF will accomplish our goal.

better 65.00% 67.00%

Short-Term Solvency, or Liquidity, Measures FORMULA

Long-Term Solvency Measures

Debt-equity ratio: 0.38 times TD/TE

Asset Management, or Turnover, Measures

Market Value Measures

Shares outstanding: 33.00 (in millions)

Earnings per share (EPS): $ 10.99

RWJ Excel Tip

RWJ Excel Tip

Short-Term Solvency, or Liquidity, Measures

Long-Term Solvency Measures

Asset Management, or Turnover, Measures

0.19 Too high?

2.95 Looks OK.

17.83% Looks OK.

ROE = Profit margin ´ Total asset turnover ´ Equity multiplier

DuPont Income Statement DuPont Balance She

Total assets $ 49,876

Now we can show an expanded DuPont analysis, which is:

RWJ Excel Tip

DuPont Balance Sheet

Long-term debt $ 23,916

Total equity $ 13,320

Total liabilities and

Fixed Plus Current

A Simple Financial Planning Model

COMPUTERFIELD CORPORATION COMPUT

Sales growth: 20%

COMPUTERFIELD CORPORATION COMPUT

Debt increased by: $ 50

The Percentage of Sales Approach

Tax rate: 21%

Dividends $ 44 Fixed assets

Next years' sales: $ 1,250

Percentage sales increase: 25%

The pro forma income statement will be:

Dividend payout ratio: 33.33%

Retention ratio: 66.67%

Capital intensity ratio: 3 or 300%

Total assets $ 3,750 Total liabilities and equity