4/8/2021

Principles of
Corporate Chapter 29
Finance
Financial Analysis and
Seventh Edition
Planning
Richard A. Brealey
Stewart C. Myers

Slides by
Matthew Will

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Topics Covered
 Financial Statements
 Executive Paper Corporation
 The DuPont System
 Financial Planning
 Financial Planning Models
 Growth and External Financing

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Accounting Standards
Country ratings on quality of accounting standards
(a high figure indicates high quality)

Country Legal Tradition Rating

Sweden Scandinavian 83
UK English 78
USA English 71
France French 69
Hong Kong English 69
Switzerland German 68
Japan German 65
Germany German 62
South Korea German 62
Mexico French 60
India English 57
Peru French 38
Egypt French 24

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Executive Paper

Executive Paper Balacne Sheet

Dec Dec
1998 1999 diff
Assets

Current Assets
Cash & Securities 75.0 110.0 35.0
Receivables 433.1 440.0 6.9
Inventory 339.9 350.0 10.1
Total 848.0 900.0 52.0

Fixed Assets
P, P, E 929.5 100.0 -829.5
accum Depr 396.7 450.0 53.3
Net Fixed Assets 532.8 550.0 17.2

Total Assets 1,380.8 1,450.0 69.2

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Executive Paper

Executive Paper Balacne Sheet

Dec Dec
1998 1999 diff
Liabilities and Equity

Current Liabilities
Debt due in 1 year 96.6 100.0 3.4
Payable 349.9 360.0 10.1
Total current liabilities 446.5 460.0 13.5

Long term debt 425.0 450.0 25.0

Shareholders equity 509.3 540.0 30.7

Total liabilities and equity 1,380.8 1,450.0 69.2

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Executive Paper

Executive Paper - Other Data 1998 1999

Market value of equity 598 708

Average number of shares, millions 14.16 14.16

Share price, dollars 42.25 50

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Executive Paper

Executive Paper Income Statement (1999)

$ millions
Revenues 2,200.00
Costs 1,980.00
Depreciation 53.30
EBIT 166.70
Interest 42.50
Tax 49.70
Net income 74.50

Dividend 43.80
Retained earnings 30.70
Earnings per share, dollars 5.26
Dividend per share, dollars 3.09

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Executive Paper

Executive Paper Sources and Uses of Funds (1999)

Sources: $ millions
Net Income 74.60
Depreciation 53.30
Operating cash flow 127.80
Borrowing 25.00
Stock issues -
Total sources 152.80

Uses:
Increase in net working capital 38.50
Investment 70.50
Dividends 43.80
Total uses 152.80

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Leverage Ratios

long term debt

Long term debt ratio =
long term debt + equity

long term debt + value of leases

Debt equity ratio =
equity

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Leverage Ratios

total liabilities
Total debt ratio =
total assets

EBIT
Times interest earned =
interest payments

EBIT + depreciation
Cash coverage ratio =
interest payments

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Liquidity Ratios

Net working capital Net working capital

=
to total assets ratio Total assets

current assets
Current ratio =
current liabilities

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Liquidity Ratios

cash + marketable securities + receivables

Quick ratio =
current liabilities

cash + marketable securities

Cash ratio =
current liabilities

cash + marketable securities + receivables

Interval measure =
average daily expenditures from operations

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Efficiency Ratios

Sales
Asset turnover ratio =
Average total assets

sales
NWCturnover =
average net working capital

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Efficiency Ratios
cost of goods sold
Inventory turnover ratio =
average inventory

average inventory
Days' sales in inventory =
cost of goods sold / 365

average receivables
Average collection period =
average daily sales

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Profitability Ratios

EBIT - tax
Net profit margin =
sales

EBIT - tax
Return on assets =
average total assets

earnings available for common stock

Return on equity =
average equity

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Profitability Ratios
dividends
Payout ratio =
earnings

earnings - dividends
Plowback ratio =
earnings
= 1 - payout ratio

earnings - dividends
Growth in equity from plowback =
earnings

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Market Value Ratios

stock price
PE Ratio =
earnings per share

P0 Div 1 1
Forecasted PE ratio = = x
aveEPS 1 EPS1 r - g

dividend per share

Dividend yield =
stock price

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Market Value Ratios

Div 1
Price per share = P0 =
r - g

stock price
Market to book ratio =
book value per share

m arket value of assets

Tobins Q =
estimated replcem ent cost

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The DuPont System

 A breakdown of ROE and ROA into

component ratios
EBIT - taxes
ROA =
assets

EBIT - tax - interest

ROE =
equity

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The DuPont System

sales EBIT - taxes

ROA = x
assets sales

asset profit
turnover margin

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The DuPont System

assets sales EBIT - taxes EBIT - taxes - interest

ROE = x x x
equity assets sales EBIT - taxes

leverage asset profit debt

ratio turnover margin burden

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Executive Paper

Financial Planning

1. Best case
2. Normal growth
3. Retrenchment

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Executive Paper

Financial Planning Models

Executive Paper - Latest & Proforma Income Statements

1999 2000 2004

Revenue 2,200.0 2,640.0 5,474.0
Costs (90% of revenue) 1,980.0 2,376.0 4,927.0
Depreciation (10% of fixed assets) 53.3 55.0 114.0
EBIT 166.7 209.0 433.4
Interest (10% of LT debt) 42.5 45.0 131.3
Tax (40% of pretax profit) 49.7 65.6 120.8
Operating cash flow 74.5 98.4 181.2
127.8 153.4 295.3

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Executive Paper

Financial Planning Models

Executive Paper - Latest & Proforma Statemet of Cash Flows

1999 2000 2004

Increase in NWC (NWC=20% of revenues) 38.5 88 182.5
Invetment in fixed assets (FA=25% of revenues) 70.2 165 342.1
Dividends (60% of net income) 45.6 59 108.7
Total uses of funds 129.3 312 633.4
External capital requried (Uses-operating CF) 25 158.6 338.1

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Executive Paper

Financial Planning Models

Executive Paper - Latest & Proforma Statemet of Cash Flows

1999 2000 2004

Net working capital (20% of revenues) 440.0 528.0 1,095.0
Net fixed assets (25% of revenues) 550.0 660.0 1,369.0
Total net assets 990.0 1,188.0 2,463.0
Long-term debt 450.0 608.6 1,651.0
Equity 540.0 579.4 812.0
Total long-term liabilities and equity 990.0 1,188.0 2,463.0

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