MID-TERM REVIEW

BA 211
Brother Baker
EPS or Earnings Per Share: EPS indicates how much money a company makes for each share of its stock and is a
widely used metric for estimating corporate value. A higher EPS indicates greater value because investors will pay more for
a company's shares if they think the company has higher profits relative to its share price.

Andrews EPS is $3,344,000 (profit) divided by 2,259,239 (number of shares) = $1.48 (because shares is in millions, add
,000 to net profit)
Price to Earnings Ratio or P/E Ratio: Relates a company's share price to its earnings per share. A high P/E ratio
could mean that a company's stock is overvalued, or else that investors are expecting high growth rates in the future.

Formula: You must calculate Earnings Per Share First (Net Profit / Shares Outstanding), then: Current Stock Price / EPS

Andrews: We calculate EPS First--- $7,500,000 / 2,000,000 = $3.75 Earnings Per Share (Since shares are listed in millions, add the ,000 to net profit)

Then, the P/E Ratio: Current Stock Price / EPS which is $26.03 / $3.75 = 6.94
Market Capitalization: The investment community uses this figure to determine a company's size, as opposed to
using sales or total asset figures. In an acquisition, the market cap is used to determine whether a takeover
candidate represents a good value or not to the acquirer.

Andrews’ market capitalization is $17.70 (stock price) multiplied by 2,259,239 (the number of shares) =
$39,988,530 (rounded to $40 million on the FastTrack below)
Calculating Total Assets:
On the chart below, you add the all the assets together. You need to note that accumulated depreciation is a
negative on the Asset line, so it is subtracted.

Cash + A/R + Inventory + Plant & Equipment – Depreciation = $71,000 in total assets

Asset Cash $ 10,000

Asset A/R $ 7,000
Asset Inventory $ 4,000
Asset Plant & Equipment $ 80,000
Asset Accumulated Depreciation $ (30,000)
Liability A/P $ 2,500
Liability Current Debt $ 3,000
Liability Long-Term Debt $ 25,000
Owners Equity Common Stock $ 31,000
Owners Equity Retained Earnings $ 19,000
Owners Equity Market Cap $ 42,000
Calculating Total Equity:
On the chart below, you add the all the assets together. You need to note that accumulated depreciation is
actually a negative on the Asset line, so it is subtracted.

Formula: Equity = Total Assets - Total Liabilities

Andrews: $45,996 - $20,314 = $25,682 (rounded)
Calculation: $71,000 - $30,500 = $40,500
Asset Cash $ 10,000
Asset A/R $ 7,000
Asset Inventory $ 4,000
Asset Plant & Equipment $ 80,000
Asset Accumulated Depreciation $ (30,000)
Liability A/P $ 2,500
Liability Current Debt $ 3,000
Liability Long-Term Debt $ 25,000
Owners Equity Common Stock $ 31,000
Owners Equity Retained Earnings $ 19,000
Owners Equity Market Cap $ 42,000
 Current Liabilities: a company's short-term financial obligations that are due within one
year or within a normal operating cycle. Examples of current liabilities include accounts payable,
short-term debt, dividends, and notes payable as well as income taxes owed.

Which of the liabilities below need to be paid back in 12 months?

Study the definition of current liabilities, then calculate it for the chart below.

Answer: $5,500

Asset Cash $ 10,000

Asset A/R $ 7,000
Asset Inventory $ 4,000
Asset Plant & Equipment $ 80,000
Asset Accumulated Depreciation $ (30,000)
Liability A/P $ 2,500
Liability Current Debt $ 3,000
Liability Long-Term Debt $ 25,000
Owners Equity Common Stock $ 31,000
Owners Equity Retained Earnings $ 19,000
Owners Equity Market Cap $ 42,000
 Retained Earnings and Dividends:
Retained earnings are the cumulative net earnings or profits of a company after
accounting for dividend payments. As an important concept in accounting, the
word “retained” captures the fact that because those earnings were not paid out
to shareholders as dividends, they were instead retained by the company.

For this reason, retained earnings decrease when a company either loses money
or pays dividends and increase when new profits are created. (Investopedia)

In the example on the right, Andrews reported $13,915,000 in

retained earnings. The retained earnings for next year would be
affected by any dividend that gets paid out to shareholders.
Let’s assume net profit for next year is $5,000,000 and
management wants $16,000,000 in retained earnings next year.
Management could could pay $2,915,000 in a dividend to
shareholders.
Next year's retained earnings goal $ 16,000,000
Minus This year's retained earnings $ 13,915,000
Equals how much net profit needed to reach retained earnings goal $ 2,085,000

Next year's net profit goal $ 5,000,000

Minus profit to go into retained earnings $ 2,085,000
Equals how much to pay in divend from net profit $ 2,915,000
Retained Earnings:

Use Ferris on the chart to the right and calculate Retained

Earnings

Prior Year Retained Earnings: $10,554,000 (prior year FastTrack)

Current Year Net Income: $3,998,000 (FastTrack to the right)
Dividends Paid: $3,240,000 ($1.62 x $2,000,000)
$ 10,554,000
+ $ 3,988,000
- $ 3,240,000
$ 11,302,000

You see $11,302 (rounding down to $11,301) is listed on the

right as the current year retained earnings.

If calculating next year’s retained earnings, it would be

this year’s retained earnings + next years net income -
next year’s dividends paid.
Accounts Receivable and Accounts Payable:
How they affect the Cash Flow Statement

If accounts payable decreases, it means you used cash to pay for your materials. Cash would decrease.

If accounts receivable decreases, it means you got paid for the sale of your product (converted inventory to cash).
Cash would increase.
Productivity: In CapSim, the productivity index shows how productive your employees are. You can increase
productivity by spending more money on recruiting employees and training hours. When you have 10
employees doing the work of 15 because they are better trained, and the productivity index increases. In the
example below, you see that Andrews spent $4,000 on recruiting and paid for 80 hours of training. Their index
increased to 110.9%.
Promo Budget and Sales Budget:

Spending additional money on the promo budget increases customer awareness. More customers will know you
have a product for sale. These are commercials, billboards, sponsoring a team, etc.

Spending additional money on the sales budget increases customer accessibility. This makes your company easier
for customers to work with and increases customer satisfaction.
Variable vs. Fixed Costs

Variable costs are tied to the sale of each item of inventory. If you make more units, you will spend more on material,
labor, etc.

Fixed costs are things like administration, salespeople, customer service reps. These costs stay the same if you produce
100 units or 1,000 units.
Current Ratio: Tells us if a company has enough liquidity to pay upcoming bills. A higher current ratio tells us
they have plenty of liquid assets to pay their bills.

Formula: Current Assets divided Current Liabilities

Andrews: $13,152 / $3,516 = 3.74

Working Capital: This is also a measure of liquidity but is a dollar amount instead of a ratio.

Formula: Current Assets minus Current Liabilities

Andrews: $13,152 - $3,516 = $9,636

Days Working Capital: How many days will the company’s cash last given upcoming expenses. You need to calculate Working
Capital before you can calculate Days Working Capital
Formula: Working Capital / (Sales / 365)

Andrews: $44,639 / 365 = 122.29 Days (this is Sales / 365)

$9,636 (This is Working Capital: Current Assets - Current Liabilities)
$9,636 / 122.29 = 78.79 Days
Free Cash Flow: indicates the amount of cash generated each year that is free and clear of all internal or
external obligations. A company with more debt than cash could have a negative free cash flow number.

Formula: Cash from Operations minus Capital Expenditures (in CapSim, Capital Expenditures are Plant
Improvements)

Andrews: $6,148 - $5,770 = $378 Baldwin: $3,790 - $6,400 = -$2,610

Book Value: a company’s equity value as reported in its financial statements. The book value figure is typically
viewed in relation to the company’s stock value
Formula: Total Equity / Number of Shares

Andrews: $25,681,000 / 2,000,000 = $12.84 (Because shares are written in millions, you need to add the ,000 to Total Equity)
Calculate Market Demand: Can you predict how many sensors the market will purchase next year?
Forecasting is both an art and a science. It is very difficult to forecast future sales because of how many factors
could change over time.

Formula: Number of Sensors Sold * Next Year’s Segment Growth Rate

Calculation: 6,629,000 * 10.4% = 689,416 (how many additional sensors will be sold)
Then 6,629,000 + 689,416 = 7,318,416 (total market unit demand)
Leverage Ratio: Leverage ratio refers to the proportion of debt compared to equity or capital. A company's
financial leverage ratio shows the level of debt in comparison to its accounts, such as the income statement, cash
flow statement, or balance sheet.

Formula: Total Assets / Total Equity

Andrews: $87,335 / $51,731 = 1.68

*The FastTrack rounded it to 1.7

Return on Assets (ROA): an indicator of how profitable a company is relative to its total assets. ROA gives an idea
as to how efficient a company's management is at using its assets to generate earnings. ROA is displayed as a
percentage; the higher the ROA is, the better.

Formula: Net Profit / Total Assets

Andrews: $18,581,473 / $87,335,000 = 21.27%

*FastTrack rounded it to 21.3%
Return on Equity (ROE): a measure of a company's financial performance, calculated by dividing net income
(net profit) by Total equity. ROE is considered a gauge of a corporation's profitability and how efficient it is in
generating profits.

Formula: Net Profit / Total Equity

Andrews: $18,581,473 / $51,731,000 = .359 or 35.9%
Return on Sales (ROS): a measure of a company's financial performance, calculated by dividing net income
(net profit) by Sales.

Formula: Net Profit / Sales

Andrews: $18,581,473 / $107,189,133 = .173 or 17.3%

Contribution Margin: Represents the incremental money generated for each product/unit sold after deducting the
variable portion of the firm's costs.

Formula: Sales - Variable Costs

Andrews: $85,980 - $57,668 = $28,312

Contribution Margin Percentage: Contribution Margin / Sales

Andrews: $28,312 / $85,980 = .329 or 32.9%

Earnings Before Interest & Taxes (EBIT): a company's net income before income tax expense and interest
expenses are deducted. EBIT is used to analyze the performance of a company's core operations without the
costs of the capital structure and tax expenses impacting profit.

Andrews: Subtract Depreciation, SGA, and Other from the Contribution Margin to get EBIT
Sales $ 85,980
Variable Costs$ (57,668)
Cont Margin $ 28,312
Depreciation $ (2,967)
SGA $ (9,532)
Other $ (2,450)
EBIT $ 13,363
Depreciation: Depreciation ties the cost of using a tangible asset with the benefit gained over its useful life. There
are many types of depreciation, including straight-line and various forms of accelerated depreciation.

Straight Line Depreciation Formula: Cost of Plant & Equipment / Number of Years Useful Life

Example: Ford purchases a new plant & assembly line for $50,000,000 to make trucks. The useful life of the plant is
20 years. Straight line depreciation would be $50,000,000 / 20 years to get $2,500,000 per year.
Stock Price in CapSim: The following is from the CapSim User Guide
Purchasing on Account: Any purchases made with credit can be referred to as “purchased on account.” A
business that owes another entity for goods or services rendered will record the total amount as a credit entry
to increase accounts payable (a liability). Since your company has not paid cash for the material yet, but received
the material already, it also increases assets.

Example: You purchase $20,000 in material for your sensors from ABC Company, and you don’t have to pay for 60
days. You take delivery of the sensors on Day 1. Your liabilities increase by $20,000 because you have a bill that will
be due (accounts payable). Your assets increase because you now have $20,000 worth of material.