essential learning for ctp candidates new york cash ... · as a prep course for the ctp exam,...
TRANSCRIPT
![Page 1: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/1.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 1
New York Cash Exchange: 2016Essential Learning for CTP CandidatesSession #4: Wed. Afternoon (6/01)
ETM4-Chapter 18:Financial Accounting and Reporting
ETM4-Chapter 19:Financial Planning and Analysis
ETM4-Chapter 20:Financial Decisions and Management
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 1
Essentials of Treasury Management, 4th Ed. (ETM4) is published by the AFP which holds the copyright and all rights to the related materials.
As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text.
Overview of Chapter 18 Topics
IntroductionAccounting Concepts and
StandardsFinancial Reporting
StatementsAccounting for
Derivatives, Hedges, and Foreign Exchange(FX) Translation
Accounting for G/NFP
2© 2016 - The Treasury Academy, Inc. - All Rights Reserved
Introduction to Financial Accounting and Reporting Financial
statements
summarize a
company’s
operating
results and
financial
position
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 3
![Page 2: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/2.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 2
Analyzing Financial Statements Provides Insights Into:
Management of liquidity positionEffective use and
financing of assetsBalance between debt
and equity financingControl of operating
and financing costsProfitability
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 4
Accounting Concepts and Standards
Global Accounting Standards IASB & IFRS
U.S. Accounting Standards GAAP & SEC Filings
Comparison IFRS is high level/less detailed
than GAAP GAAP converging towards
IFRS standards5© 2016 - The Treasury Academy, Inc. - All Rights Reserved
Group Exercise
Working in your groups,answer the following questions:Why do we need auditors?Is there a difference between internal
and external auditors?What was the impact of SOX on the
auditing profession?
6© 2016 - The Treasury Academy, Inc. - All Rights Reserved
![Page 3: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/3.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 3
Auditing & Financial Statement Reliability
Confidence in the integrity of financial reports is critical in an open, market-driven economyCertification of
accounting and auditing professionals is a key part of the process
7© 2016 - The Treasury Academy, Inc. - All Rights Reserved
The Audit Process
An independent audit helps to assure outside parties that the information provided in the financial statements is relevant, complete, accurate and presented fairly
8© 2016 - The Treasury Academy, Inc. - All Rights Reserved
Audit Opinions
Standard Unqualified Opinion
Unqualified with Explanatory
Paragraph or Modified Unqualified
Qualified
Adverse
Disclaimed
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 9
![Page 4: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/4.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 4
Impact of SOX on Audit Process
Role of the PCAOBcontrolsCEO and CFO
certification of financial statementsFines and criminal
penaltiesRequires independent
audit committees
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 10
Types of Financial Statements
Balance Sheet Assets Liabilities Shareholders’ Equity
Income StatementRevenues Expenses
Statement of Retained EarningsStatement of Cash Flows Sources and Uses of Funds
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 11
Sample Balance Sheet
“Snapshot”Assets:
Current assetsFixed assetsDepreciable fixed
assetsIntangible assets
Liabilities:Current liabilitiesLong-term liabilities
EquityAssets = Liabilities +
Shareholders’ Equity
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 12Source: ETM3 - © AFP
![Page 5: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/5.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 5
Sample Income Statement
A record of revenues and expenses
Shows the net change in shareholders’ equity from operations over a specified period
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 13
Source: ETM3 - © AFP
Sample Statement of Cash FlowsShows sources and
uses of cash
Sections:
Operating
Investing
Financing
Cash from operations calculated by adding back non-cash charges (e.g., depreciation)
Cash, not earnings, repays debt
This example shows the indirect format
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 14Source: ETM3 - © AFP
Accounting for Derivatives, Hedges and FX Translation
Derivative/Hedge AccountingWhat is instrument’s intended use?
FX Translation Accounting Functional Currency: currency of
the primary economic environment in which the entity operates
Translation of foreign statementsto reporting currency
GAAP VS IFRS
15© 2016 - The Treasury Academy, Inc. - All Rights Reserved
![Page 6: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/6.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 6
Overview of Chapter 19 Topics
IntroductionCost BehaviorDecision EvaluationDeveloping Operating
and Financial BudgetsFinancial Statement
AnalysisPerformance
MeasurementFinancial Analysis and
Rating Agencies
16© 2016 - The Treasury Academy, Inc. - All Rights Reserved
Who Uses Financial Analysis?
Suppliers
Trading Partners
Lenders
Rating Agencies
Investors
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 17
Cost Types and Behaviors
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 18
Source: ETM3 - © AFP
![Page 7: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/7.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 7
Basic Financial ConceptsTime Value of Money Future Value Present Value
Opportunity Cost What is the right rate to use?
Cost of Capital Concept of WACC
Cost Behavior Total, Fixed, Variable, Semi-variable Operating & Financial Leverage, Econ. of Scale
Capital Budgeting NPV, PI, IRR
n
2FV = PV × (1 + i)
= $100 × (1 + .10)= $100 × 1.21 = $121
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 1919
Time Value of MoneyThe value of cash flow is determined by:
• Amount of the cash flows.• Appropriate interest rate.• At what future period the
cash flow is expected to occur.
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 20
Future Value
121$21.1100$
)10.1()10.1(100$
)10.1(100$
i)(1 PV ValueFuture2
n
What is the future value of $100 if it can be invested for two years, compounded annually, at a rate of 10% per year?
Where: FV = Future value PV = Present valuei = Periodic interest raten = Number of periods
21© 2016 - The Treasury Academy, Inc. - All Rights Reserved
Source: ETM3 - © AFP
![Page 8: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/8.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 8
Present Value
What is the present value of $2,382 to be received after three years, discounted at a rate of 6.00% annually?
Where:FV = Future valuei = Periodic interest raten = Number of periods
000,2$191.1
382,2$
)06.1)(06.1)(06.1(
382,2$
)06.01(
382,2$
i)(1
FV ValuePresent
3n
22© 2016 - The Treasury Academy, Inc. - All Rights Reserved
Source: ETM3 - © AFP
PV of a Stream of Payments
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 23
31 2 n1 2 3 n
CC C CPV ... ...
(1 i) (1 i) (1 i) (1 i)
1 2 3
$200 $400 $600PV
(1 .12) (1 .12) (1 .12)
$200 $400 $600
1.12 1.2544 1.4049
$178.57 $318.88 $427.08 $924.53
As an example, assume the following annual cash flows: $200 in year one, $400 in year two and $600 in year three. If the appropriate discount rate is 12%, then the PV of the stream would be:
Source: ETM3 - © AFP
Breakeven Analysis
Fixed CostsUnit B/E Point = Selling Price Per Unit Variable Cost Per Unit
$10,000= $10 $6
= 2,500 Units
Breakeven point: Level of activity for an operation at which costs exactly equal benefits
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 24
Source: ETM3 - © AFP
![Page 9: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/9.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 9
Capital BudgetingDeveloping strategic plans for a company’s
proposed large-dollar investments
For example, replacement of existing equipment, expansion of facilities, purchase of new equipment or introduction of a new product line
Form of Cost-Benefit analysis using models Payback period
Net present value
Profitability index
Internal rate of return
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 25
Group ExerciseWorking in your groups,
answer the following questions:What is the difference between
Payback Period, Net Present Value, Internal Rate of Return and Profitability Index?What are the key inputs needed to
use these evaluation approaches?
26© 2016 - The Treasury Academy, Inc. - All Rights Reserved
Net Present Value (NPV)Evaluates the present value
(PV) of all inflows and outflows of a project using the weighted average cost of capital as a discount rate
If the only cash outflow takes place in the present :
NPV = PV of Cash Inflows PV of Cash Outflows
31 2 n1 2 3 n
NPV = PV of Cash Inflows Cash Cost
CC C CNPV = + + + ... + Cost
(1+ i) (1+ i) (1+ i) (1+ i)
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 27Source: ETM3 - © AFP
![Page 10: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/10.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 10
Net Present Value (NPV)
A 1 2 3 4 5
B 1 2 3 4 5
$300 $300 $400 $100 $100NPV = + + + + $1,000(1 + .10) (1 + .10) (1 + .10) (1 + .10) (1 + .10)
= $ 48.42
$1,000 $1,000$300 $300 $400NPV = + + + + (1 + .10) (1 + .10) (1 + .10) (1 + .10) (1 + .10)
$1,000
= $1,124.98
Year 1 Year 2 Year 3 Year 4 Year 5
Project A $300 $300 $400 $100 $100
Project B $300 $300 $400 $1,000 $1,000
Assume an initial outlay of $1,000 and a cost of capital of 10%
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 28
Source: ETM3 - © AFP
Profitability Index (PI)
Present Value of Cash InflowsProfitability Index = Present Value of Cash Outflows
Ratio of the PV gained to the cost required to obtain that value; shows value gained per dollar of investment
If the only cash outflow is in the present (period 0):
A
B
$951.57PI = = 0.952$1,000
$2,124.98PI = = 2.125$1,000
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 29Source: ETM3 - © AFP
Internal Rate of Return (IRR)Discount rate (i) for NPV = 0
or
PV of Cash Inflows = PV of Cash Outflows
=
A 1 2 3 4 5
B 1 2
NPV = PV of Cash Inflow Cost = 0
$300 $300 $400 $100 $100NPV = + + + + $1,000 0(1 + i) (1 + i) (1 + i) (1 + i) (1 + i)
i = 7.7%
$300 $300 $400NPV = + + (1 + i) (1 + i) (1 + i
=
3 4 5
$1,000 $1,000+ + $1,000 0) (1 + i) (1 + i)
i = 38.1%
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 30Source: ETM3 - © AFP
![Page 11: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/11.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 11
Capital Expenditure Analysis Summary
MethodProject
Acceptance Criterion
Project A Project B
Net Present Value (NPV)
NPV > 0 $–48.43 $1,124.98
Profitability Index (PI)
PI > 1 0.952 2.2125
Internal Rate of Return (IRR)
IRR > WACC* 7.7% 38.1%
* Weighted Average Cost of Capital (WACC) = 10% in the example © 2016 - The Treasury Academy, Inc. - All Rights Reserved 31
Source: ETM3 - © AFP
Risk AnalysisScenario analysis “What if” analyses establishing best and worst
cases (calculates NPV for each)
Sensitivity analysis Identifies and evaluates areas of greatest
vulnerabilities by varying one factor while holding others constant in an NPV calculation
Simulation Monte Carlo simulation
Risk Adjusted Discount Rate (RADR) Requires high-risk endeavors to earn a higher
rate of return in order to justify the investment
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 32
Financial Statement Analysis
Common-Size Statements and RatiosLiquidity or Working Capital RatiosEfficiency or Asset Management RatiosDebt Management RatiosPerformance RatiosIntegrated Ratio AnalysisService Industry RatiosStrengths and Limitations of Ratio
Analysis
33© 2016 - The Treasury Academy, Inc. - All Rights Reserved
![Page 12: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/12.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 12
Sample Common-Size Balance Sheet
34© 2016 - The Treasury Academy, Inc. - All Rights Reserved
Financial Statement AnalysisSuppliers determine whether
to make sales on credit.
Trading partners assess thefinancial ability of a counterpartyto meet contractual obligations.
Lenders determine whether to extend or maintain credit.
Rating agencies assess credit risk of issues.
Investors make decisions about purchasing and selling corporate debt and equity.
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 35
Key Financial Ratios
Liquidity or Working Capital Measures firm’s ability to meet its
payment obligations and cash management efficiency
Efficiency or Asset Management Measures how efficiently assets
are utilized
Debt Management Measures level of debt and
ability to service it
Performance Measures profitability in relation
to revenue and investment
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 36
![Page 13: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/13.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 13
Efficiency and Asset Management: Total Asset Turnover
RevenuesTotal Asset Turnover =
Total Assets
$15,000= = 0.968 Times
$15,500
Measures how many times the asset base is turned over with the flow of revenue
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 37Source: ETM3 - © AFP
Efficiency and Asset Management: Fixed Asset Turnover
RevenueFixed Asset Turnover =
Net Property, Plant & Equip
$15,000= = 2.0 Times
$7,500
Focuses on how efficiently fixed assets, or plant and equipment, are used
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 38Source: ETM3 - © AFP
Debt Management: Total Liabilities to Total Assets
Total LiabilitiesTotal Liabilities to Total Assets =
Total Assets
$7,300= = .471 or 47.1%
$15,500
Measures the percentage of all liabilities relative to total investments or total assets
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 39Source: ETM3 - © AFP
![Page 14: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/14.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 14
Debt Management: Long-Term Debt to Capital
-
-
Long Term DebtL / T Debt to Capital =
Long Term Debt + Equity
$3,900= = .322 or 32.2%
$3,900 + $8,200
Measures the percentage of a company’s capitalization that is provided by long-term debt
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 40Source: ETM3 - © AFP
Debt Management/Coverage: Times Interest Earned (TIE) Ratio
Operating ProfitTIE =
Interest Expense
EBIT =
Interest Expense
$1,600= = 5.33 Times
$300
Measures a firm’s ability to service debt through interest payments
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 41
Source: ETM3 - © AFP
Performance: Gross Profit Margin
Gross Profit $5,800Gross Profit Margin = =
Revenues $15,000
= .387 or 38.7%
Measures the percentage of revenues remaining after the cost of goods sold is deducted from revenue – it is also a typical common-size ratio measure
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 42Source: ETM3 - © AFP
![Page 15: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/15.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 15
Performance: Operating & EBITDA Profit Margins
EBITOperating Profit Margin =
Revenues
$1,600= = 0.107 or 10.7%
$15,000
Measures the flow of commonly used operating income measures in relation to the flow of revenue
EBITDAEBITDA Margin =
Revenues
$1,800= = 0.120 or 12.0%
$15,000© 2016 - The Treasury Academy, Inc. - All Rights Reserved 43
Source: ETM3 - © AFP
Performance: Net Profit Margin
Net IncomeNet Profit Margin =
Revenues
$850=
$15,000
= .057 or 5.7%
Measures the flow of net income in relation to the flow of revenue
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 44Source: ETM3 - © AFP
Performance: Return on Total Assets
Net IncomeReturn on Total Assets =
Total Assets
$850=
$15,500
= .055 or 5.5%
Measures net income in relation to the stock of assets
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 45
Source: ETM3 - © AFP
![Page 16: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/16.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 16
Performance: Return on Common Equity
Earnings Avail. to Common S / HsReturn on Common Equity =
Common Equity
Net Income Preferred Dividends=
Total Equity Preferred Stock
$850 0= = 0.104 or 10.4%
$8,200 0
Measures earnings available to common shareholders (net income less any preferred stock dividends) expressed as a percentage of common equity
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 46
Source: ETM3 - © AFP
Strength and Limitations of Ratio Analysis
Advantages:
Easily computed
Widely used
Information easily
obtained
Facilitate comparison
between companies
Disadvantages:
Express static (historical), not
dynamic, relationships
Summarize accounting information
and may not reflect economic value
Cannot reflect qualitative value
(business strategies, managerial
talent)
Use of different accounting methods
may reduce the validity of
comparisons between companies
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 47Source: ETM3 - © AFP
Performance Measurement
Return on Investment (ROI)
Residual Income (RI)
Free Cash Flow (FCF)
Economic Value Added (EVA)
48© 2016 - The Treasury Academy, Inc. - All Rights Reserved
![Page 17: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/17.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 17
Performance Measurement Return on investment (ROI) ROI over a partial period may be misleading. ROI does not include charge for cost of capital. Positive NPV project can be rejected if it lowers overall ROI
Residual Income (RI) Assigns charge for invested capital. RI is a dollar amount, and any profitable project after
deducting cost of capital will increase RI.
Net Income Net IncomeROI = = Invested Capital Long-Term Debt + Equity
$850 $850= = = 0.0702 or 7.02%$3,900 + $8,200 $12,100
RI = Net Income Invested Capital Cost of Capital
= $850 $12,100 .10 = $850 $1,210 = $360
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 49Source: ETM3 - © AFP
Performance Measurement: Free Cash Flow
Free Cash Flow (FCF) A type of RI analysis, but also includes adjustments
for noncash items, operating working capital investments and capital expenditures (CapEx) There are many different formulas used for FCF Considered a better representation of the value of
the firm to shareholders
FCF = Net Income + (D&A) Change in Op W/C CapEx
= $850 + $200 $500 $900 = $350
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 50Source: ETM3 - © AFP
Economic Value Added (EVA)A measure of the incremental value that a
company’s investments add.What is the EVA for the following company? Long-term debt of $3,900
Equity of $8,200
Marginal tax rate of 34.615%
Weighted average cost of capital (WACC) of 10%
Operating income (EBIT) of $1,600
EVA = EBIT (1 Tax Rate) (WACC)(Long-term Debt + Equity)
= $1,600 (1 .34615) (.10)($3,900 + $8,200)
= $1,046 (.10)($12,100)
= $1,046 $1,210 = $164
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 51Source: ETM3 - © AFP
![Page 18: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/18.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 18
Financial Analysis and Rating Agencies
Role of rating agencies in debt issuesRating fees are typically paid for by
the entity being ratedCredit ratings are also done internally
by banks and other lenders, as well as by trade creditors to a business
52© 2016 - The Treasury Academy, Inc. - All Rights Reserved
Overview of Chapter 20 Topics Introduction
Capital Structure of ACompany
Raising and Managing Long-Term Capital
Cost of Capital and Firm Value
Lease Financing and Management
Equity Financing and Management
Other Topics in Financial Decisions
53© 2016 - The Treasury Academy, Inc. - All Rights Reserved
Capital Structure of A Company
Optimal and Target Capital StructuresTrade-Offs Between Financing with
Long-Term Debt and Common StockCapital Structure TheoryBusiness and Financial RiskTarget Capital StructureOther Consideration in Capital
Structure DecisionCapital Structure in Not-For-Profit
Organizations
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 54
![Page 19: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/19.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 19
Cost of Capital
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 55
More on Raising CapitalAdvantages and disadvantages of
using both debt & equity (stock) financingAdvantages and disadvantages of
private placements vs. public issuesAdvantages and disadvantages of
listing stocksIssues related to lease financingDividend policy & stock
repurchases
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 56
Operating Risk and LeverageOperating risk is a function of the mix of
variable and fixed costs in a company’s operations
It is assessed by looking at the changes in a company’s EBIT for given change in sales
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 57
% Change in EBITDegree of Operating Leverage =
% Change in Sales
33%Degree of Operating Leverage = = 1.65 Times
20%
Using the information from the text Exhibit 14.1
Source: ETM3 - © AFP
![Page 20: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/20.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 20
Financial Risk and LeverageFinancial risk is a function of the
mix of capital sources used to finance the company
It is assessed by looking at the changes in a company’s net income for given change in EBIT
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 58
% Change in Net IncomeDegree of Fin. Leverage =
% Change in EBIT
Cost of Capital and Firm ValueCost of capital is the basic target number that
asset returns must exceed if the company is to create shareholder value
Capital Components and Costs Primary sources of “permanent” capital are long-term
debt (bonds) and equity (common stock and retained earnings)
The relevant costs ofthese sources are theirmarginal cost
Be sure to use onlyafter-tax values for the costs
Typically calculated as WACC Weighted Average Cost of Capital
59© 2016 - The Treasury Academy, Inc. - All Rights Reserved
Cost of DebtRelevant cost is after-tax YTM
After-tax kd = Before-tax kd(1 – T)
Calculation Example – AssumeYTM of 5% and marginal tax rate of 30%: After-tax kd = 5%(1 – .3) = 3.5%
In companies with complicated tax liabilities, the marginal tax rate may be difficult to estimate from standard financial statements
Though flotation costs of debt are usually low, they should be considered if they are significant
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 60
![Page 21: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/21.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 21
Cost of Common Equity
Two sources of common equity Retained earnings during the period
Issue new common stock
CAPM may be used to estimate the market’s required rate of return on equity
Flotation costs are usually not considered for retained earnings, but may be significant for new common stock issues
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 61
Common Equity Calculation Example
Assume a risk-free rate of 4.0%, a return on the stock market of 10.0% and a Beta of 1.2In this case the cost of equity is:
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 62
E RF M RFr r (r r )
= .04 + (.10 .04)(1.2) = .112 or 11.2%
Weighted Average Cost of Capital (WACC)
Assume 1/3 of total financing is from debt and 2/3 is from equity, and the costs of debt and equity are those found on previous slides:
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 63
D D E EWACC = W r (1 T) W r
D D E EWACC = W r (1 T) W r
[.333 0.05 (1 0.3)] (.667 0.112)
8.64%
![Page 22: Essential Learning for CTP Candidates New York Cash ... · As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text](https://reader030.vdocuments.net/reader030/viewer/2022040817/5e604636e05f9b41cd3a8a1d/html5/thumbnails/22.jpg)
Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #04
Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 22
Repatriation of Capital for MNCs
Multinational Company Dividends
Management Fees
Transfer Pricing
Intra-company Loans
Deemed Dividends
Restrictions on Dividends
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 64
Session Wrap-upSession 4: Financial Statements, Analysis & Decision
What did we learn in this session?
What topics do we need to learn more about?
65© 2016 - The Treasury Academy, Inc. - All Rights Reserved
New York Cash Exchange: 2016Essential Learning for CTP Candidates
End of This Session
We will reconvene tomorrow morning.
The topic will be:
More Key ConceptsReview of CTP Calculations
© 2016 - The Treasury Academy, Inc. - All Rights Reserved 66