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Chapter 29

Principles of

Corporate Finance

Eighth Edition

Financial Analysis

and Planning

Slides by

Matthew Will

Copyright 2006 by The McGraw-Hill Companies, Inc. All rights reservedMcGraw-Hill/Irwin

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Topics Covered

Financial Statements

ACC

The DuPont System

Financial Planning

Growth and External Financing

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ACC

Assets Mar - 0 04 Mar- 005 Change

Current Assets

Cash and Bank 64.97 57.32 -7.65Receivables 576.18 577.54 + 1.36

Inventory 378.01 542.38 + 164.37

Total current assets 1019.16 1177.24 + 158.08

Investments 375.74 326.69 -49.05

Fixed Assets:

Gross Fixed Assets 3899.58 4477.68 + 578.1

Less accumulated depreciation 1406.93 1569.46 + 162.53Net Fixed Assets 2492.65 2908.22 + 415.57

Other assets 77.04 66.23 -10.81

Total assets 3964.59 4478.38 + 513.79

Figures in s. rores

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ACC

Fig r s i s. r r s

Liabilities and Shareholders' Equity Mar -04 Mar-05 Change

rr t liabiliti s

D bt d withi 1 y ar 17.24 200 + 182.76

Payabl s a d pr visi s 851.71 1022.84 + 171.13

T tal c rr t liabiliti s 868.95 1222.84 + 353.89

L g-t rm d bt 1425.48 1309.07 -116.41

Oth r liabiliti s 316.97 349.28 + 32.31

Shar h ld rs' q ity 1353.19 1597.19 + 244

T tal liabiliti s & shar h ld rs' q ity 3964.59 4478.38 + 513.79

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ACC

Other financialinformation:

Market value of equity 4510.63 6434.03 1923.407

Avera e number of shares (crores) 17.72 17.85 0.13

Share price (Rs.) 254.55 360.45 105.9

Fi ures (e ceptin per-share fi ures) in Rs.

rores

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ACC

Rs. Cror s

Sourc s:

rofit aft r tax 378.39

Depreciation 188.82

Operating cas flow 567.21

Issues ofOt er liabilities 32.31

Issues ofequit 8.56

Decrease in Working apital 195.81

Saleof Invest ents 9. 5

Decrease inot erassets 10.81

Total Sources 863.75

Uses:

Invest ent in fixedassets 604.39

Redemptionof long-termdebt 116.41

Dividends 142.95

Total uses 863.75

Sources andUses ofFunds:

(Figures inRs. rores)

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Leverage Ratios

Long term debt ratio =long term debt

long term debt + equity

ebt equity ratio =long term debt + value of leases

equity

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Leverage Ratios

Total debt ratio =total liabilities

total assets

Times interest earned =EBIT

interest payments

ash coverage ratio =EBIT + depreciation

interest payments

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Liquidity Ratios

Net working capital

to total assets ratio

Net working capital

Total assets

urrent ratiocurrent assets

current liabilities

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Liquidity Ratios

Cash ratiocash marketable securities

current liabilities

Quick ratiocash marketable securities receivables

current liabilities

Interval measurecash marketable securities receivables

average daily expenditures rom operations

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E iciency Ratios

sset turnover ratio =ales

verage total assets

W turnover =sales

average net orking capital

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E iciency Ratios

Days' sales in inventoryaverage inventory

cost o goods sold / 365

Inventory turnover ratiocost o goods sold

average inventory

Average collection period average receivables

average daily sales

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Pro itability Ratios

Return on assetsEBIT - tax

average total assets

et pro it marginEBIT - tax

sales

Return on equity earnings available or common stock

average equity

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Pro itability Ratios

Plo back ratio = earnings - dividendsearnings

= 1 - payout ratio

Payout ratio =dividends

earnings

ro th in equity rom plo back = earnings - dividends

earnings

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Market Value Ratios

Forecasted PE ratioP

aveEPS

1

r - g

0

1

=Div

EPSx

1

1

PE Ratiostock price

earnings per share

ividend yield dividend per share

stock price

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Market Value Ratios

Market to book ratiostock price

book value per share

rice per shareiv

r - g0

1

Tobins Q market value of assets

estimated replcement cost

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ACC Ratios (continued)

ACC

C t

I str

fficiencyRatios:

Sales-to-assets ratio Sales/average total assets 1.08 0.93

Sales-to-net-working-capitala

Sales/averagenet working capital 86.97 22.16

Days in inventory

Average inventory/(cost of goods

sold/365) 55.70 71.74

Inventory turnovera

Cost of goods sold/average inventory 6.55 5.09

Average collectionperiod (days) Average receivables/(sales/365) 46.29 64.35

Receivables turnovera Sales/average receivables 7.89 5.67

ProfitabilityRatios:

Net profit margin (E IT-taxes)/sales 0.10 0.10

Returnonassets (ROA) (E IT-taxes)/average total assets 0.11 0.09

Returnonequity (ROE)

Earnings available for common

stock olders/averageequity 0.26 0.19

Payout ratio Dividendper s are/earnings per s are 0.38 0.37

Market-ValueRatios:

Price-earnings ratio (P/E) Stock price/earnings per s are 17.00 31.84

Dividendyield Dividendper s are/stock price 0.02 0.01

arket-to-book ratio Stock price/book valueper s are 4.03 3.86

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The DuPont System

A breakdown o ROE and ROA intocomponent ratios

equityinterest-tax-EBITROE

assetstaxes-EBITROA

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The DuPont System

=sales

assetsx

IT - taxes

sales

asset

turnover

pro it

margin

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The DuPont System

ROEassets

equityx

sales

assetsx

EBIT - taxes

salesx

EBIT - taxes - interest

EBIT - taxes

leverage

ratio

asset

turnover

pro it

margin

debt

burden

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ACC

Financial Planning

1. Best case2. Normal growth

3. Retrenchment

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ACC

Financial Planning Models

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ACC

Financial Planning Models

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ACC

Financial Planning Models

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Growth and Retained Earnings

ACC Growth

retained earningsInternal growth rate 9.85%

net assets!

retained earnings profit after tax equityInternal gro th rate =

profit after tax equity net assets

equity plo back ratio return on equitynet assets

v v

! v v

=9.85%

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Web Resources

www.ibm.com/investor/financialguide

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