GPC INDUSTRIES

GPC is raw material distributor. They buy and sell raw material for nutritional and food market. Wanted to choose a bigger company within the same industry.

USING D&B AS THE MARKET INDICATOR

They are "independent" ratings of how safe an investment in a particular company.

GPC Balance Sheet at Dec 31, 2xx1

2xx0 Assets Cash & mkt'ble secs Receivables Inventories *Current assets Pp&e Acc depreciation *Net pp&e **Total Assets Liabilities & Equity Accounts payable Short-term debt *Current liabilities Long-term debt **Total liabilities Paid-in capital Retained earnings *Shareholders equ Liab + Shareholder 100.0 50.0 150.0 300.0 400.0 (100.0) 300.0 600.0 2xx1 120.0 60.0 180.0 360.0 490.0 (130.0) 360.0 720.0 Change 20.0 10.0 30.0 60.0 90.0 (30.0) 60.0 120.0

60.0 90.0 150.0 150.0 300.0 200.0 100.0 300.0 600.0

72.0 184.6 256.6 150.0 406.6 200.0 113.4 313.4 720.0

12.0 94.6 106.6 106.6 13.4 13.4 120.0

GPC Income Statement for Year Ending 2xx1

Sales revenues Cost of goods sold *Gross margin Gen sell & admin exp *Operating income Interest expense *Taxable income Income tax *Net income Allocation to divs *Chg retained earn 200.0 (110.0) 90.0 (30.0) 60.0 (21.0) 39.0 (15.6) 23.4 (10.0) 13.4

The Cash-Flow Statement

Show the cash that flowed into and from a firm in during a time period
Focuses attention on a firm s cash situation
A firm may be profitable and short of cash

Unlike the balance sheet and income statement, cash flow statements are independent of accounting methods
The IRS uses accounting income to compute tax, so accounting rules have a second order effect on cash flows through taxes

GPC Cas Flow State ent, for t e Year ending ec 31, 2xx0
Net inco e + epreciation - Increase in acc rec - Increase in invent + Increase in acc rec *Total cash fro operations - Invest in new ppe *Cash flow invest' activities - iv paid + Inc s ort-ter debt *Cash flow fro financing **Chng cash mkt securities 23. 30.0 (10.0) (30.0) 12.0 25.4 ( 0.0) (90.0) (10.0) .6 84.6 20.0

GPC Income Statement for Year Ending 2xx1

Sales revenues Cost of goods sold *Gross argin Gen sell, & admin exp *Operating inco e Interest expense *Taxable inco e Income tax *Net inco e Allocation to divs *Chg retained earn 200.0 (110.0) 90.0 (30.0) 60.0 (21.0) 39.0 (15.6) 23.4 (10.0) 13.4

GPC Balance Sheet at Dec 31, 2xx1

2xx0 Assets Cash & mkt'ble secs Receivables Inventories *Current assets 2xx1 Change

100.0 50.0 150.0 300.0 400.0 (100.0) 300.0

600.0

120.0 60.0 180.0 360.0 490.0 (130.0) 360.0

720.0

20.0 10.0 30.0 60.0 90.0 (30.0) 60.0

120.0

Pp&e Acc depreciation *Net pp&e

**Total Assets Liabilities & Equity Accounts payable Short-term debt *Current liabilities

60.0 90.0 150.0 150.0 300.0 200.0 100.0 300.0

600.0

72.0 184.6 256.6 150.0 406.6 200.0 113.4 313.4

720.0

12.0 94.6 106.6 106.6 13.4 13.4

120.0

GPC Cash low Statement, for the Year ending Dec 31, 2xx0
Net income Depreciation - Increase in acc rec - Increase in invent Increase in acc pay *Total cash fro operations - Invest in new ppe *Cash flow invest' activities -Div paid Inc short-term debt *Cash flow fro financing
**Chng cash & t securities

Long-term debt **Total liabilities Paid-in capital Retained earnings *Shareholders equ
Liab + Shareholder

23.4 30.0 (10.0) (30.0) 12.0 25.4 (90.0) (90.0) (10.0) 94.6 84.6
20.0

Analysis using Financial Ratios

Despite the differences in accounting and financial principles, the published accounts of a firm yield clues about its financial condition Five aspects of a firms performance:
Profitability Asset turnover Financial leverage Liquidity Market value

Profitability
INDUSTRY AVERAGE

EBIT Sales 60 ! ! 30% 200 EBIT Return on Assets (RoA) ! AverageTotalAssets 60 ! ! 9.1% 600  720 / 2 NetIncome Return on Equity (RoE) ! StockHolder' sEquity 23.4 ! ! 7.6% 300  313.4 / 2 Return on Sales (RoS) !

25%

5%

Asset Turnover
INDUSTRY AVERAGE

eceivables Turnover !

ales verage eceivables 200 ! ! 3.6 Times 50  60 / 2 Cost of Goods old Inventory Turnover ! verage Inventory 110 ! ! 0.7 Times 150  180 / 2 ales sset Turnover ! verage Total ssets 200 ! ! 0.3 Times 600  720 / 2

2%

1%

Liquidity
360 Current ssets . ! ! 14Times Current ! Ciurrent Liabilities 256.6 180 Cash  C. Quick or cid Test ! ! Current Liab. 256.6 ! 0.7 Times

The Financial Planning Process

Starting point is the strategic plan
Strategy guides the financial planning process by establishing overall business development guidelines and growth targets Which businesses does the firm want to

enter expand contract exit

and how quickly?

GPC inancial Statements, Years xxx1 - xxx3

Year (Nearest $ Million) xxx0 xxx1 xxx2 xxx3 200 110 90 30 60 30 12 18 5 13 240 132 108 36 72 45 11 16 5 11 288 158 130 43 86 64 9 13 4 9 (Percent of Year's Sales) xxx1 xxx2 xxx3 100.0% 100.0% 100.0% 55.0% 55.0% 55.0% 45.0% 45.0% 45.0% 15.0% 15.0% 15.0% 30.0% 30.0% 30.0% 15.0% 18.8% 22.2% 6.0% 4.5% 3.1% 9.0% 6.7% 4.7% 2.7% 2.0% 1.4% 6.3% 4.7% 3.3%

Inco e State ent

Sales Cost of goods sold Gross margin Selling, general & admin. expenses EBIT Interest expenses Taxes Net income Dividends Change in shareholder's equity

Balance Sheet
Assets: Cash & equivalents Receivables Inventories Property, Plant & equipment Total Assets Liabilities: Payables Short-term debt Long-term debt Total Liabilities Shareholder's equity 10 40 50 500 600 30 120 150 300 300 12 48 60 600 720 36 221 150 407 313 14 58 72 720 864 43 347 150 540 324 17 69 86 864 1037 52 502 150 704 333 6.0% 6.0% 6.0% 24.0% 24.0% 24.0% 30.0% 30.0% 30.0% 300.0% 300.0% 300.0% 360.0% 360.0% 360.0% 18.0% 18.0% 18.0% 110.7% 144.6% 174.2% 75.0% 62.5% 52.1% 203.7% 225.1% 244.3% 156.3% 134.9% 115.7%

Constructing a Financial Planning Model

Percent-of-sales method
First examine which items in the income statement have maintained a fixed ratio to sales
This enables us to decide which items should be forecast on projected sales, and which need to be forecast on another basis

Constructing a Financial Planning Model

Percent-of-sales method
We will assume the Following
Sales will continue to grow at 20% next year (as it has in the past) Interest rate on long-term debt is 8%, and on shortterm debt is 15% To avoid complexity, we assume that interest is computed on the yearend long- and short-term balances interest = 0.08*501.72 + 0.15*150 = 87.26 The dividend pay-out ratio and tax rate is 30% and 40%

 Percent-of-sales method
We will assume the Following
During the coming year, the firm will mount a major program to expand sales. The expected result is a 20% growth in revenue. Pricing and product mix will remain unchanged.

The revenue growth will be accomplished by increasing efforts in the marketing/sales department. The increased expenses generated will be accommodated by planning Marketing Department expenses at 19% of the expanded revenue rather than the current 18%.

 SALES GREW 20% FROM $240 MILLION DOLLAR IN 2002 TO $288 MILLION IN 2003. SINCE WE ASSUMED SALES WILL GROW ANOTHER 20%, SALES WILL BE A $346 MILLION IN 2004

GPC inancial Statements, Years xxx1 - xxx3

Year 2000 (Nearest $ Million) 2001 2002 2003 200 110 90 30 60 30 12 18 5 13 240 132 108 36 72 45 11 16 5 11 288 158 130 43 86 64 9 13 4 9 (Percent of Year's Sales) 2001 2002 2003 100.0% 100.0% 100.0% 55.0% 55.0% 55.0% 45.0% 45.0% 45.0% 15.0% 15.0% 15.0% 30.0% 30.0% 30.0% 15.0% 18.8% 22.2% 6.0% 4.5% 3.1% 9.0% 6.7% 4.7% 2.7% 2.0% 1.4% 6.3% 4.7% 3.3% 2004 346 190 156 52 104 87 7 10 3 7

Inco e State ent

Sales Cost of goods sold Gross margin Selling, general & admin. expenses EBIT Interest expenses Taxes Net income Dividends Change in shareholder's equity

Balance Sheet COST OF GOODS SOLD, FOR 2003= Assets: 288/100 = 2.8 Cash & equivalents 10 12 14 17 6.0% 6.0% 6.0% Yes Receivables 40 48 58 69 24.0% 24.0% 24.0% Yes 2.8 *55% (STEADY RATE FOR50 60OF GOODS SOL) = $158 MILLION COST Inventories 72 86 30.0% 30.0% 30.0% Yes Property, Plant $346 MILLION FOR 720 SINCE SALESAssets & equipment 500 600 2004864 300.0% 300.0% 300.0% Yes WAS Total 600 720 864 1037 360.0% 360.0% 360.0% N/A(Yes) Liabilities: 55% OF IT WILL BE THE COST OF GOOD SOLD = 190
Payables Short-term debt Long-term debt Total Liabilities Shareholder's equity 30 120 150 300 300 36 221 150 407 313 43 347 150 540 324 52 502 150 704 333 18.0% 18.0% 18.0% Yes 110.7% 144.6% 174.2% No 75.0% 62.5% 52.1% No 203.7% 225.1% 244.3% N/A 156.3% 134.9% 115.7% N/A

21 83 104 1037 1244 62

904 340

19

GPC inancial Statements, Years xxx1 - xxx3

(Nearest $ Million) Year xxx0 xxx1 xxx2 xxx3 xxx4

Inco e State ent

Sales Cost of goods sold Gross margin Selling, general & admin. expenses EBIT Interest expences Taxes Net income Dividends Change in shareholder's equity 200 110 90 30 60 30 12 18 5 13 240 132 108 36 72 45 11 16 5 11 288 158 130 43 86 64 9 13 4 9 346 190 156 52 104 87 7 10 3 7

 We also said the Interest rate on long-term debt is 8%, and on short-term debt is 15%
Inco e
Sales

State ent
200 240 288 100.0% 100.0% 100.0% N/A 346

We of goods sold the balance110 132 recognizing55.0% there are only 190 sheet by 158 55.0% that 55.0% Yes Cost complete Gross 156 two margin & admin. expenses to90 estimated, 15.0% 15.0% 15.0% Yesand Long-52 accounts that need 30 108 130 45.0% 45.0% 45.0% N/A(Yes) be 36 43 Short-term debt, elling, general term debt EIT 60 72 86 30.0% 30.0% 30.0% N/A 104 Inerest expenses 30 45 87 The sum is then 904 (Liabilities)11 62 64 15.0% 18.8% 22.2% No - (Payables) = $842 Million Taxes 12 9 6.0% 4.5% 3.1% N/A 7 Net inome 18 16 13 9.0% 6.7% 4.7% N/A 10 Assume no change in long-term debt Dividends 5 5 4 2.7% 2.0% 1.4% N/A 3 Short-term debt =$842 - 150 = $692 million 6.3% 4.7% 3.3% 13 11 9 7
GPC inancial Statements, Years 2001- 2003
Balance Sheet
(Nearest $ Million) Assets: 2000 2001 2002 2003 Year Cash & equivalents 10 12 14 17 Receivables 40 48 58 69 Inventories 50 60 72 86 Property, Plant & equipment 500 600 720 864 Total Assets 600 720 864 1037 Liabilities: Payables 30 36 43 52 Short-term debt 120 221 347 502 Long-term debt 150 150 150 150 Total Liabilities 300 407 540 704 Shareholder's equity 300 313 324 333 (Percent of Year's Sales) 2001 2002 2003 6.0% 6.0% 6.0% 24.0% 24.0% 24.0% 30.0% 30.0% 30.0% 300.0% 300.0% 300.0% 360.0% 360.0% 360.0% 18.0% 18.0% 18.0% 110.7% 144.6% 174.2% 75.0% 62.5% 52.1% 203.7% 225.1% 244.3% 156.3% 2004 21 83 104 1037 1244 62

904

Comparison of GPC to Industry Using DuPont Equation

ROE = NI/S S/TA TA/E NI/S = 8/288 = 2.7% TA/S = 9/288 = 3.1 TA/E = 9/333= 2.0 ROEGPC = 2.7% 3.1 2.07 = 17.3%. ROEIndustry = 2.74% 2.0 2.13 = 11.6%.

AFN Key Factors (Continued)

Profit margin (Net income/Sales): The higher the profit margin, the smaller AFN will be other things held constant. Payout ratio (DPS/EPS): The lower the payout ratio, the smaller AFN will be other things held constant.

Additional Funds Needed (AFN)

Equation approach:

A* S S L* PM S1 d

= = = = = = =

assets which increase proportionately to sales prior year sales change in sales liabilities which increase proportionately to sales net profit margin projected sales for next period dividend payout ratio