Capital Raising

and Business Plan

1
Course content

PRELIMINARY READING(S) ADDITIONAL READING(S)

SESSION TOPIC
AND ASSIGNMENTS AND ASSIGNMENTS

1 Financial Planning Case Study Tesla (2019) : Sources and Uses of Cash

2 Financing Choice Case Study ArcelorMittal (2016) : Financial Structure

External Financing:
3 Case Study ArcelorMittal (2016) : SPO
Equity Financing
External Financing:
4
Equity Financing
External Financing:
5 Case Study Qualcomm (2016) : Bonds
Debt Financing
External Financing:
6 Case Study Tesla (2019) : Equity and Bond Issuance
Debt Financing
Group Work :
7 External Financing
External Financing Case Study

8 Financing Strategy Case Study Kodak (2019) : Convertible Bonds

Group Work :
9 Financing Strategy
Financing Strategy Presentation

10 Final examination

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Evaluation

 Group work :
– The case study consists of determining the external financing of a fim.
– The presentation consists of explaining the financing strategy of a firm.

 Final Exam: The final exam is an individual written exam, the student needs a
calculator.

 A calculator is required for most of sessions!

 EVALUATION OF STUDENT PERFORMANCE

Case Study Presentation Final examination

25% 25% 50%

Session 7 Session 9 Session 10

Groups of 5 students Groups of 5 students

External Financing
Calculator allowed
Financing Strategy

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Group Work: Company Analysis

 Maximum 5 students per group. (15 min presentation)

 Choose a company from the 100 Fastest-Growing Companies in 2022 with a

market value of less than $100 billion from this website :
https://fortune.com/100-fastest-growing-companies/2022/search/

– What is the company main activity?

– What are the strategy and the development of this company over the last
10 years?

– How the company raises capital for its activity over the last 10 years?

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 Capital Raising
and Business Plan
Financial Planning

5
Outline

 Financial Planning:
1-Pro Forma Financial Statements
2-Sources and uses of cash
3-Case study 1

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1-Pro Forma Financial Statements: Methods

 It is important for firms to forecast their operating cash flow and net income for
the forthcoming period by developing pro forma financial statements.
 There are a variety of ways to produce pro forma statements, but the
statements usually rely on two primary inputs:
– The prior year’s financial statements and the relationship of the account
balances to each other, and
– The projected sales for the coming year.
 The percentage of each item either to sales or to total assets is computed for
the prior year and then multiplied by the projected sales or total assets for the
coming year to develop pro forma financial statements.
• For example, let’s say that the cash balance for the prior year is $2 million and
the total assets is $100m. So cash is 2% of total assets.
• For the Pro Forma Balance Sheet, we would forecast cash as 2% of the
forecasted total assets as well, i.e. if total assets are forecasted to increase by
20% to $120m the cash would be forecasted to be .02 x 120m = $2.4m.
 This approach, a good first step, is often too simplistic in reality because many
financial statement items do not vary proportionally with sales.
– In particular, depreciation decreases over time and cost of goods sold
often declines due to economies of scale. The manager would have to fine-
tune the forecasted values to make them more in line with reality
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1-Pro Forma Financial Statements: Income statement

Income Statement Balance Sheet

2022 2023 Margins 2022 2020
Net sales 4 800 Cash 130
Costs 3 900 Accounts Receivable 245
EBITDA 900 Inventory 724
Depreciation 220 Other Current assets 0
EBIT 680 Current assets 1 099
Interest expense 300 Gross PP&E 6 053
EBT 380 Accum. Dep. 1 100
Taxes 114 Other Fixed Assets 0
Net income 266 Total Assets 6 052
Dividends 146
Retained earnings 120 Accounts payable 358
Other Current liabilities 242
Short-term debt 0
Current liabilities 600
Long-term debt 2 702
Other Non-Current liabilities 0
Common stock 62
Retained earnings 2 688
Total liab /OE 6 052

 What are the margins, the corporate tax rate and the dividend payout ratio for
2022 ?
 What is the pro forma income statement with the same depreciation and
interest expense but with an increase of 6% of net sales ?

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1-Pro Forma Financial Statements: Balance sheet

Income Statement Balance Sheet

2022 2023 Margins 2022 2023
Net sales 4 800 Cash 130
Costs 3 900 Accounts Receivable 245
EBITDA 900 Inventory 724
Depreciation 220 Other Current assets 0
EBIT 680 Current assets 1 099
Interest expense 300 Gross PP&E 6 053
EBT 380 Accum. Dep. 1 100
Taxes 114 Other Fixed Assets 0
Net income 266 Total Assets 6 052
Dividends 146
Retained earnings 120 Accounts payable 358
Other Current liabilities 242
Short-term debt 0
Current liabilities 600
Long-term debt 2 702
Other Non-Current liabilities 0
Common stock 62
Retained earnings 2 688
Total liab /OE 6 052

 What is the average interest rate of the company?

 What is the pro forma balance sheet if we assume no other change than the
income statement ?

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1-Pro Forma Financial Statements: Balance sheet

Income Statement Balance Sheet

2022 2023 Margins 2022 2023
Net sales 4 800 Cash 130
Costs 3 900 Accounts Receivable 245
EBITDA 900 Inventory 724
Depreciation 220 Other Current assets 0
EBIT 680 Current assets 1 099
Interest expense 300 Gross PP&E 6 053
EBT 380 Accum. Dep. 1 100
Taxes 114 Other Fixed Assets 0
Net income 266 Total Assets 6 052
Dividends 146
Retained earnings 120 Accounts payable 358
Other Current liabilities 242
Short-term debt 0
Current liabilities 600
Long-term debt 2 702
Other Non-Current liabilities 0
Common stock 62
Retained earnings 2 688
Total liab /OE 6 052

 Each prior year’s balance sheet item is expressed as a percent of total assets,
and then multiplied by the forecasted total assets figure for the next period.
 Items which are obviously either constant each period, or which vary at a
different rate (for whatever reason) are accordingly adjusted.
 If total assets exceed total liabilities and owner’s equity, external financing is
allocated according to some pre-determined ratio to serve as the plug variable.
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1-Pro Forma Financial Statements: Balance sheet

Income Statement Balance Sheet

2022 2023 Margins 2022 2023
Net sales 4 800 Cash 130
Costs 3 900 Accounts Receivable 245
EBITDA 900 Inventory 724
Depreciation 220 Other Current assets 0
EBIT 680 Current assets 1 099
Interest expense 300 Gross PP&E 6 053
EBT 380 Accum. Dep. 1 100
Taxes 114 Other Fixed Assets 0
Net income 266 Total Assets 6 052
Dividends 146
Retained earnings 120 Accounts payable 358
Other Current liabilities 242
Short-term debt 0
Current liabilities 600
Long-term debt 2 702
Other Non-Current liabilities 0
Common stock 62
Retained earnings 2 688
Total liab /OE 6 052

 Based on the following assumptions, what is the pro forma balance sheet ?
– Fixed assets will increase by $500 000 (capital expenditure) and will
depreciate over 10 years.
– Cash balance account will be at $140 000.
– Account receivables will be 6% of forecasted sales.
– Total inventories will be 17% of prior year's sales, on $4 800 000.
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1-Pro Forma Financial Statements: Balance sheet

Income Statement Balance Sheet

2022 2023 Margins 2022 2023
Net sales 4 800 Cash 130
Costs 3 900 Accounts Receivable 245
EBITDA 900 Inventory 724
Depreciation 220 Other Current assets 0
EBIT 680 Current assets 1 099
Interest expense 300 Gross PP&E 6 053
EBT 380 Accum. Dep. 1 100
Taxes 114 Other Fixed Assets 0
Net income 266 Total Assets 6 052
Dividends 146
Retained earnings 120 Accounts payable 358
Other Current liabilities 242
Short-term debt 0
Current liabilities 600
Long-term debt 2 702
Other Non-Current liabilities 0
Common stock 62
Retained earnings 2 688
Total liab /OE 6 052

 Based on the following assumptions, what is the pro forma balance sheet ?
– Accounts payable will represent 5% of total assets.
– Other current liabilities will reach $470 000.
– All new financing will be long-term debt.
 What is the new pro forma income statement and the new pro forma balance
sheet ?
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2-Sources and uses of cash: Cash flow statement

Income Statement Cash Flow Statement Balance Sheet

2022 2023 2023 2022 2023
Net sales 4 800 OPERATING ACTIVITIES Cash 130
Costs 3 900 Net income Accounts Receivable 245
EBITDA 900 + Depreciation, amortisation Inventory 724
Depreciation 220 = Cash flow Other Current assets 0
EBIT 680 - ∆ Working capital Current assets 1 099
Interest expense 300 + Other non-cash items Gross PP&E 6 053
EBT 380 = Cash Flow from Operating Activities (A) Accum. Dep. 1 100
Taxes 114 Other Fixed Assets 0
Net income 266 INVESTING ACTIVITIES Total Assets 6 052
Dividends 146 Disposal of fixed assets
Retained earnings 120 - Capital expenditure Accounts payable 358
- Other investments Other Current liabilities 242
= Cash Flow from Investing Activities (B) Short-term debt 0
Current liabilities 600
FINANCING ACTIVITIES Long-term debt 2 702
Proceeds from share issues Other Non-Current liabilities 0
- Dividends paid Common stock 62
+ New ST, MT and LT borrowings Retained earnings 2 688
- Repayment of ST, MT and LT borrowings Total liab /OE 6 052
+ Other financing
= Cash Flow from Financing Activities (C)

 Finally, the pro forma cash flow statement is prepared to tie together all the
changes in operating, investment, and financing cash flows.
 It helps the company see where funds will be generated in the coming period
and where funds will be used.
 If operations is insufficient in generating cash inflow and borrowing is needed
(from lenders or owners) it must be a temporary situation to be sustainable.
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2-Sources and uses of cash: Cash at the end of period

Income Statement Cash Flow Statement Sources and Uses of Cash

2022 2023 2023 2023 2023
Net sales 4 800 OPERATING ACTIVITIES Sources:
Costs 3 900 Net income Net income
EBITDA 900 + Depreciation, amortisation Depreciation
Depreciation 220 = Cash flow Operating cash flow
EBIT 680 - ∆ Working capital Borrowing
Interest expense 300 + Other non-cash items New stock issue
EBT 380 = Cash Flow from Operating Activities (A) Total sources
Taxes 114
Net income 266 INVESTING ACTIVITIES Uses:
Dividends 146 Disposal of fixed assets ∆ Working capital
Retained earnings 120 - Capital expenditure Capital expenditure
- Other investments Repayment of Debt
= Cash Flow from Investing Activities (B) Dividends
Total uses
FINANCING ACTIVITIES
Proceeds from share issues Financing requirements
- Dividends paid 2023
+ New ST, MT and LT borrowings Cash at start of period
- Repayment of ST, MT and LT borrowings + Net cash inflow
+ Other financing = Cash at end of period
= Cash Flow from Financing Activities (C)

 What are the sources and uses of cash ?

 What are the financing requirements ?

Capital raising and business plan - 14

3-Case study 1: Tesla

 Tesla had sales of $21.46 billion in 2018. Suppose you expect its sales to grow
at a rate of 25% in 2019 and 2020, but then slow at 5% per year. Based on
Tesla’s past income statement and balance sheet, the cost of sales will represent
90% of sales for 2019 and 2020 and 86% for next years, and the depreciations
is equal to 2 billion per year. The net working capital will increase by 7% for any
increase in sales. All their future investments will depreciate over 5 years.
2019 2020 2021 2022 2023
Capital Expenditure 0,80 1,00 1,40 1,60 1,30

 Tesla has $3.5 billion in cash, $11.12 billion in debt, and a tax rate of 30%.
Tesla never gives dividends but expects to give a dividend from 2021 with a
payout ratio of 10%. The type of repayment of the debt is the constant annuity.
The debt maturity is 5 years with 4% interest rate. In January 2019, they have
a short term debt to pay back that represents $2.71 billion.
 What is the depreciation for 2019 to 2023 ?
 What is the interest expense for 2019 to 2023 ?
 What is the income statement for 2019 to 2023 ?
 What is the change in working capital for 2019 to 2023 ?
 What are the sources and uses of cash ?
Capital raising and business plan - 15
3-Case study 1: Tesla (Depreciation)

Income Statement Sources and Uses of Cash

2019 2020 2021 2022 2023 2019 2020 2021 2022 2023
Net sales Sources:
Costs Net income
EBITDA Depreciation
Depreciation Operating cash flow
EBIT Borrowing
Interest expense New stock issue
EBT Total sources
Taxes
Net income Uses:
Dividends ∆ Working capital
Retained earnings Capital expenditure
2019 2020 2021 2022 2023 Repayment of Debt
Total Depreciation Dividends
Capital Expenditure Total uses
Depreciation
Financing requirements
2019 2020 2021 2022 2023
Cash at start of period
+ Net cash inflow
= Cash at end of period

 Tesla had sales of $21.46 billion in 2018. Suppose you expect its sales to grow at a rate of 25% in
2019 and 2020, but then slow at 5% per year. Based on Tesla’s past income statement and
balance sheet, the cost of sales will represent 90% of sales for 2019 and 2020 and 86% for next
years, and the depreciations is equal to 2 billion per year. The net working capital will increase by
7% for any increase in sales. All their future investments will depreciate over 5 years.
2019 2020 2021 2022 2023
Capital Expenditure 0,80 1,00 1,40 1,60 1,30

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3-Case study 1: Tesla (Interest expense)

Income Statement Sources and Uses of Cash

2019 2020 2021 2022 2023 2019 2020 2021 2022 2023
Net sales Sources:
Costs Net income
EBITDA Depreciation
Depreciation Operating cash flow
EBIT Borrowing
Interest expense New stock issue
EBT Total sources
Taxes
Net income Uses:
Dividends ∆ Working capital
Retained earnings Capital expenditure
2019 2020 2021 2022 2023 Repayment of Debt
Total Depreciation Dividends
Capital Expenditure Total uses
2019 2020 2021 2022 2023
Unpaid Balance Financing requirements
Interests 2019 2020 2021 2022 2023
Repayments Cash at start of period
Annuity + Net cash inflow
= Cash at end of period
 Tesla had sales of $21.46 billion in 2018. Suppose you expect its sales to grow at a rate of 25% in
2019 and 2020, but then slow at 5% per year. Based on Tesla’s past income statement and
balance sheet, the cost of sales will represent 90% of sales for 2019 and 2020 and 86% for next
years, and the depreciations is equal to 2 billion per year. The net working capital will increase by
7% for any increase in sales. All their future investments will depreciate over 5 years.
 Tesla has $3.5 billion in cash, $11.12 billion in debt, and a tax rate of 30%. Tesla never gives
dividends but expects to give a dividend from 2021 with a payout ratio of 10%. The type of
repayment of the debt is the constant annuity. The debt maturity is 5 years with 4% interest rate.
In January 2019, they have a short term debt to pay back that represents $2.71 billion.

Capital raising and business plan - 17

3-Case study 1: Tesla (∆ Working capital)

Income Statement Sources and Uses of Cash

2019 2020 2021 2022 2023 2019 2020 2021 2022 2023
Net sales Sources:
Costs Net income
EBITDA Depreciation
Depreciation Operating cash flow
EBIT Borrowing
Interest expense New stock issue
EBT Total sources
Taxes
Net income Uses:
Dividends ∆ Working capital
Retained earnings Capital expenditure
2019 2020 2021 2022 2023 Repayment of Debt
Total Depreciation Dividends
Capital Expenditure Total uses
2019 2020 2021 2022 2023
Unpaid Balance Financing requirements
Interests 2019 2020 2021 2022 2023
Repayments Cash at start of period
2016 2017 2018 2019 2020 + Net cash inflow
∆ Net Sales = Cash at end of period
 Tesla had sales of $21.46 billion in 2018. Suppose you expect its sales to grow at a rate of 25% in
2019 and 2020, but then slow at 5% per year. Based on Tesla’s past income statement and
balance sheet, the cost of sales will represent 90% of sales for 2019 and 2020 and 86% for next
years, and the depreciations is equal to 2 billion per year. The net working capital will increase by
7% for any increase in sales. All their future investments will depreciate over 5 years.
 Tesla has $3.5 billion in cash, $11.12 billion in debt, and a tax rate of 30%. Tesla never gives
dividends but expects to give a dividend from 2021 with a payout ratio of 10%. The type of
repayment of the debt is the constant annuity. The debt maturity is 5 years with 4% interest rate.
In January 2019, they have a short term debt to pay back that represents $2.71 billion.

Capital raising and business plan - 18