Principles of Corporate Finance

Chapter 29

Eighth Edition

Financial Analysis and Planning
Slides by Matthew Will

McGraw-Hill/Irwin

Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

29- 2

Topics Covered 
Financial Statements ACC
± The DuPont System 

Financial Planning Growth and External Financing

McGraw-Hill/Irwin

Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Crores Assets Current Assets Cash and Bank Receivables Inventory Total current assets Investments Fixed Assets: Gross Fixed Assets Less accumulated depreciation Net Fixed Assets Other assets Total assets Mar-2004 64.3 ACC Figures in Rs.29.38 1177.18 378.59 4477.36 + 164.65 77.97 576.65 + 1.01 1019.04 3964.46 2908.37 + 158.58 1406.38 + 578.22 66.79 McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies.54 542.08 -49.16 375.53 + 415.32 577.81 + 513.05 3899.93 2492.74 Mar-2005 57.68 1569.23 4478. Inc. All rights reserved .1 + 162.69 Change -7.57 -10.24 326.

84 1222.89 -116. Inc.59 Mar-05 200 1022.79 McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies.28 1597.95 1425.41 + 32.19 4478.13 + 353.71 868. All rights reserved . Crores Liabilities and Shareholders' Equity Current liabilities Debt due within 1 year Payables and provisions Total current liabilities Long-term debt Other liabilities Shareholders' equity Total liabilities & shareholders' equity Mar-04 17.38 Change + 182.97 1353.4 ACC Figures in Rs.07 349.24 851.76 + 171.29.19 3964.48 316.31 + 244 + 513.84 1309.

72 254.9 McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies.55 6434. Crores Other financial information: Market value of equity Average number of shares (crores) Share price (Rs. Inc.63 17.5 ACC Figures (excepting per-share figures) in Rs.29.03 17.407 0.) 4510.85 360. All rights reserved .45 1923.13 105.

20 8. All rights reserved .29.32 66.44 21. rupees Rs.39 142.95 235. Crores 4548.27 3908.82 541.31 188. rupees Dividend per share.35 4638.43 378.0 McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies.14 96.6 ACC Sales Other Income Total revenue Costs Depreciation EBIT Interest Tax Net Income (PAT) Dividends Retained Earnings Earnings per share. Inc.92 89.

05 10.81 49.75 (Figures in Rs.41 142.21 32. Crores Sources: Profit after tax Depreciation Operating cash flow Issues of Other liabilities Issues of equity Decrease in Working Capital Sale of Investments Decrease in other assets Total Sources Uses: Sources and Uses of Funds: 378. All rights reserved .81 863. Crores) Investment in fixed assets Redemption of long-term debt Dividends Total uses McGraw-Hill/Irwin 604.95 863.82 567.29.56 195.39 116.75 Copyright © 2006 by The McGraw-Hill Companies. Inc.31 8.39 188.7 ACC Rs.

Inc.8 Leverage Ratios long term debt Long term debt ratio = long term debt + equity long term debt + value of leases Debt equity ratio = equity McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies.29. All rights reserved .

Inc.9 Leverage Ratios total liabilities Total debt ratio = total assets EBIT Times interest earned = interest payments EBIT + depreciation Cash coverage ratio = interest payments McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies. All rights reserved .29.

29.10 Liquidity Ratios Net working capital to total assets ratio Net working capital = Total assets current assets Current ratio = current liabilities McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies. All rights reserved . Inc.

All rights reserved . Inc.29.11 Liquidity Ratios cash + marketable securities + receivables Quick ratio = current liabilities cash + marketable securities Cash ratio = current liabilities cash + marketable securities + receivables Interval measure = average daily expenditures from operations McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies.

Inc.29. All rights reserved .12 Efficiency Ratios Sales Asset turnover ratio = Average total assets sales NWCturnover = average net working capital McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies.

13 Efficiency Ratios Inventory turnover ratio = cost of goods sold average inventory average inventory Days' sales in inventory = cost of goods sold / 365 average receivables Average collection period = average daily sales McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies.29. Inc. All rights reserved .

All rights reserved .14 Profitability Ratios EBIT .29.tax Net profit margin = sales EBIT . Inc.tax Return on assets = average total assets earnings available for common stock Return on equity = average equity McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies.

15 Profitability Ratios Payout ratio = dividends earnings earnings .payout ratio earnings . Inc.dividends Growth in equity from plowback = earnings McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies.dividends Plowback ratio = earnings = 1 .29. All rights reserved .

16 Market Value Ratios stock price PE Ratio = earnings per share P0 Div 1 1 x Forecasted PE ratio = = aveEPS1 EPS1 r .g dividend per share Dividend yield = stock price McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies. Inc.29. All rights reserved .

All rights reserved .29.17 Market Value Ratios Price per share = P0 Div 1 = r . Inc.g stock price Market to book ratio = book value per share market value of assets Tobins Q = estimated replcement cost McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies.

56 150. All rights reserved .63 Interval measure (Current asset .18 ACC Ratios ACC Leverage Ratios: Debt ratio a Cement Industryb Debt ratio (including short-term debt) Debt-equity ratio Times-interest-earned Liquidity Ratios: Net-working-capital-to-total assets Current ratio Quick ratio Cash ratio a a Long-term debt/(long-term debt + equity) (Long-term debt + short-term debt)/(long-term debt + short-term debt + equity) Long-term debt/equity (EBIT + depreciation)/interest 0.55 McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies.04 1.96 0.82 7.13 3.29.01 0.58 0.69 2.81 0.52 0.45 0.16 0.68 0.18 56. Inc.current liabilities)/total assets Current assets/current liabilities (Cash + receivables + marketable securities)/current liabilities (Cash + marketable securities)/current liabilities (Cash+marketable securities+receivables)/(costs from operations/365) -0.49 0.05 0.

55 46.84 0.38 0.89 Cement Industryb 0.70 6.29.93 22. All rights reserved .10 0.09 64.01 3.86 McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies.74 5.09 0. Inc.03 31.02 4.11 0.67 (EBIT-taxes)/sales (EBIT-taxes)/average total assets Earnings available for common stockholders/average equity Dividend per share/earnings per share 0.19 0.10 0.37 Stock price/earnings per share Dividend per share/stock price Stock price/book value per share 17.26 0.35 5.00 0.97 55.19 ACC Ratios (continued) ACC Efficiency Ratios: Sales-to-assets ratio a Sales-to-net-working-capital Days in inventory a Inventory turnover Average collection period (days) Receivables turnovera Profitability Ratios: Net profit margin Return on assets (ROA) Return on equity (ROE) Payout ratio Market-Value Ratios: Price-earnings ratio (P/E) Dividend yield Market-to-book ratio Sales/average total assets Sales/average net working capital Average inventory/(cost of goods sold/365) Cost of goods sold/average inventory Average receivables/(sales/365) Sales/average receivables 1.16 71.08 86.29 7.

20 The DuPont System A breakdown of ROE and ROA into component ratios EBIT .interest ROE = equity McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies. All rights reserved .taxes ROA = assets EBIT . Inc.29.tax .

Inc. All rights reserved .29.21 The DuPont System sales EBIT .taxes ROA = x assets sales asset turnover profit margin McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies.

taxes EBIT .29.interest ROE = x x x equity assets sales EBIT . All rights reserved .22 The DuPont System assets sales EBIT .taxes .taxes leverage asset ratio turnover profit margin debt burden McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies. Inc.

Inc. Retrenchment McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies. Best case 2.23 ACC Financial Planning 1.29. Normal growth 3. All rights reserved .

Inc. All rights reserved .29.24 ACC Financial Planning Models McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies.

Inc.25 ACC Financial Planning Models McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies.29. All rights reserved .

All rights reserved .26 ACC Financial Planning Models McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies. Inc.29.

85% net assets Internal growth rate = retained earnings profit after tax equity v v profit after tax equity net assets equity ! plowback ratio v return on equity v net assets =9.27 Growth and Retained Earnings ACC Growth retained earnings Internal growth rate = ! 9.85% McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies. Inc. All rights reserved .29.

com www.prars.com edgarscan.jaxworks.com McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies.29.com/investor/financialguide www.ibm. All rights reserved .28 Web Resources Click to access web sites Internet connection required www. Inc.reportgallery.pwcglobal.com www.