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CF 473.32 3 Winter 2014

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07 Winter472.422 Corporate Finance 1.Capital Budgeting Long-term investments which ones? 2.Capital Structure Long-term financing where? 3.Working Capital Management Ongoing financial activities how?

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07 Winter472.422 Prufrock Corporation Statement of Cash Flows [A] Operating activities Investment activities Financing activities

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07 Winter472.422 Prufrock Corporation Statement of Cash Flows [A] Operating activities Net income$363+ plus: Depreciation276+ Change in accounts payable32+ less: Change in accounts receivable23- Change in inventory29- Net cash from operating activity$619

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07 Winter472.422 Prufrock Corporation Statement of Cash Flows [A] Investment activities Fixed asset acquisition$425- Net cash from investment activity$-425

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07 Winter472.422 Prufrock Corporation Statement of Cash Flows [A] Financing activities Change in notes payable$-35+ Change in long-term debt-74+ Dividends paid121- Change in common stock50+ Net cash from financing activity$-180

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07 Winter472.422 Comparing apples to apples size time one-to-many

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07 Winter472.422 Comparing 3 basic ways 1. common size 2. base year 3. ratios

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07 Winter472.422 Comparing 1.common size 3,373 2,880 2,731Net, P & E 3,588Total assets Fixed assets 708642Total 422393Inventory 188165A/R 98$ 84Cash Current assets Change20062005 Prufrock Balance Sheets

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07 Winter472.422 Comparing 1.common size 0100.0.7-80.381.0 100.0%.719.719.0.1+11.811.7.3+5.24.9.2+2.72.5 Change20062005 Prufrock Balance Sheets + Net, P & E Total assets Fixed assets Total Inventory A/R Cash Current assets

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07 Winter472.422 Comparing 2.base year 3,373 1.05 2,731 1.06 1.10642 1.07393 1.14165 1.17$ 84 2005 Prufrock Balance Sheets 2,880 3,588 708 422 188 98 20062005 Net, P & E Total assets Fixed assets Total Inventory A/R Cash Current assets

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07 Winter472.422 Comparing 2.base year 2007 3,373 1.05 2,731 1.06 1.10 642 1.07393 1.14165 1.17$ 84 2008 Prufrock Balance Sheets 20062005 Net, P & E Total assets Fixed assets Total Inventory A/R Cash Current assets

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07 Winter472.422 Comparing 1.common size 2.base year 3.ratios “crunching the numbers”

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07 Winter472.422 Crunching The Numbers short-term Liquidity ratios longer-term Solvency ratios Financial leverage asset use Turnover ratios Activity ratios Profitability Performance ratios Market value

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07 Winter472.422 Crunching The Numbers Liquidity 1.Current ratio 2.Quick ratio acid test ratio 3.Cash ratio 4.Net working capital 5.Interval measure

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07 Winter472.422 Current Ratio ratios$ 540 708 2011 543current liabilities 1.311.18 642current assets current ratio = 20112010

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07 Winter472.422 Quick Ratio ratios$ 540 708 - 422 2011 543current liabilities 0.530.46 642 - 393current assets - inventory quick ratio = 20112010

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07 Winter472.422 Interval Measure days$ = 3.68 708 2011 average daily operating costs 192 current assets interval measure = 2011 365 total costs – (depreciation + interest) average daily operating costs = COGS

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07 Winter472.422 Assignment 1 Mini Case from end of ch 3 pg 84

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07 Winter472.422 Crunching The Numbers short-term liquidity ratios longer-term solvency ratios financial leverage asset use turnover ratios activity ratios profitability performance ratios market value

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07 Winter472.422 Crunching The Numbers Solvency 6.Total debt ratio 7.Debt/equity ratio 8.Equity multiplier 9.Long-term debt ratio 10.Times interest earned ratio 11.Cash coverage

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07 Winter472.422 Total Debt Ratio ratio$ 3,588 3,588 – 2,519 2011 total assets.28 total assets – total equity total debt ratio = 2011

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07 Winter472.422 Debt/Equity Ratio ratio$ 2,591 540 + 457 2011 total equity.38 current liabilities + long-term debt debt/equity ratio = 2011

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07 Winter472.422 Long-term Debt Ratio ratio$ 457 + 2,591 457 2011 long-term debt + total equity.15 long-term debt long-term debt ratio = 2011 long-term capitalization

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07 Winter472.422 Cash Coverage ratio$ 141 691 + 276 2011 interest 6.9 EBIT + depreciation cash coverage = 2011

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07 Winter472.422 Crunching The Numbers short-term liquidity ratios longer-term solvency ratios financial leverage asset use turnover ratios activity ratios profitability performance ratios market value

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07 Winter472.422 Crunching The Numbers Turnover 12.Inventory turnover 13.Day’s sales in inventory 14.Receivables turnover 15.Days’ sales in receivables 16.NWC turnover 17.Fixed asset turnover 18.Total asset turnover

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07 Winter472.422 Inventory Turnover times$ 422 1,344 2011 inventory 3.2 COGS inventory turnover = 2011

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07 Winter472.422 Days Sales in Receivables days$ 2,311 188 x 365 2011 sales 30 A/R x 365 days sales in receivables = 2011 “collection ratio”

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07 Winter472.422 net working capital NWC Turnover times$ 708 - 540 2,311 2011 current assets – current liabilities 13.8 sales NWC turnover = 2011

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07 Winter472.422 Crunching The Numbers short-term liquidity ratios longer-term solvency ratios financial leverage asset use turnover ratios activity ratios profitability performance ratios market value

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07 Winter472.422 Crunching The Numbers Profitability 19.Cash flow to total assets 20.Profit margin 21.Gross profit margin 22.Operating profit margin 23.ROA 24.ROE 25.Du Pont Identity

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07 Winter472.422 Profit Margin rate$ 2,311 363 2011 sales 16% net income profit margin = 2011

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07 Winter472.422 Return On Assets rate$ 3,588 363 2011 total assets 10% net income ROA = 2011 Return on Investment ROI

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07 Winter472.422 Return on Equity rate$ 2,591 363 2011 total equity 14% net income ROE = 2011 Return on shareholders’ investment Return on net worth

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07 Winter472.422 Du Pont Identity du pont identity: ROE =profit margin x asset turnover x equity multiplier

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07 Winter472.422 Du Pont Identity profit margin x asset turnover x equity multiplierdu pont identity: ROE = operating efficiency asset use efficiency financial leverage

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07 Winter472.422 Du Pont Identity du pont identity: ROE = net income sales assets salesassetsequity operating efficiency asset use efficiency financial leverage

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07 Winter472.422 Du Pont Identity -6% 1.39 1.47 equity assets 35% = 14.0% = 10.4% +6%+35%change: x.64x15.7%2011: x.61x11.6%2010: x sales net income x assets sales du pont identity: ROE = operating efficiency asset use efficiency financial leverage

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07 Winter472.422 Crunching The Numbers short-term liquidity ratios longer-term solvency ratios financial leverage asset use turnover ratios activity ratios profitability performance ratios market value

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07 Winter472.422 Crunching The Numbers Market value measures 26.Price/Earnings ratio 27.Market-to-book ratio 28.Earnings Per Share

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07 Winter472.422 Price/Earnings Ratio P/E ratio = share price x shares outstanding net income P/E shares sell for ____ times earnings shares carry a P/E multiple of ____ ratio$ 363 157 x 33 2011 14.27 2011

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07 Winter472.422 Market-to-Book Ratio $ratio 2011 market-to-book ratio = share price x shares outstanding157 x 33 2 total equity2,591 Book value per share Market capitalization to balance sheet equity

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07 Winter472.422 Uses Internal Performance compensation comparison Planning future cash flows External Creditors Stockholders

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07 Winter472.422 Problems apples to apples? diversified firms different accounting methods different fiscal years extraordinary events no underlying theory (except duPont)

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07 Winter472.422 Smolira Golf Corp. pg 82-83 q 26 - 30 Performance Plus http://www.ic.gc.ca/eic/site/pp- pp.nsf/eng/h_pm00000.html

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07 Winter472.422 Short-term solvency20052006 current4.333.59 quick1.781.47 cash0.450.39 Asset utilization total asset turnover1.22 inventory turnover3.90 receivables turnover13.30 Smolira Golf Corp.

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07 Winter472.422 Long-term solvency20052006 total debt ratio0.280.24 debt/equity ratio0.390.32 equity multiplier1.32 time interest earned ratio14.55 cash coverage ratio16.73 Profitability profit margin30.83% ROA32.72% ROE43.10% Smolira Golf Corp.

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07 Winter472.422 Smolira Golf Corp. Performance Plus http://www.ic.gc.ca/eic/site/pp- pp.nsf/eng/h_pm00000.html

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