Intro to Financial Management Understanding Financial Statements and Cash Flows

Review Homework What are spot and future markets? What is a spread? What are nominal rates? What are real rates? What types of risk are involved in interest rates? How do you calculate real returns? How do you calculate simple, one-period, future values? What is liquidity? What is the Yield Curve?

The Income Statement Calculates the firm’s profit Amount Sales$100 COGS 45 _ Gross profit 55 Sales, General & Admin. 28 R&D 7 _ Operating income (EBITDA) 20 Interest, taxes, depreciation 15 _ Net income 5

The Income Statement Calculates the firm’s profit Amount Pct. of Sales Sales$100100% COGS 45 45% _ Gross profit 55 55% Sales, General & Admin % R&D 7 7% _ Operating income (EBITDA) 20 20% Interest, taxes, depreciation 15 15% _ Net income 5 5%

The Income Statement Calculates the firm’s profit Sales COGS Gross profit Sales, General & Admin. R&D Operating income (EBITDA) Interest taxes depreciation Net income Operations run by COO Finance run by CFO

Income Statement Common-sized statement Gross profit margin Operating profit margin Net profit margin Earnings Earnings per share

Balance Sheet Shows what a company is worth Amount Assets Current Assets Cash$20 Accounts Receivable 45 Inventory135 Long-term Assets (Fixed) Plant & Equipment 1,000 Liabilities & Owners Equity Current liabilities Short-term loans 15 Accounts Payable 35 Long-term Liabilities Long-term debt500 Stockholders’ Equity Capital150 Retained Earnings500

Balance Sheet Shows what a company is worth Amount Pct. of Assets Assets Current Assets Cash$202% Accounts Receivable 454% Inventory13511% Long-term Assets (Fixed) Plant & Equipment 1,00083% Liabilities & Owners Equity Current liabilities Short-term loans 151% Accounts Payable 35 3% Long-term Liabilities Long-term debt50042% Stockholders’ Equity Capital15012% Retained Earnings50042%

Balance Sheet Common-sized Book value Gross working capital = current assets Net working capital = current assets – current liabilities Debt ratio Leverage ratio

Cash Flows Profits are not cash Free cash flow = cash after operations Cash flow statement Cash flows –From operations –From investing in fixed assets –From financing Borrowing (cash in) Selling stock (cash in) Dividends (cash out)

Cash Flow Statement Amount Net earnings (from Income Statement)$5 Adjustments from operations Depreciation 6 Cash from investing Investment in plant, property, & equipment 10 Cash from financing Debt issued10 Dividends(9) Net Change in Cash22

Income Taxes and Finance Taxable income –Operating income –Capital gains Gain (loss) from sale of assets Tax deductions –Interest expense –Depreciation expense –Not dividend payments Marginal tax rates –Tax rate on the next dollar earned

In Class Excel Exercise Create a common sized income statement and balance sheet Change –Revenues –Some expense –Asset