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Chapter 29

Principles of

Corporate Finance

Eighth Edition

Financial Analysis

and Planning

Slides by

Matthew Will

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

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

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Topics Covered

Financial Statements

ACC

± The DuPont System

Financial Planning

Growth and External Financing

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ACC

Assets Mar -2004 Mar -2005 Change

Current Assets

Cash and Bank 64.97 57.32 -7.65Receivables 576.18 577.54 + 1.36

Inventory 378.01 542.38 + 164.37

Total current assets 1019.16 1177.24 + 158.08

Investments 375.74 326.69 -49.05

Fixed Assets:

Gross Fixed Assets 3899.58 4477.68 + 578.1

Less accumulated depreciation 1406.93 1569.46 + 162.53Net Fixed Assets 2492.65 2908.22 + 415.57

Other assets 77.04 66.23 -10.81

Total assets 3964.59 4478.38 + 513.79

Figures in Rs. Crores

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ACC

Figures in Rs. Crores

Liabilities and Shareholders' Equity Mar -04 Mar -05 Change

Current liabilities

Debt due within 1 year 17.24 200 + 182.76

Payables and provisions 851.71 1022.84 + 171.13

Total current liabilities 868.95 1222.84 + 353.89

Long-term debt 1425.48 1309.07 -116.41

Other liabilities 316.97 349.28 + 32.31

Shareholders' equity 1353.19 1597.19 + 244

Total liabilities & shareholders' equity 3964.59 4478.38 + 513.79

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ACC

Other f inancial inf ormation:

Market value of equity 4510.63 6434.03 1923.407

Average number of shares (crores) 17.72 17.85 0.13

Share price (Rs.) 254.55 360.45 105.9

Figures (excepting per-share figures) in Rs.

Crores

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ACC

Rs. Cr oresSales 4548.92

Other Income 89.35

Total revenue 4638.27

Costs 3908.31

Depreciation 188.82EBIT 541.14

Interest 96.32

Tax 66.43

Net Income (PAT) 378.39

Dividends 142.95

Retained Earnings 235.44Earnings per share, rupees 21.20

Dividend per share, rupees 8.0

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ACC

Rs. Cr ores

Sources:

Profit after tax 378.39

Depreciation 188.82

Operating cash flow 567.21

Issues of Other liabilities 32.31

Issues of equity 8.56

Decrease in Working Capital 195.81

Sale of Investments 49.05

Decrease in other assets 10.81

Total Sources 863.75

Uses:

Investment in fixed assets 604.39

Redemption of long-term debt 116.41

Dividends 142.95

Total uses 863.75

Sources and Uses of Funds:

(Figures in Rs. Crores)

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Leverage Ratios

Long term debt ratio =long term debt

long term debt + equity

Debt equity ratio =long term debt + value of leases

equity

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Leverage Ratios

Total debt ratio =total liabilities

total assets

Times interest earned =EBIT

interest payments

Cash coverage ratio = EBIT + depreciation

interest payments

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Liquidity Ratios

Net working capital

to total assets ratio=

Net working capital

Total assets

Current ratio =current assets

current liabilities

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Liquidity Ratios

Cash ratio =cash + marketable securities

current liabilities

Quick ratio =cash + marketable securities + receivables

current liabilities

Interval measure =cash + marketable securities + receivables

average daily expenditures from operations

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Efficiency Ratios

Asset turnover ratio =Sales

Average total assets

NWCturnover =sales

average net working capital

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Efficiency Ratios

Days' sales in inventory =average inventory

cost of goods sold / 365

Inventory turnover ratio =cost of goods sold

average inventory

Average collection period = average receivablesaverage daily sales

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Profitability Ratios

Return on assets =EBIT - tax

average total assets

Net profit margin =EBIT - tax

sales

Return on equity = earnings available for common stock average equity

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Profitability Ratios

Plowback ratio = earnings - dividendsearnings

= 1 - payout ratio

Payout ratio =dividends

earnings

Growth in equity from plowback = earnings - dividendsearnings

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Market Value Ratios

Forecasted PE ratio =P

aveEPS

1

r - g0

1

=Div

EPSx

1

1

PE Ratio =stock price

earnings per share

Dividend yield = dividend per sharestock price

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Market Value Ratios

Market to book ratio =stock price

book value per share

Price per share = P =Div

r - g0

1

Tobins Q = market value of assetsestimated replcement cost

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ACC Ratios

ACC

Cement

Industryb

Leverage Ratios:

Debt ratio

Long-term debt/(long-term debt +

equity) 0.45 0.68

Debt ratio (including short-term debt)a

(Long-term debt + short-term

debt)/(long-term debt + short-term debt

+ equity) 0.49 0.69

Debt-equity ratio Long-term debt/equity 0.82 2.13

Times-interest-earned (EBIT + depreciation)/interest 7.58 3.63

Liquidity Ratios:

Net-working-capital-to-total assetsa

(Current asset - current liabilities)/total

assets -0.01 0.04

Current ratio Current assets/current liabilities 0.96 1.16

Quick ratio

(Cash + receivables + marketable

securities)/current liabilities 0.52 0.81

Cash ratio

(Cash + marketable securities)/current

liabilities 0.05 0.18

Interval measurea

(Cash+marketablesecurities+receivables)/(costs from

operations/365) 56.56 150.55

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ACC Ratios (continued)

ACC

Cement

Industryb

Eff iciency Ratios:

Sales-to-assets ratio Sales/average total assets 1.08 0.93

Sales-to-net-working-capitala

Sales/average net working capital 86.97 22.16

Days in inventory

Average inventory/(cost of goods

sold/365) 55.70 71.74

Inventory turnover a

Cost of goods sold/average inventory 6.55 5.09

Average collection period (days) Average receivables/(sales/365) 46.29 64.35

Receivables turnover a Sales/average receivables 7.89 5.67

Pr of itability Ratios:

Net profit margin (EBIT-taxes)/sales 0.10 0.10

Return on assets (ROA) (EBIT-taxes)/average total assets 0.11 0.09

Return on equity (ROE)

Earnings available for common

stockholders/average equity 0.26 0.19

Payout ratio Dividend per share/earnings per share 0.38 0.37

Market-Value Ratios:

Price-earnings ratio (P/E) Stock price/earnings per share 17.00 31.84

Dividend yield Dividend per share/stock price 0.02 0.01

Market-to-book ratio Stock price/book value per share 4.03 3.86

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The DuPont System

A breakdown of ROE and ROA intocomponent ratios

equityinterest-tax-EBIT=ROE

assetstaxes-EBIT=ROA

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The DuPont System

ROA =sales

assetsx

EBIT - taxes

sales

asset

turnover

profit

margin

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The DuPont System

ROE =assets

equityx

sales

assetsx

EBIT - taxes

salesx

EBIT - taxes - interest

EBIT - taxes

leverage

ratio

asset

turnover

profit

margin

debt

burden

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ACC

Financial Planning

1. Best case2. Normal growth

3. Retrenchment

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ACC

Financial Planning Models

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ACC


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ACC


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Growth and Retained Earnings

ACC Growth

retained earningsInternal growth rate = 9.85%

net assets!

retained earnings profit after tax equityInternal growth rate =

profit after tax equity net assets

equity plowback ratio return on equitynet assets

v v

! v v

=9.85%

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Web Resources

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