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Reformulated Balance sheet

Assets Operating assets Financial assets Total Assets Liabilities and Equity Operating liabilities Financial obligations Common stockholders equity Total OL FO CSE OA FA OA + FA

OL + FO + CSE

OA FA OA + FA

OL FO CSE

also called as current liability incurred for the purpose of operation borowed capital (debt) + preference shares

L + FO + CSE

Reformulated Balancesheet

Operating Assets Operating assets Operating liabilities Net operating assets

(O

NO

Financial Obligations & Owners Equity Financial liabilities Financial assets Net financial obligations Common equity

FO

(FA

NF

CS

Total NFO & Equity NFO + CS

ancesheet

OA (OL) NOA

sets

Owners Equity FO (FA) NFO CSE

igations

uity NFO + CSE

Income Statement Operating income Operating revenue Operating expense Net financial expense Financial expense Financial income Earnings

OR (OE)

FE (FI)

tatement

the P and L statement

OR (OE)

OI

FE (FI)

NFE Earn

1 Assets Operating Assets Financial Assets Total 2005 189.90 42.00 231.90

Balance Sheet 2006 Liability and Equity 205.30 Operating Liabilities 45.70 Financial liabilities Shareholder's Equity 251.00 Total

Income Statement 2006 Operating revenue Operating Expenses Operating income Interest revenue Interest expense Net income

134.5 -112.8 21.7 2.50 -9.6 -0.07973422 14.60 if entire income is paid as dividen

Reformulate the balancesheet and answer the following questions How much was paid as net dividends in 2006?

2 3 4

What is the free cash flow for 2006? What was the return on net operating assets in 2006? What was the firm's net borrowing cost?

Isolate financial from operating activities

regrouping 2005 34.20 120.40 77.30 231.90 2006 40.60 120.40 90.00 251.00 NOA

NBC (net borrowing cost) -7.10

To cross check ntire income is paid as dividendthere wont be any change in equity from 2005 to 2006Therefore only the remaining after the differen

llowing questions 1.90 earlier FCF it is Operating cash flow - Capex. Now it can be arived from our regrouping .. Operating 12.70 income -(change in net operating assets) is the real return from operations 9.505%

1.90 Netincome - (change in share holder's eq

Also called capital employed

13.18%

2005 155.70

2006 164.70 NFO EQUITY

2005 78.40 77.30 155.70

2006 74.70 90.00 164.70

To reduce this - borrow thru ECB or Japan where the cost of borrowing is less or Invest wisely and thereby ur cash is properly investing Value of firm is going to increase only through operating activities

- (change in share holder's equity)

capital employed

Current Assets Cash and Cash equivalents Short term investments Accounts receivable Inventories Deferred income tax Prepaid expenses Total current assets Property, Plant and equipment Intangible assets Goodwill Deferred income tax Total assets Current liabilities Current portion of long term debt Notes payable Accounts payable Accrued liabilities Income tax payable Total current liabilities Long term debt Deferred income taxes Preference stock Shareholders equity Total liabilities and shareholders equity

828.00 400.80 2120.20 1633.60 165.00 364.40 5512.00 1586.90 366.30 135.40 291.00 7891.60

6.60 146.00 763.80 974.40 118.20 2009.00 682.40 418.20 0.30 4781.70 7891.60

Reclassify under the following groupings Net Operating Assets Net financial Obligations Common stock holder's equity 5481.80 700.10 NFO + Common stock equity = NOA 4781.70

another exercise on regrouping anything invested under financing - that will earn u a revenue or financial assets OPERATING ASSETS 5111.20 FINANCIAL ASSETS

mmon stock equity = NOA

Reformulate the following balance sheet and income statement for a manufacturing concern. Amounts are in millions. (Tax rate is 36%)

Balance Sheet Assets Operating Cash Cash equivalents Accounts receivable Inventory PPE 23 435 1827 2876 3567 Liabilities and Equity Accounts payable Accrued Expenses Deferred Tax liability Long-term debt Preferred stock Common equity

Total

8728 Income statement Revenues Operating expenses Interest expense Income before tax Income tax paid Net income Preferred dividend Net income 7493 6321 221 951 342.36 608.64 26 582.64

tement for a

Reformulated Balance sheet Liabilities and Equity Accounts payable Accrued Expenses Deferred Tax liability Long-term debt Preferred stock Common equity 1245 1549 712 3678 432 1112 8728 reformulating the income statement Revenue Operating Expences Operating Income before Tax Tax at 36% Operating Income After Tax or NOPAT Financial expense or Interest Expense(FE) Outflowso negative 221 Tax Benefit at 36% ..So subtract it..that gives u the 79.56 net benefit So total outflow Preference shares divident NOA or capital employed Total 4787

4787

NFO Common stock equity Total

3675 1112 4787

7493 6321 1172 (-) 421.92 750.08 (-)

Key driver of the residual operating incomeSo only we are isolating it

141.44 608.64 (-) 26 582.64 (-)

Shown differently as it wont give u any tax benefitSo only ppl go for long term debts

are isolating it

nly ppl go for long term debts.eventhough preference shares are there

Pepsico reported the following income statement for the year in million dollars Net sales Operating Expenses Restructuring charges Operating Profit Gain on sale of assets Interest expense Interest income 20367 -17484 -65 2818 1083 -363 118 3656 1316.16 2339.84

Income tax Net income (Income tax rate 36%) Reformulate the statement to distinguish operating items from financing items and operating income from other income.

3 things in reformulating income - 1) NOPAT distinction 2) Other income to be shown separately 3) Financial income NOPAT Revenue Operating Expences Operating Income before Tax Tax at 36% Operating Income After Tax or NOPAT Other Income Category Gain on sale of Asset Restructuring charges Other Income before Tax Less Tax at 36% Other Income after Tax Financial Income (also called the Net Borrowing cost) Net Financial Expense Tax Benefit at 36% So total outflow or Net Borrowing COST Total (should be equal to the NET Income as given in the case) Essentially what we saw given is regrouped under 3 categories now cross verifying the tax components

-245 -88.2 -156.8

20367 -17484 2883 1037.88 1845.12

1083 -65 1018 366.48 651.52 (-)

-156.8 2339.84

1316.16 got as the same as in the given case

HP reported earnings that were consistently growing at 20% per year. The growth rate slowed down in 1990s. Earnings for the third quarter of 1998 were reported flat when compared with the same period during the previous year. The income statement for HP 1998 third quarter was as under: 1998 1997 Net revenue Products 9213 8900 Services 1766 1571 Total 10979 10471 Cost and expenses COGS 7505 7053 R&D 815 777 S,G & A 1885 1816 10205 9646 Earnings from operations 774 825 Interest income 154 109 Interest Expense 54 53 Earnings Before tax 874 881 Provision for tax 253 264 Net earnings 621 617 Income tax rate 38% What is wrong with the interpretation that earnings were flat in 1998?

Given below are the data pertaining to ITC Ltd Reformulate the balancesheet on the lines of Business activities (Rupees Crores) 2006 2007 2008 2009 2010 Year Ending 31st March SOURCES OF FUNDS 376 376 377 377 382 Equity 8686 10061 11681 13358 13683 Reserves and Surplus Shareholders Funds 9061 10437 12058 13735 14064 120 201 214 178 108 Loan Funds 325 473 545 867 785 Deferred Tax Net 9506 11111 12817 14780 14957 FUNDS EMPLOYED APPLICATION OF FUNDS 6471 8000 10087 11773 12977 Fixed Assets (Gross) 2065 2390 2791 3287 3825 Depreciation 4405 5611 7296 8486 9151 Fixed Assets (Net) 3517 3068 2935 2838 5727 Investments 1584 2432 2587 3456 79 Net Current Assets 9506 11111 12817 14780 14957 NET ASSETS EMPLOYED Operating income after tax 6654 7778 8972 10346 10470 Show the trends in RNOA

Consider the following Comparative Balancesheets for the Liquidity company Operating cash Accounts receivable Inventories Land Plant Less depreciation Total Accounts payable Equity capital 2007 435000 40000 100000 400000 200000 -100000 100000 1075000 25000 1050000 1075000

The company paid a dividend of 150000 during 2007 and there were no equity contributions or stock repurchase a. Calcualte Free cash flow generated during 2007 b. Where did the increase in cash come from? Explain the change in cash balance c. How would your calculation in part (a) change if the firm invested in short term deposits than paying a dividend?

2006 50000 0 0 800000 200000 0 200000 1050000 0 1050000 1050000