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Flat Tax Rate: Tax Rate same for all income levels. Average Tax Rate: Total Taxes paid divided by Total Taxable Income. Marginal Tax Rate: Amount of Tax payable on the next rupee earned.

INCOME TAX SLABS

500,001 750,001 1,000,001 3,350,001 10,000,001 15,000,001 18333334 +
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TAX RATE
15% 25% 34% 39% 34% 35% 38% 35%
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500,000 750,000 1,000,000 3,350,000 10,000,000 15,000,000 18,333,333

Quick Look

Suppose Co. A and Co. B has a taxable income of Rs. 2,000,000/- and Rs. 850,000/respectively. What are the TAX BILLS?
TAX RATE AMOUNT
500,000 250,000 250,000 1,000,000 15% 25% 34% 39% 75,000 62,500 85,000 390,000 612,500 500,000 750,000 1,000,000 3,350,000 2,000,000 612,500 30.625%

INCOME TAX SLABS

500,001 750,001 1,000,001 Taxable Income Tax Amount

Average Tax = Tax Amount / Taxable Income = Marginal Tax

Presented by: M. Noman Ansari

0.39 pcs per additional Rupee earned

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Cash inflows and outflows. Standard Cash Flow Statements Balance Sheet Identity
Liabilities Stock Holders

Assets

Similarly, Cash Flow Identity:

Cash Flow From Assets Cash Flow to Liabilities Cash flow to Stock Holders

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Operating Cash Flows: Cash Generated from the

Business, Less: Depreciation (its is non cash item) and Interest Paid and add back the Amount of Tax paid.

Less: Capital Spending: Amount Spent on Fixed

Assets Less amount received from sale of Assets if any.

Less: Changes in Working Capital: Amount

spent/received against Working Capital.

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Operating Cash Flow

Funds generated from Firms normal Business

EBIT + Depreciation -Taxes = Ending F.A + Depreciation -Opening F.A = Ending WC -Opening WC =

xxx xxx (xxx) xxx xxx xxx (xxx) xxx xxx (xxx) xxx

Capital Spending

Net Amount Spent on Fixed Assets Less money received from sale (if any)

Net Changes in Working Capital

Net Amount Spent on Working Capital

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Operating Cash Flow

EBIT xxx + Depreciation xxx -Taxes (xxx) = xxx Ending F.A xxx + Depreciation xxx -Opening F.A (xxx) = xxx Ending WC xxx -Opening WC (xxx) = xxx

EBIT 694 + Depreciation 65 -Taxes (212) = 547 Ending F.A 1709 + Depreciation 65 -Opening F.A (1644) = 130 Ending WC 1014 -Opening WC (684) = 330

Capital Spending

Net Changes in Working Capital

Operating Cash Flow - Capital Spending - Net Changes in Working Capital Cash Flow Assets: 547 -130 330 =
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Represents Net Payments to Creditors and Owners during the period.

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Cash Flows To Creditors:

Cash flows to stockholder:

Firms Interest Payment Less Net New Borrowing

Interest Payment xxx -Net New Borrowing (xxx) = xxx Dividend Paid xxx -New Equity Raised (xxx) = xxx

Dividend Paid less New Equity Raised

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Operating Cash Flow

EBIT + Depreciation -Taxes = Ending F.A + Depreciation -Opening F.A = Ending WC -Opening WC =

xxx xxx (xxx) xxx xxx xxx (xxx) xxx xxx (xxx) xxx

EBIT + Depreciation -Taxes = Ending F.A + Depreciation -Opening F.A = Ending WC -Opening WC =

694 65 (212) 547 1709 65 (1644) 130 1014 (684) 330

Capital Spending

Net Changes in Working Capital

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Cash Flows To Creditors:
Cash flows to stockholder: Interest Payment xxx -Net New Borrowing(xxx) = xxx Dividend Paid xxx -New Equity Raised xxx) = xxx Interest Payment 70 -Net New Borrowing ( 46) = 24 Dividend Paid 103 -New Equity Raised (40) = 63

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Internal Uses:

Performance Evaluation Planning for Future

External Uses:

Useful for: Short Term and Long Term Creditors Potential Investors Evaluation of Suppliers Evaluation of Competitors Credit Ratings Acquisition decisions

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Common Sized Balance Sheet: Balance Sheet

items are shown as a Percentage of Assets

Common Sized Income Statement: Income

Statements items are shown as a Percentage of Sales

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PRUFLOCK CORPORATION COMMON SIZE BALANCE DEC 31, 2005 & 2006 2005 ASSETS Current Assets Cash Account Receivables Inventory Total Fixed Assets Net Plant and Equipment Total Liabilities and Owner's Equity Current Liabilities Accounts Payable Notes Payables Total Long Term Debt Owner's Equity Common Stock and Paid Up Capital Retained Earning Total Total Liabilities and Owner's Equity
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2006

Change

84 165 393 642

2.5% 4.9% 11.7% 19.0%

98 188 422 708

2.7% 5.2% 11.8% 19.7%

14 23 29 66

0.2% 0.3% 0.1% 0.7%

2,731 3,373

81.0% 100.0%

2,880 3,588

80.3% 100.0%

149 215

-0.7% 0.0%

312 231 543 531

9.2% 6.8% 16.1% 15.7%

344 196 540 457

9.6% 5.5% 15.1% 12.7%

32 (35) (3) (74)

0.3% -1.4% -1.0% -3.0%

500 1,799 2,299 3,373

14.8% 53.3% 68.2% 100.0%

550 2,041 2,591 3,588

15.3% 56.9% 72.2% 100.0%

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50 242 292 215

0.5% 3.5% 4.1% 0.0%

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PRUFLOCK CORPORATION COMMON SIZE INCOME STATEMENT FYE DEC 31, 2006 Sales Cost of Goods Sold Depriciation Earning Before interest and Taxes Interest Paid Taxable Income Taxes Net Income Dividend Addition to Retained Earning 2,311 1,344 276 691 141 550 187 363 121 242
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100.0% 58.2% 11.9% 29.9% 6.1% 23.8% 8.1% 15.7% 5.2% 10.5%
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Quick Look

What would happen to a Current Ratio if

a) Firm buys some Inventory. b) Firm sells some Merchandise. c) Firm were to pay off to some of its suppliers and short term creditors.
a) Cash goes out and Inventory increases (No Effect). b) Cash (Cost + Profit) comes in and Inventory decreases at cost. (Improve). c) Cash goes out and Current Liability decreases ...

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It tells us that ROE is affected by 3 things;

Operating Efficiency i.e. NP Margin Assets use Efficiency i.e. Total Assets Turnover Financial Leverage i.e. Asset to Equity

Weakness in Operating Efficiency or Assets use Efficiency will show up in decreased returns and translate into lower ROE.
NP Margin X Total Assets Turnover X Asset to Equity

Note: Difference between the two profitability Ratios i.e. ROA & ROE is a reflection of the use of Debt Financing.

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If sales are to grow, Assets have to grow. If Assets are growing than the firm must obtain funds to finance the needed Assets. Sources of Finance can be INTERNAL (through profits) or EXTERNAL through Debt or Equity.
Internal
Profits & retention

Sales
Assets Funds required for acquisitions

External
Debt Equity
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Dividend payout Ratio:

Cash Dividend / Net Income

Internal Growth Rate: ROA x Dividend payout Ratio (1- ROA) x Dividend payout Ratio Earning Retention Ratio: Addition to Retained Earning / Net Income Sustainable Growth Rate: ROE x Retention Ratio (1- ROA) x Retention Ratio

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Accounts Receivable (A/R) is the fastest nonliquid asset to convert to cash Analysis:
Questions to Ask
What % of sales are returned? Why? What % of sales are sold on credit? What % of sales are written-off? Is there a concentration with one or two sales people? What % of sales are guaranteed (contractually obligated)? What % of sales are foreign?

Reason
Are returns a significant part of the business model? Are returns due to poor quality? How reliant is the company on extending credit? Do they continue to sell to customers who dont pay? What if those sales people leave? What happens when the contract expires? Where is new business coming from? Do they use letters of credit to protect against non-payment? Foreign customers are hard to collect from. The government is typically slow paying

What % of sales is to the government?

Accounts Receivable Aging Schedule

A schedule of all outstanding receivables grouped both by customer and due date

Analysis:
Questions to Ask
Is there a concentration greater than 10% of any customers? What % of customers are past due?

Reason
What happens if they lose a large customer? How reliable are their accounts receivable

Are there any receivables over 120 days past due that have not been written-off?

Typically these will not be collected and should be backed out of the total accounts receivable

Inventory is typically the largest current asset and is what the company tries to convert to cash. Inventory includes:
Raw materials inventory Work-in-Process inventory Finished goods inventory

In case of liquidation

Raw materials inventory can be sold back to the supplier (at a fraction of the cost) Finished goods inventory can be sold to customers (at a fraction of the cost)

Analysis:
Questions to Ask
How does the company inventory compare with the industry average? Is inventory valued at LIFO, FIFO, or Weighted Average? What % of current assets is made up of inventory? What % of inventory is work-in-process?

Reason
Do they carry too much? Too little? Do they have too much in finished goods inventory? This will impact the cost of goods sold and inventory balance. Could inventory be obsolete? Inventory is typically the hardest current asset to convert to cash This inventory is virtually worthless. What can you do with the frame of a car?

Current Assets / Current Liabilities Measures a firms ability to meet current obligations Analysis:

Liquidity Ratios Current Ratio:

Questions to Ask
Calculate the Current Ratio

Reason
Too low suggests a lack of liquidity, too high suggests financial assets are not used efficiently

How does the companys current ratio compare with companies of similar size in their industry?
Are liabilities being paid on time?

If they are not in-line with the industry, then the underwriter must find out why.
If suppliers and service bills are being stretched, this would decrease the current ratio.

How much is inventory weighted in current Inventory is the most difficult current asset to assets? convert to cash? How quickly is it turning over? Are accounts receivable over 120 days being written off? Exclude Prepaid Current Assets These accounts will probably not be collected and should be removed from current assets Cash cannot easily be obtained from a prepaid phone bill or rent

Liquidity Ratios Quick Ratio (Acid Test):

Analysis:

(Current Assets Inventory)/ Current Liabilities Measures a firms ability to meet current obligations without liquidating inventory

Questions to Ask
Calculate the Quick Ratio How does the companys current ratio compare with companies of similar size in their industry? Are liabilities being paid on time?

Reason
Too low suggests a lack of liquidity, too high suggests financial assets are not used efficiently If they are not in-line with the industry, then the underwriter must find out why. If suppliers and service bills are being stretched, this would decrease the current ratio.

How much is inventory weighted in current assets?

Are accounts receivable over 120 days being written off? Exclude Prepaid Current Assets

Inventory is the most difficult current asset to convert to cash? How quickly is it turning over?
These accounts will probably not be collected and should be removed from current assets Cash cannot easily be obtained from a prepaid phone bill or rent

Leverage Ratios Debt-Equity Ratio:

Analysis:

Total Liabilities / Total Net Worth Measures the funds contributed by owners or shareholders versus creditors. Reason
Banks generally like to see this ratio below 40% If this ratio was greater than 50%, the company would primarily be financed by creditors The owners would be more likely to declare bankruptcy in the event of a downturn, as they would have less to lose

Questions to Ask
Calculate the Debt-Equity ratio

How much of total liabilities are current liabilities?

Matching Principle: current assets should be financed with current liabilities, long-term assets should be financed with long-term debt

Efficiency Ratios Accounts Receivable Turnover:

Analysis:

(Accounts Receivable / Sales) x 365 Measures the average number of days it takes the company to collect their receivables.

Questions to Ask
Calculate the Accounts Receivable Turnover

Reason
The shorter the better The faster a company can collect, the faster they have cash The less time they need to borrow If they sell on 2/10 net 30, one would expect to see a turnover around 30 days. A few days over is ok, but 40 or 45 would be too long

Is the accounts receivable turnover relatively close to the companys financing terms?

Are accounts receivable over 120 days being written off?

How does the companys turnover compare with the industry?

These accounts will probably not be collected and should be removed from current assets
The turnover should be close to industry averages, if not, the underwriter needs to know why

Efficiency Ratios Inventory Turnover:

(Inventory / Cost of Goods Sold) x 365
Measures the average number of days inventory is on hand

Analysis:

Questions to Ask
Calculate the Inventory Turnover

Reason
The shorter the better The faster a company can sell its inventory, the faster they have cash The less time they need to borrow Which method is standard for the industry? Have they changed valuation methods recently? If so, why?

Which inventory valuation method do they use? LIFO, FIFO, or weighted average?

Is the inventory turnover different for different products?

How does the companys turnover compare with the industry?

Are some products selling and others not? Are some products becoming obsolete?
The turnover should be close to industry averages, if not, the underwriter needs to know why

Efficiency Ratios Accounts Payable Turnover:

Analysis:

(Accounts Payable / Cost of Goods Sold) x 365 Measures the average number of days the company takes to pay its suppliers

Questions to Ask
Calculate the Accounts Payable Turnover

Reason
This is a sensitive ratio: The longer the turnover, the longer the company has cash If the supplier get stretched to much, they may not sell to the company, which can put the company out of business Is the company taking advantage of discounts? An underwriter will want to call 3 or 4 suppliers to confirm the company is in good standing The turnover should be close to industry averages, if not, the underwriter needs to know why

What terms to the suppliers offer? Supplier reference check How does the companys turnover compare with the industry?

Profitability Ratios Gross Profit Margin:

Analysis:

(Sales Cost of Good Sold) / Sales Measures the differential between what it costs to manufacture or purchase the product and how much the product is sold.

Questions to Ask
Calculate the Gross Profit Margin

Reason
The higher the gross profit margin, the more money is available to cover the operating costs of the company

Has the gross profit margin changed over time?

Understand the industry How does the companys turnover compare with the industry?

This can show the impact of price changes or changes in the cost of inventory.
Certain industries may have tighter margins, such as technology retail. The turnover should be close to industry averages, if not, the underwriter needs to know why

Profitability Ratios Return on Equity (ROE):

Analysis:

Net Income / Total Equity Measures the relationship between profits and the investment of the owners.

Questions to Ask
Calculate the Return on Equity Has the ROE changed over time? How does the companys turnover compare with the industry?

Reason
This ratio will have a direct impact on the companys ability to raise capital This can show changes in capital structure, infusions of capital, an changes in net income The ROE may be close to the industry, despite low profits, as the company may have higher levels of liabilities

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