Principles of Corporate Finance

Brealey and Myers

Sixth Edition

Financial Analysis and Planning

Slides by
Matthew Will
Irwin/McGraw Hill

Chapter 28

The McGraw-Hill Companies, Inc., 200

28- 2

Topics Covered
Executive Paper Corporation
Financial Ratios
The DuPont System
Financial Planning
Growth and External Financing

Irwin/McGraw Hill

The McGraw-Hill Companies, Inc., 200

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Executive Paper
Executive Paper Balance Sheet
Dec
1998

Dec
1999

diff

Assets
Current Assets
Cash & Securities
Receivables
Inventory
Total

100.0
433.1
339.9
873.0

110.0
440.0
350.0
900.0

10.0
6.9
10.1
27.0

Fixed Assets
P, P, E
accum Depr
Net Fixed Assets

929.8
396.7
533.1

100.0
450.0
550.0

-829.8
53.3
16.9

1,406.1

1,450.0

43.9

Total Assets
Irwin/McGraw Hill

The McGraw-Hill Companies, Inc., 200

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Executive Paper
Dec
1998

Dec
1999

diff

Liabilities and Equity

Current Liabilities
Debt due in 1 year
Payable
Total current liabilities

96.6
349.9
446.5

100.0
360.0
460.0

3.4
10.1
13.5

Long term debt

400.0

400.0

0.0

Shareholders equity

559.6

590.0

30.4

1,406.1

1,450.0

43.9

Total liabilities and equity

Irwin/McGraw Hill

The McGraw-Hill Companies, Inc., 200

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Executive Paper

Executive Paper - Other Data

1998

1999

Estimated repalcement cost of assets

1110

1231

598

708

Average number of shares, millions

14.16

14.16

Share price, dollars

42.25

50

Market value of equity

Irwin/McGraw Hill

The McGraw-Hill Companies, Inc., 200

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Executive Paper
Executive Paper Income Statement (1999)

Revenues
Costs
Depreciation
EBIT
Interest
Tax
Net income
Dividend
Retained earnings
Earnings per share, dollars
Dividend per share, dollars

Irwin/McGraw Hill

$ millions
2,200.00
1,980.00
53.30
166.70
40.00
50.70
76.00
45.60
30.40
5.37
3.22

The McGraw-Hill Companies, Inc., 200

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Executive Paper
Executive Paper Sources and Uses of Funds (1999)
Sources:
Net Income
Depreciation
Operating cash flow
Borrowing
Stock issues
Total sources
Uses:
Increase in net working capital
Investment
Dividends
Total uses

Irwin/McGraw Hill

$ millions
76.00
53.30
129.30
129.30

13.50
70.20
45.60
129.30

The McGraw-Hill Companies, Inc., 200

28- 8

Leverage Ratios
long term debt
Long term debt ratio =
long term debt + equity

long term debt + value of leases

Debt equity ratio =
equity

Irwin/McGraw Hill

The McGraw-Hill Companies, Inc., 200

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Leverage Ratios
total liabilities
Total debt ratio =
total assets

Times interest earned

EBIT
=
interest payments

EBIT + depreciation
Cash cover age ratio =
interest payments

Irwin/McGraw Hill

The McGraw-Hill Companies, Inc., 200

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Liquidity Ratios
Net working capital
Net working capital
=
to total assets ratio
Total assets

current assets
Current ratio =
current liabilities

Irwin/McGraw Hill

The McGraw-Hill Companies, Inc., 200

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Liquidity Ratios
cash + marketable securities + receivables
Quick ratio =
current liabilities

cash + marketable securities

Cash ratio =
current liabilities

Interval measure =

Irwin/McGraw Hill

cash + marketable securities + receivables

average daily expenditures from operations

The McGraw-Hill Companies, Inc., 200

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Efficiency Ratios
Sales
Asset turnover ratio =
Average total assets

sales
NWCturnover =
average net working capital

Irwin/McGraw Hill

The McGraw-Hill Companies, Inc., 200

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Efficiency Ratios
cost of goods sold
Inventory turnover ratio =
average inventory

average inventory
Days' sales in inventory =
cost of goods sold / 365

Average collection period =

Irwin/McGraw Hill

average receivables
average daily sales

The McGraw-Hill Companies, Inc., 200

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Profitability Ratios
Net profit margin =

EBIT - tax
sales

EBIT - tax
Return on assets =
average total assets

earnings available for common stock

Return on equity =
average equity

Irwin/McGraw Hill

The McGraw-Hill Companies, Inc., 200

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Profitability Ratios
dividends
Payout ratio =
earnings

earnings - dividends
Plowback ratio =
earnings
= 1 - payout ratio
earnings - dividends
Growth in equity from plowback =
earnings

Irwin/McGraw Hill

The McGraw-Hill Companies, Inc., 200

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Market Value Ratios

stock price
PE Ratio =
earnings per share

P0
Di v 1
1
Forecasted PE ratio =
=
x
aveEPS1
EPS1
r - g

dividend per share

Dividend yield =
stock price

Irwin/McGraw Hill

The McGraw-Hill Companies, Inc., 200

28- 17

Market Value Ratios

Price per share = P0

Div 1
=
r - g

stock price
Market to book ratio =
book value per share

market value of assets

Tobins Q =
estimated replcement cost

Irwin/McGraw Hill

The McGraw-Hill Companies, Inc., 200

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The DuPont System

A breakdown of ROE and ROA into
component ratios:
EBIT - taxes
ROA =
assets
earnings available for common stock
ROE =
equity

Irwin/McGraw Hill

The McGraw-Hill Companies, Inc., 200

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The DuPont System

sales
EBIT - taxes
ROA =
x
assets
sales

Irwin/McGraw Hill

The McGraw-Hill Companies, Inc., 200

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The DuPont System

sales
EBIT - taxes
ROA =
x
assets
sales

asset
turnover

Irwin/McGraw Hill

profit
margin

The McGraw-Hill Companies, Inc., 200

28- 21

ROE =

The DuPont System

assets
sales
EBIT - taxes EBIT - taxes - interest
x
x
x
equity assets
sales
EBIT - taxes

Irwin/McGraw Hill

The McGraw-Hill Companies, Inc., 200

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The DuPont System

ROE =

assets
sales
EBIT - taxes EBIT - taxes - interest
x
x
x
equity assets
sales
EBIT - taxes

leverage asset
ratio turnover

Irwin/McGraw Hill

profit
margin

debt
burden

The McGraw-Hill Companies, Inc., 200