博迪教学课件03VIP

Chapter3:

ManagingFinancial HealthandPerformanceObjectivesPurposeofFinancialPlanningWorkingCapitalManagement1Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallChapter3Contents3.1FunctionsofFinancialStatements3.2ReviewofFinancialStatement3.3Marketvaluesv.BookValues3.4Accountingv.EconomicMeasuresofIncome3.5ReturnonShareholdersv.ReturnonBookEquity3.6AnalysisUsingFinancialRatios3.7TheFinancialPlanningProcess3.8ConstructingaFinancialPlanningModel3.9Growth&theNeedforExternalFinancing3.10WorkingCapitalMgmt.3.11Liquidity&CashMgmt.2Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHall3.1FunctionsofFinancialStatementsFinancialStatements:Provideinformationtotheowners&creditorsofafirmaboutthecurrentstatusandpastperformanceProvideaconvenientwayforowners&creditorstosetperformancetargets&toimposerestrictionsofthemanagersofthefirmProvideaconvenienttemplatesforfinancialplanning3Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHall3.2ReviewofFinancialStatementsBalanceSheetsIncomeStatementsCash-FlowStatements4Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallTheBalanceSheetSummarizesafirmsassets,liabilities,andowner’sequityatamomentintimeAmountsmeasuredathistoricalvaluesandhistoricalexchangeratesPreparedaccordingtoGAAP,GenerallyAcceptedAccountingPrinciplesGAAPmodifiedoccasionallybytheFinancialAccountingStandardsBoardExchange-listedcompaniesmustcomplywithSecuritiesandExchangeCommission(SEC)rules5Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallTheBalanceSheetMajorDivisions:AssetsCurrentassets(lessthanayear)Long-termassets(longerthanayearDepreciationLiabilitiesandStockholder’sEquityLiabilitiesCurrentLiabilitiesLong-termdebtEquity6Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallGPCBalanceSheetonDecember317Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallTheIncomeStatementSummarizestheprofitabilityofacompanyduringatimeperiodMajorDivisions:Revenue&costofgoodssoldGrossmarginGeneraladministrativeandsellingexpenses(GS&A)OperatingincomeDebtserviceTaxableincomeCorporateTaxesNetincome8Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallTheIncomeStatementImportantReminders:Retainedearningsarenotaddedtothecashbalanceinthebalancesheet,butareaddedtoshareholder’sequityAccountsshowhistoricalvalues,notmarketvaluesTheshareholder’sequitymaybemuchhigherorlowerthanthemarketvalueofthefirmThevalueofthefirm’slandmayhavehalvedordoubled,butthiswouldnotbereportedinthebalancesheet9Copyright©2009PearsonEducation,Inc.

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PublishingasPrenticeHallTheCash-FlowStatementShowthecashthatflowedintoandfromafirminduringatimeperiodFocusesattentiononafirm’scashsituationAfirmmaybeprofitableandshortofcashUnlikethebalancesheetandincomestatement,cashflowstatementsareindependentofaccountingmethodsTheIRSusesaccountingincometocomputetax,soaccountingruleshaveasecondordereffectoncashflowsthroughtaxes11Copyright©2009PearsonEducation,Inc.

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PublishingasPrenticeHallNotestoFinancialStatementsExplainsaccountingmethodsusedDetailsofassetsandliabilitiesDetailsofequitystructureDocumentschangesinoperationDocumentsoff-balance-sheetitems14Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallReviewingPublishedAccountsUsualorderfeelqualityofthepaper,reviewpicturesreadChair’sreportreviewaccountsreadnotesproduceestimatesCorrectorderproduceestimatesreadnotescompareyournumbers&report’sreadChair’sreportcheckpictures,etc.15Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallReasonsforthisOrderingFormyourownunbiasedexpectationsindependentlyofthelatestfinancialreportNotestoaccountsgivethenumbersmoreprecisemeaningCompareyournumbersandthefirm’stotellyouwheretofocuswhenreadingthechair’sreport.LookforomissionsandconflictsComparethePR-Department’spublicimagewithyour(now)informedinvestor’sview16Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHall3.3MarketValuesv.BookValuesNotallassetsandliabilitiesareincluded,andothersareunderstateand/oroverstatedIntangibleassetssuchaspatentsmayhavesomevalueincluded,butbrandloyalty,technologicalknow-how,orahighlytrainedloyalworkforcewillnotbevalued.Goodwillmaybeincluded,butsoonlosesitsconnectiontomarketvaluebecauseofaccountingdepreciationandmarketfluctuationsSomecontingentliabilitiessuchaslaw-suitsarenotroutinelydisclosed,oronlydisclosedinthenotesAccountantsarebeginningtomark-to-markettheassetsofpensionfunds17Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHall3.4Accountingv.EconomicMeasuresofIncomeEconomist’sMeasureofNetIncomeNetcashflowtoshareholderspluschangeinmarketvalueofexistingshareholdersequityAccountant'sMeasureofNetIncomeRevenueLessExpensesLessTaxesTheabovetwomeasureswouldbeequalifaccountantsmarkedallrelevantassetsandliabilitiestomarket(theydon’t!)18Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallAccountingv.EconomicMeasuresofIncome:ExampleGPC’saccountingnetincomewasplus$23,400,000in2001Assumethetotalmarketvalueofthestockfellfrom$200,000,000to$187,000,000fromyear2xx0to2xx1.Wesawearlierthatthecashdividendtoshareholderswas$10,000,000.Theeconomicincomeinyear2xx1wasminus

$2,800,000TheAccountingandEconomicmeasuresofIncomemaydiffersubstantially19Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHall3.5ReturnstoShareholdersv.ReturnonBookEquityRecallourdefinitioninChapter2oftheholdingperiodreturn,andcomparethiswiththeeconomicmeasureofincomeThisistheTotalShareholderReturn20Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallReturnstoShareholdersv.ReturnonBookEquity(Continued)Traditionally,corporateperformancehasbeenmeasuredbyReturnonEquity,ROE21Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallReturnstoShareholdersv.ReturnonBookEquity(Conclusion)Thus,weseethatthereisnocorrespondencebetweenafirm'sROEinanyyear&thetotalrateofreturnearnedbyshareholdersontheirinvestmentinthecompany’sstock22Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHall3.6AnalysisusingFinancialRatiosDespitethedifferencesinaccountingandfinancialprinciples,thepublishedaccountsofafirmyieldcluesaboutitsfinancialconditionFiveaspectsofafirmsperformance:ProfitabilityAssetturnoverFinancialleverageLiquidityMarketvalue23Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallProfitability24Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallAssetTurnover25Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallFinancialLeverage26Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallLiquidity27Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallMarketValue28Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallRatioComparisonsEstablishYourPerspectiveShareholderEmployee,Management,orUnionCreditorPredator,Customer,Supplier,Competitor,TradeAssociationBenchmarksOthercompaniesratiosThefirm’shistoricalratiosDataextractedfromfinancialmarketsSourcesDun&Bradstreet,RobertMorris,CommerceDepartment'sQuarterlyFinancialReport,TradeAssociations29Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallRelationshipsAmongstRatiosItissometimesvaluabletodecomposeratiosintosums,differences,productsandquotientsofotherratios.Manysuchschemesstartwith:30Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallRatioAnalysisLimitations

Ratioanalysisindicateswhereyoumightprofitablyfocusyourattention,butitcanalsomisleadyouLookforcollaboratingevidenceforthehypothesesyouformfromtheratiosSoundlong-termgoalsofafirmmaycauseratiostolookawful.Management-by-ratiosmaynotbeinthefirmslong-terminterestCompaniesinthesameindustrymayhaveverydifferentdistributionchannels,andaccountingmethods,leadingtomarkedlydifferentratiosthatarenone-the-lessappropriatetoeachcompany31Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallComment:Alwayskeepinmindthatfinancialstatementsarepreparedaccordingtoaccounting

standardsandtraditions,andthattheydonotfullysatisfytheneedsofafinancialanalystsTheydoyieldusefulinformationifusedwithcareandunderstanding32Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallEffectofFinancialLeverageFinancialleveragesimplymeanstheuseofborrowedmoneyShareholdersofafirmusefinancialleveragetoboosttheirROEThisincreasesthesensitivityofROEtofluctuationsinthefirm’sunderlyingprofitabilityasmeasuredbyitsROA33Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallIllustration(Table3.7&3.8oftextbook)ConsidertwofirmsthatareidenticalexceptthatNodebtisfinancedusing$1,000,000ofequityandHalfdebtisfinancedusing$500,000ofequityand$500,000ofdebtfurtherassumethattheEBITofbothfirmsis$120,000andtaxis40%34Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallCase:Borrowat10%35Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallCase:Borrowat15%36Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallCase:Borrowat10%:EffectofBusinessCycleonROE37Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallConclusion:FromtheperspectiveofCreditors:increasingdebtisunambiguouslyharmful,andbondratingagencieswilldowngradethefirm’ssecuritiesShareholders:maybenefit,dependingonthesignof(ROA-interestrate)andROA38Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHall3.7TheFinancialPlanningProcess“Idon’tgiveastrawberrywhathappens.Iwantyoualltostonewallit.LetthempleadtheFifthAmendment,cover-uporanythingelse,ifit’llsaveit,savetheplan.”RichardMilhousNixononPlanning(22March,1973)(Bowdlerizedtoavoidoffendingaccountingstudents)39Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallIntroductiontoPlanningThissectionnavigatesusthroughthefinancialplanningprocess,usingthehistoricalfinancialstatementsforamanufacturingfirmasourembarkationpointLater,wediscussshort-termplanningandthemanagementofworkingcapital40Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallTheFinancialPlanningProcessFinancialplanningisadynamicprocessthatfollowsacycleofmakingplans,implementingthem,andrevisingtheminthelightofactualresults41Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallTheFinancialPlanningProcessStartingpointisthestrategicplanStrategyguidesthefinancialplanningprocessbyestablishingoverallbusinessdevelopmentguidelinesandgrowthtargetsWhichbusinessesdoesthefirmwanttoenterexpandcontractexitandhowquickly?42Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallTheFinancialPlanningProcessLengthoftheplanninghorizonThelongerthefinancialplan,thelessdetaileditshouldbe(ingeneral)TherevisionofafinancialplanisgenerallyafunctionofthelengthoftheplanninghorizonShort-termplansarerevisedfrequently,long-termplansarerevisedmuchlessfrequently43Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallTheFinancialPlanningProcessThefinancialplanninghorizonmaybebrokendownintoseveralsteps:Managementforecaststhekeyexternalfactors,includinglevelofeconomicactivity,inflation,interestrates,andthecompetition’soutputandpricesBasedonabove,theynextforecastrevenues,expenses,cashflows,andimpliedneedforexternalfinancing44Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallTheFinancialPlanningProcessSpecificperformancetargetsaregeneratedforthedivisions,functionsandkeyindividualsofthefirmPeriodicmeasurementsofperformancearemade,andcomparedtotheplaninordertocorrecteithertheplanorperformancePeriodically,keypersonnelarecounseled,rewardedorpunished,andanewiterationisinstigated45Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallTheFinancialPlanningProcess:NotesSomevariablesmustbeforecastwellinadvancebecauseexploitationrequiresalonglead-time,othersmaybereactedtoimmediatelySomevariablesarehighlyvolatile,andcan’tbeforecasteffectively,sothebestwecandoistoplanfortheunknown(contingencyplanning)46Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallTheFinancialPlanningProcess:NotesPlanninghorizonsmustbeappropriate Foramagazinestand,atwoyearplanninghorizonmaybefartoolongApharmaceuticalbusiness(withlongnew-plantconstructionlead-times,andlongdrugdevelopment/testing/approvalprocedures)needsaplanninghorizonthatmaybeaslongatenyears47Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallTheFinancialPlanningProcess:NotesAplanshouldalwaysleadtodecisionsthatjustifythecostofitspreparationProperplanningis,inessence,partoftheprocessofdecisionmaking.Anypartofaplanthatdoesnotleadtoadecisionisprobablyawasteofmanagerialresources48Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallTheFinancialPlanningProcess:AplanshouldmakereasonabletradeoffsbetweenflexibilityandthecostofflexibilityRecallthatincapitalbudgeting,optionsweresometimesveryvaluable49Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHall3.8ConstructingaFinancialPlanningModelThenextslideshowsthehistoryofGPC50Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallGPCFinancialStatements,Yearsxxx1-xxx3(Nearest$Million)(PercentofYear'sSales)Yearxxx0xxx1xxx2xxx3xxx1xxx2xxx3IncomeStatementSales200240288100.0%100.0%100.0%Costofgoodssold11013215855.0%55.0%55.0%Grossmargin9010813045.0%45.0%45.0%Selling,general&admin.expenses30364315.0%15.0%15.0%EBIT60728630.0%30.0%30.0%Interestexpenses30456415.0%18.8%22.2%Taxes121196.0%4.5%3.1%Netincome1816139.0%6.7%4.7%Dividends5542.7%2.0%1.4%Changeinshareholder'sequity131196.3%4.7%3.3%BalanceSheetAssets:Cash&equivalents101214176.0%6.0%6.0%Receivables4048586924.0%24.0%24.0%Inventories5060728630.0%30.0%30.0%Property,Plant&equipment500600720864300.0%300.0%300.0%TotalAssets6007208641037360.0%360.0%360.0%Liabilities:Payables3036435218.0%18.0%18.0%Short-termdebt120221347502110.7%144.6%174.2%Long-termdebt15015015015075.0%62.5%52.1%TotalLiabilities300407540704203.7%225.1%244.3%Shareholder'sequity300313324333156.3%134.9%115.7%51Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHall(Nearest$Million)Yearxxx0xxx1xxx2xxx3IncomeStatementSales200240288Costofgoodssold110132158Grossmargin90108130Selling,general&admin.expenses303643EBIT607286Interestexpenses304564Taxes12119Netincome181613Dividends554Changeinshareholder'sequity1311952Copyright©2009PearsonEducation,Inc.

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PublishingasPrenticeHall(PercentofYear'sSales)Yearxxx1xxx2xxx3IncomeStatementSales100.0%100.0%100.0%Costofgoodssold55.0%55.0%55.0%Grossmargin45.0%45.0%45.0%Selling,general&adminexp.15.0%15.0%15.0%EBIT30.0%30.0%30.0%Interestexpenses15.0%18.8%22.2%Taxes6.0%4.5%3.1%Netincome9.0%6.7%4.7%Dividends2.7%2.0%1.4%Changeinequity6.3%4.7%3.3%54Copyright©2009PearsonEducation,Inc.

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PublishingasPrenticeHallConstructingaFinancialPlanningModelPercent-of-salesmethodFirstexaminewhichitemsintheincomestatementhavemaintainedafixedratiotosalesThisenablesustodecidewhichitemsshouldbeforecastonprojectedsales,andwhichneedtobeforecastonanotherbasis56Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallConstructingaFinancialPlanningModelPercent-of-salesmethodThesecondstepistoforecastsalesThisisamajorexercise,butwewillassumethatsaleswillcontinuetogrowat20%nextyear(asithasinthepast)57Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallConstructingaFinancialPlanningModelPercent-of-salesmethodThethirdstepistoforecastthoseitemsthathavebeenassumedtovarywithsales58Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallConstructingaFinancialPlanningModelPercent-of-salesmethodThefourthandfinalstepistoforecastthemissingitemsthathavenotbeenassumedtovarywithsalesWeneedsomeassumptions:59Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallConstructingaFinancialPlanningModelAssumptions:Interestrateonlong-termdebtis8%,andonshort-termdebtis15%Toavoidcomplexity,weassumethatinterestiscomputedontheyearendlong-andshort-termbalances(wecanre-addressthislater)interest=0.08*501.72+0.15*150=87.2660Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallConstructingaFinancialPlanningModelTheincomestatementmaynowbeconstructedgiventhedividendpay-outratioandtaxrate(30%and40%)Thechangeinequityisaddedtotheequityforyearxxx3,togivethenewbalanceforyearxxx4“Totalassets”isavailable,sothe“Totalliabilities”maynowbecomputed61Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallGPCFinancialStatements,Yearsxxx1-xxx3(Nearest$Million)(PercentofYear'sSales)Yearxxx0xxx1xxx2xxx3xxx1xxx2xxx3F(sales)?xxx4IncomeStatementSales200240288100.0%100.0%100.0%N/A346Costofgoodssold11013215855.0%55.0%55.0%Yes190Grossmargin9010813045.0%45.0%45.0%N/A(Yes)156Selling,general&admin.expenses30364315.0%15.0%15.0%Yes52EBIT60728630.0%30.0%30.0%N/A104Interestexpenses30456415.0%18.8%22.2%No87Taxes121196.0%4.5%3.1%N/A7Netincome1816139.0%6.7%4.7%N/A10Dividends5542.7%2.0%1.4%N/A3Changeinshareholder'sequity131196.3%4.7%3.3%7BalanceSheetAssets:Cash&equivalents101214176.0%6.0%6.0%Yes21Receivables4048586924.0%24.0%24.0%Yes83Inventories5060728630.0%30.0%30.0%Yes104Property,Plant&equipment500600720864300.0%300.0%300.0%Yes1037TotalAssets6007208641037360.0%360.0%360.0%N/A(Yes)1244Liabilities:Payables3036435218.0%18.0%18.0%Yes62Short-termdebt120221347502110.7%144.6%174.2%NoLong-termdebt15015015015075.0%62.5%52.1%NoTotalLiabilities300407540704203.7%225.1%244.3%N/A904Shareholder'sequity300313324333156.3%134.9%115.7%N/A34062Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallExampleCompletedWecompletethebalancesheetbyrecognizingthatthereareonlytwoaccountsthatneedtobeestimated,Short-termdebt,andLong-termdebtThesumisthen904(Liabilities)-62(Payables)=$842MillionAssumenochangeinlong-termdebtShort-termdebt=$842-150=$692million63Copyright©2009PearsonEducation,Inc.

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PublishingasPrenticeHall3.9Growth&NeedforExternalFinanceInordertogrowby20%,thefirmwillneedanadditional692-502=$190millioninexternalfunding(allshort-termfundingintheexample)Itissometimesusefultobeabletocomputetheexternalfundsneededdirectly:66Copyright©2009PearsonEducation,Inc.

PublishingasPrenticeHallGrowth&NeedforExternalFinanceLetS1bethesalesinnextyearS0bethesalesthisyearA[S]betheassetsthatvarywithsalesL[S]betheliabilitiesthatvarywithsalesdbethedividendpay-outratiot