Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11FINANCIAL RATIOS Types of ratiosLiquidity RatiosAsset Management RatiosSlide 15Financial Leverage ManagementSlide 17Profitability RatiosSlide 19Market-Based RatiosDividend Policy RatiosFinancial Ratio AnalysisRelationships Among RatiosDupont FormulaSlide 25Interest RatesWhat’s the FV of an initial $100 after 3 years if i = 10%?What’s the PV of $100 due in 3 years if i = 10%?Slide 29What’s the FV of a 3-year ordinary annuity of $100 at 10%?What’s the PV of this ordinary annuity?Slide 32What is the PV of this uneven cash flow stream?Slide 34Bonds and Their ValuationKey Features of a BondSlide 37How does adding a call provision affect a bond?What’s a sinking fund?Slide 40What’s the value of a 10-year, 10% coupon bond if rd = 10%?What’s the YTM on a 10-year, 9% annual coupon, $1,000 par value bond that sells for $887?What’s interest rate (or price) risk? Does a 1-year or 10-year 10% bond have more risk?What is reinvestment rate risk?Slide 45Slide 46What factors affect default risk and bond ratings?Slide 48Stocks and Their ValuationCommon Stock: Owners, Directors, and ManagersDifferent Approaches for Valuing Common StockSlide 52What’s the Efficient Market Hypothesis (EMH)?Slide 54Perpetuities and Their ValuationSlide 56Slide 57Slide 58Slide 59SENIOR OUTCOMES SEMINAR(BU385)FINANCE1. OBTAIN FINANCING•Short term debt•Long term debt•StocksMODEL OF THE FIRM 2. INVEST IN RESOURCES•Current assets•Fixed assets 3. TO RUN OPERATIONS•Revenues•Expenses1. OBTAIN FINANCING•Short term debtMODEL OF THE FIRMAccounts payableNotes payableAccrued expenses•Long term debtCorporate bondsNYSE•StocksCommon stockPreferred stockMODEL OF THE FIRM2. INVEST IN RESOURCES•Current assetsCashMarketable securitiesAccounts receivableInventories•Fixed assetsPlant and equipmentAccumulated depreciationMODEL OF THE FIRM3. TO RUN OPERATIONS•Operating profitsTotal salesCost of goods soldGross margins•Net profitsSelling and adminInterest expensesTaxesNet profit marginWHAT the firm does:WHY the firm does it:HOW the firm does it:MAXIMIZE SHAREHOLDER WEALTHMINIMIZE RISK / MAXIMIZE RETURNSMODEL OF THE FIRM1. OBTAIN FINANCING2. INVEST IN RESOURCES3. TO RUN OPERATIONSBASIC CONCEPTS•Investment: What assets should the firm acquire and how much money should they spend?•Financing: What securities should the firm issue and how much should be raised issuing stocks and bonds?•Dividends: What portion of the firm’s profits should be paid in dividends (payout ratio)? •Working Capital: Management of current assets and current liabilities.FINANCIAL RATIOS(using financial statements)•Balance sheet - Common-sized balance sheet shows assets,liabilities, and equity as a % of total assets.•Income statement - Common-sized income statement shows income and expense items as a % of sales.•Statement of cash flowsINCOME STATEMENT(Common Size) (Each line item as a percent of sales) ($ amount) (% of sales)Sales $2,311 100.0%COGS 1,344 58.2Depreciation 276 11.9EBIT 691 29.9Interest paid 141 6.1Taxable income 55023.8Taxes (34%) 187 8.1Net income 363 15.7% Dividends $121 5.2% Addition to RE 242 10.5BALANCE SHEET(Common Size) (Each item as a percent of total assets) ($ amt) (% tot. assets)Current Assets cash $ 84 2.5% AR 165 4.9Inventory 393 11.7Total $ 642 19.1Fixed Assets Net P & E $2,731 80.9 Total assets $3,373 100.0%FINANCIAL RATIOS(standardized measures)•Used by managers for planning and evaluation•Used by credit managers to assess risk•Used by investors to assess stocks and bonds•Used to compare with industry and over timeFINANCIAL RATIOSTypes of ratiosLiquidity -ability to meet short term debtAsset management -efficiency in using resourcesFinancial leverage management -level of risk due to debtProfitability -effectiveness in generating profitsMarket-based -market’s view of the firm13Liquidity RatiosCurrent ratio = Current assets Current liabilities CR = $50,190 / $25,523 CR = 1.97 vs. 2.4 Ind. Avg.Quick ratio = Current assets – inventories Current liabilities QR = ($50,190 - $27,530) / $25,523 QR = .89 vs. .92 Ind. Avg.14Asset Management RatiosAvg collection period = Accounts receivable Annual credit sales/365 ACP = $18,320 / ($112,760/365) ACP = 59.3 days vs. 47 days Ind. Avg.Inventory turnover = Cost of sales Average inventory Inv. Turn. = $85,300 / ($27,530 + $26,470)/2 Inv. Turn. = 3.16 vs. 3.9 Ind. Avg.15Asset Management RatiosFixed-asset turnover = Sales Net fixed assets FAT = $112,760 / $31,700 FAT = 3.56 vs. 4.6 Ind. Avg.Total asset turnover = Sales Total assets TAT = $112,760 / $81,890 TAT = 1.38 vs. 1.82 Ind. Avg.16Financial Leverage ManagementDebt ratio = Total debt Total assets DR = $47,523 / $81,890 DR = 58% vs. 47% Ind. Avg.Debt-to-equity ratio = Total debt Total equity D/E = $47,253 / $34,367 D/E = 138.3% vs. 88.7% Ind. Avg.17Financial Leverage ManagementTimes interest earned = EBIT Interest charge Coverage Ratio = $11,520 / $3,160 Coverage Ratio = 3.65 vs. 6.7 Ind. Avg.Equity multiplier = Total assets Total equity EM = $81,890 / $34,367 EM = 2.38 vs. 1.89 Ind. Avg.18Profitability RatiosGross profit margin = Sales - Cost of sales Sales GPM = ($112,760 - $85,300) / $112,760 GPM = 24.4% vs. 25.6% Ind. Avg.Net profit margin = EAT Sales NPM = $5,016 / $112,760 NPM = 4.45% vs. 5.1% Ind. Avg.19Profitability RatiosROI = EAT Total Assets ROI = $5,016 / $81,890 ROI = 6.13% vs. 9.28% Ind. Avg.ROE = EAT Stockholders equity ROE = $5,016 / $34,367 ROE = 14.6% vs. 17.54% Ind. Avg.20Market-Based RatiosP/E ratio = Market price per share Current earnings per shareMarket to book ratio= Market price per share Book value per share21Dividend Policy RatiosPayout ratio = Dividends per share EPSDividend yield = Expected dividends per share Stock