FIN 311 1st Edition Lecture 4 Outline of Last Lecture I. Income StatementII. Statement of Retained Earnings/Statement of Shareholder’s EquityIII. Statement of Cash Flowsi. Cash flow from operating activitiesii. Cash flow from investing activities:iii. Cash flow from financing activities:IV. Statement of Comprehensive IncomeV. TaxesOutline of Current LectureI. Estimate Cash Flow From Assets (CFFA)II. Using Financial Statement Information i. Internal Usesii. External Usesiii. Ratio Analysisiv. Common Size Financial Statementsv. 5 Categories of Financial Ratios Current LectureI. Estimate Cash Flow From Assets (CFFA) - Is approximately Net Cash Flow Earned – Reinvestment in the Firm- Evaluation of a firm depends on CFFA- Vo: today’s value = Sum of PV of all future CFFACash Flow Identity: CFFA = CF to creditors + CF to shareholders OCF: Operating Cash FlowCFFA = OCF – Net Capital Spending – Additions to NWC Income Statement Long-term Assets Short-term Assets (Less Short-term Liabilities) Reinvestment: Balance SheetOCF = EBIT + Depreciation - TaxesOutback Example: OCF = 51.7 + 22.7 – 18.1 = 56.3Net Capital Spending = Ending NFA – Beginning NFA +Depreciation Or = Ending Gross Fixed Assets – Beginning Gross Fixed Assets These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Outback Example: Net Capital Spending = 203.8 – 167.0 + 22.7 = 59.5 → Invested (purchases) long-term assets (Indicates Growth) Additions to Net Working Capital = Ending NWC – Beginning NWC = (End CA – End CL) – (Beg CA – Beg CL)= (376.6 – 162.7) – (334.1 – 109.9)= 213.9 – 224.2= -10.3 CFFA = OCF – Net Capital Spending – Additions to NWC = 56.3 – 59.5 – (-10.3) = 7.1 Outback: CF to Creditors = Interest Paid – Net New Borrowing = 7.7 – [(74.4 + 19.6) – (70.2 + 17.7)] = 1.6 CF to Shareholders = Dividends Paid – Net New Equity Raised = (1.0 + 4.5) – [(10 + 45.4) – (10 + 45.4)] = 5.5CFFA = CF to Creditors + CF to Shareholders = 1.6 + 5.5 = 7.1 II. Using Financial Statement Information i. Internal Uses:- Performance evaluation: Compensation and comparison between divisions- Planning for the Future: Guide in estimating future cash flowsii. External Uses:- Creditors- Suppliers- Customers- Stockholdersiii. Ratio Analysis:1. Time-trend Analysis : Used to see how firm’s performance is changing over time 2. Peer- Group Analysis: Used to compare similar companies or within the industries  The more diversified a firm the harder it is to iv. Common Size Financial Statements: - Takes the balance sheet and income statement and takes the “big” line item to compare financial information. Able to see trends easier.Ratio Analysis What is the ratio trying to measure and why is it measuring it? Ratios = Numerator = 3 DenominatorFor 1 unit of the denominator we have 3 units of the numeratorv. 5 Categories of Financial Ratios1. Short term Solvency Liquidity ratios2. Long term Solvency3. Asset Management  Turnover ratios How efficient are a firms assets4. Profitability Ratios Analyze the profitability of the firm5. Market Value Ratios Incorporate investors perception of the value of the