FIN 300 Lecture Notes - Lecture 2: Retained Earnings, Income Statement, Valuation Using Multiples

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8 Feb 2015

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In-class sample problem: chapter 3, more problems. Recap of cash flow: cf assets= cf creditors + cf shareholders, cf assets = ocf - net capital spending - additions to nwc, ocf = net income + dep"n + interest paid, net capital spending = Net fixed assets end net fixed assets beg + dep"n: additions to nwc = nwc end nwc beg, cf creditors = interest paid net new borrowing, cf shareholders = dividends paid net new equity raised. Chapter 3: sources and uses of cash, standardized financial statements, ratio analysis, du pont identity, using financial statements. Standardized financial statements: common-base-year statement is a standardized financial statement presenting all items relative to a certain base year amount, combined common-size and base-year analysis eliminates the effect of the overall growth in total asset / sales. Du pont identity: how roe is linked with roa: = net income / equity x assets / assets. = net income / assets x assets / equity.

Related Questions

The goal of the firm is to ____ because _____. Answer maximize shareholders' wealth; it considers all risks invest funds in real estate; the return is longer maximize shareholders' profit; it is a short term outlook closely matching management goals Mike is paying $8,000 a year on his mortgage at 6% nominal annual interest. He has 15 more years to make payments. He wants to sell his house today. The lowest [minimum] price he can sell the house without losing any money on the house would be about ___. Answer $120,000 $ 50,000 $77,698 $ 186,208 A firm's net income before tax, EBT [NIBT] (on the income statement) is affected by _____. Answer taxes interest dividends Common Stock as listed on the Balance Sheet could include which of the following? Answer A) retained earnings B) additional paid in capital over par value C) preferred capital Both A) and B) If an asset is sold for ___ than its basis, the tax effect would be ____. Answer A) more; capital gain and depreciation recapture B) less; depreciation recapture C) more; capital loss Both A) and B) The main reason for a firm to have assets is to _______. Answer generate revenue match the liabilities and equity both of the above be able to borrow money and pay its debts none of the above The only risk you would NOT have in loaning money to the United States Government (Uncle Sugar) is _____ risk. Answer liquidity maturity default A(n) ____ shows _____. Answer balance sheet; sources and uses of funds income statement; net income as of a specific date cash flow statement; how well the firm is doing relative to its competition You can compare dollars _____ because ______. Answer computed using equations; any math is always correct at any point in time; time is never a factor if they are at nominal value; that is when decisions are made only at the same point in time; dollars can be invested to earn interest There ___ a tax benefit to the company with paying preferred dividends because _______. Answer is; investors can write them off is not; investors declare them as income is; the company can use the payments as an expense is not; the company cannot use the payments as an expense XYZ issued a 6% coupon, $1,000 par, 30 year to maturity bond. It is now 6 years to maturity. What is the price of the bond if the yield to maturity [market interest rate] is 10%? Answer $1,000 $659.46 $825.79 $705.33 The valuation process can be described as ______. Answer calculating the present value of an expected future cash flow using the investor's required rate of return as the discount rate calculating the future value of an expected future cash flow using the investor's required rate of return as the discount rate amortizing the value of the asset over its holding period The ______ is the minimum required rate of return a firm must earn on its investments. Answer net present value opportunity cost of capital or weighted average cost of capital. internal rate of return gross profit margin The value of an asset is the _____ dollar price someone is willing to pay for it. Answer usual maximum minimum Companies use ____ in capital budgeting project analysis because ________. Answer accounting profit; that is the total net income after tax cash flow; that is what the owners would receive from the project and reinvest accounting profit; that is what the owners would receive from the project and reinvest after tax cash flow; that is the result of prudent accounting When borrowing money, you want to know the ____ interest rate because ____. Answer nominal; it is the easiest to find. effective; it is the true cost of borrowing risk free; that is what the government pays Fed funds; that is what you would pay the bank Cash available to pay out to the investors after the firm pays for new investments or additions to working capital is _____. Answer a statement of cash flows operating after tax cash flow free cash flow net income An organization that raises money from investors and provides financing for individuals and businesses is a ___. Answer factor federal government regulatory unit state government taxing authority financial intermediary Negatives/cons of the Net Present Value (NPV) technique include: Answer least conservative reinvestment assumption multiple rates of return for non-conventional cash flows all of the above none of the above A fixed exchange rate means a country _____. Answer can only use gold coins as money is limited in the amount of paper money it can print can print money as the economy demands Your company is considering an investment with the following expected cash flows: Initial Investment = $407,596 Operating Cash Flows = $73,428 per year Terminal Cash Flow = $11,872. The company's WACC is 11% for similar risk projects. The proposed project would have an expected life of 9 years. Your boss asks you to do the analysis. You would tell your boss this proposed project ___ because ____. Answer is acceptable; NPV is about $3,620 is acceptable; NPV is zero should be rejected; NPV is about -$5,660 [negative $5,660]. should be rejected; NPV is zero All ratios are ___ and a reason to analyze ratios is ____. Answer good; to continue to look productive good and bad; because seemingly good ratios can be masking something bad bad; to try to rework the numbers to have them look good basically irrelevant; there really is no need to analyze financial statements When analyzing financial statements, ratio analysis gives ____ and provides insight into ____. Answer very little useful information; practically nothing good practice in logical thinking; what has occurred and the logic behind it financiers something to do during slow periods; how the financier spends his time accountants a reason to provide financial statements; why accountants do what they do while at work Given: Economic State[i]: Good Average Expected Return[i]: 10% 8% Probability[i]: 30% 70% What is the Standard Deviation? Answer 3% 8.4% 0.92% 5.6% Chapter 9: XYZ has a projected project to install a new press. The expected cash revenue is $175,000 per year. Expected yearly expenses are: Operatinf costs of $50,000; Rental of $17,000; Utilities of $20,500; and Depreciation of $10,000. The tax rate is 35%. What is the expected After-Tax Operating Cash Flow for the first year? Answer $65,500 $60,375 $77,500 $97,500 A stock just paid a dividend of $1.60 per year. The dividend is expected to grow at 3% per year indefinately. Equally risky stocks offer expected rates of return of 8%. What should be the stock price? Answer 53.33 $16.00 $32.96 None of the above. A plot of the CAPM is the _____. Answer wrong thing to do Security Market Line a function showing how to calculate TVM All of the above. Derivatives are used to ___. Answer divide one number by another find old ways to do things hedge risk none of the above With the end of the Gold Standard in the 1970's, what new risk did business face in the international market? Answer Comjpetition Exchange rate Worker compensation Property taxes One of the positive aspects [pros] of a Floating Exchange Rate System is ____. Answer money can be printed as needed to support financial/economic growth no/reduced inflation economic growth is reduced as a result of reduced liquidity [lower money supply] business planning is more difficult A(n) ____ contract obligates the seller to execute the contract and the contract is executed. Answer backwards forward future option What policies did countries institute after the Great War that help lead to the Great Depression? Answer A. Mandatory military service B. Trade restrictions C. High tariffs D. Isolationism Only B., C. and D. All of the above

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Page 1
Chapter 4: Measuring Corporate Performance
Case Study: Corporate Lending Group: The Hobby Horse
Company, Inc. (HH)
Burchetts Green had enjoyed the bank training course, but it was good to
be starting his first real job in the corporate lending group. Earlier that
morning the boss had handed him a set of financial statements for The
Hobby Horse Company, Inc. (HH). "Hobby Horse," she said, "has a $45
million loan from us due at the end of September, and it is likely to ask us
to roll it over. The company seems to have run into some rough weather
recently, and I have asked Furze Platt to go down there this afternoon and
see what is happening. It might do you good to go along with her. Before
you go, take a look at these financial statements and see what you think
the problems are. Here's a chance for you to use some of that stuff they
taught you in the training course."
Mr. Green was familiar with the HH story. Founded in 1990, it had rapidly
built up a chain of discount stores selling materials for crafts and hobbies.
However, last year a number of new store openings coinciding with a poor
Christmas season had pushed the company into loss. Management had
halted all new construction and put 15 of its existing stores up for sale.
Mr. Green decided to start with the 6-year summary of HH's balance sheet
and income statement (Table 4-1). Then he turned to examine in more
detail the latest position (Tables 4-2 and 4-3).
Source: Brealey, R.A.; Myers, S.C.; Marcus, A.J. (2009): Fundamentals of
Corporate Finance, 6th ed., New York: McGraw Hill, p. 107.
Questions:
What appear to be the problem areas in HH? Do the financial ratios
suggest questions that Ms. Platt and Mr. Green need to address?
1. Calculate financial ratios to interpret HHâs profitability, efficiency,
leverage, and liquidity. Use flow measures for the calculation of the
profitability and efficiency ratios (averages of the year).
2. For the preparation of the meeting with the bank, calculate also the
development of the leverage and liquidity ratios over the past years.
3. Interpret the calculated ratios and give suggestions for the management
how to proceed or how to (possibly) solve the problems.
Fachbereich Elektrische
Energietechnik
Prof. Dr. Valerie Wulfhorst
Betriebswirtschaftslehre,
insb. Controlling
Telefon
02921 378-451
Telefax
02921 378-409
E-Mail
[email protected]
Standort Soest
LÃ¼becker Ring 2
59494 Soest
Fachhochschule
SÃ¼dwestfalen
Sitz: Iserlohn
Hagen
Iserlohn
Meschede
Soest
www.fh-swf.de
Page 2
Tables:
Table 4- 1: Finance highlights for The Hobby Horse Company, Inc., year
ending March 31
Table 4- 2:
2008 2007 2006 2005 2004 2003
Net sales 3,351 3,314 2,845 2,796 2,493 2,160
EBIT -9 312 256 243 212 156
Interest 37 63 65 58 48 46
Taxes 3 60 46 43 39 34
Net profit -49 189 145 142 125 76
Earning per share -0.15 0.55 0.44 0.42 0.37 0.25
Current assets 669 469 491 435 392 423
Net fixed assets 923 780 753 680 610 536
Total assets 1,592 1,249 1,244 1,115 1,002 595
Current liabilities 680 365 348 302 276 320
Long-term debt 236 159 297 311 319 315
Stockholderâs equity 676 725 599 502 407 324
Number of stores 240 221 211 184 170 157
Employees 13,057 11,835 9,810 9,790 9,075 7,825
INCOME STATEMENT FOR
THE HOBBY HORSE COMPANY, INC.,
FOR YEAR ENDING MARCH 31, 2008
(all items in millions of dollars)
Net sales 3,351
Cost of goods sold 1,990
Selling, general, and administrative expenses 1,211
Depreciation expense 159
Earnings before interest and taxes (EBIT) -9
Net interest expense 37
Taxable income -46
Income taxes 3
Net income -49
Allocation of net income
Addition to retained earnings -49
Dividends 0
Page 3
Table 4- 3:
CONSOLIDATED BALANCE SHEET FOR THE HOBBY HORSE COMPANY, INC.
(figures in millions of dollars)
Assets Mar. 31, 2008 Mar. 31, 2007
Current assets
Cash and marketable securities 14 72
Receivables 176 194
Inventories 479 203
Total current assets 669 469
Fixed assets
Property, plant, and equipment (net of depreciation) 1,077 910
Less accumulated depreciation 154 130
Net fixed assets 923 780
Total assets 1,592 1,249
Liabilities and Shareholders' Equity Mar. 31, 2008 Mar. 31, 2007
Current liabilities
Debt due for repayment 484 222
Accounts payable 94 58
Other current liabilities 102 85
Total current liabilities 680 365
Long-term debt 236 159
Stockholders' equity
Common stock and other paid-in capital 155 155
Retained earnings 521 570
Total stockholders' equity 676 725
Total liabilities and stockholders' equity 1,592 1,249

FIN 300 Lecture Notes - Lecture 2: Retained Earnings, Income Statement, Valuation Using Multiples

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