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FIN 300 Lecture Notes - Lecture 1: Operating Cash Flow, Financial Statement Analysis, Historical Cost

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School
Ryerson University
Department
Finance
Course
FIN 300
Professor
Laleh Samarbakhsh

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Document Summary

Need to know where you stand before you make plans for the future. The emphasis in this course is on the analysis of cash flow. Cash flow is one of the most important pieces of information that a financial manager can derive from financial statements. Financial statement which shows the value of the firm"s assets and liabilities at a particular a snapshot (e. g. as of dec 2010) What a firm owns firm"s assets. Where the money to buy those assets came from the firm"s liabilities plus the firm"s shareholder"s equity. Liquidity ability to convert to cash quickly without a significant loss in value liquid firms are less likely to experience financial distress however, liquid assets earn a lower return trade-off between liquid and illiquid assets. Assets belonging to the firm may be resold in the market. I/s shows revenue as it accrues, not necessarily when the cash comes in the door.

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Related Questions

Which statement is TRUE?

A. The relation between a company's return on common equity (ROCE) and return on net operating assets (RNOA) reveals information about the company's financial leverage.

B. Return on equity is the percentage increase in stock prices.

C. The accounting-based stock valuation formula calculates the value of a stock as the book value plus the present value of future expected dividends discounted at the cost of equity.

D. Practice considers a segment significant if its sales, operating income (or loss), or identifiable assets are 30% or more of the combined amounts of all the company's operating assets.

5. Which statement is TRUE?

A. Once the projected financial statements are prepared, there is no need for sensitivity analysis to examine the assumptions used in the preparation.

B. Prospective analysis should be performed after historical financial statements have been adjusted.

C. Prospective analysis should only be based on the firm’s historical financial statements.

D. Prospective analysis can only be used to project an income statement, a balance sheet, and a statement of cash flows.

6. Which statement is TRUE?

A. As cash is the most liquid of all assets and liquidity is crucial to a company, all companies should hold as much cash as possible.

B. If the company has available cash, they should always pay their bills immediately, even if suppliers give them time to pay before charging penalties.

C. It is possible for a profitable company to go out of business because of severe short-term liquidity problems.

D. Free cash flow in a given year is a better indicator of profitability than earnings.

Joshua & White Technologies: December 31 Balance Sheets
(Thousands of Dollars)
Assets 2010 2009
Cash and cash equivalents $21,000 $20,000
Short-term investments 3,759 3,240
Accounts Receivable 52,500 48,000
Inventories 84,000 56,000
Total current assets $161,259 $127,240
Net fixed assets 218,400 200,000
Total assets $379,659 $327,240
Liabilities and equity
Accounts payable $33,600 $32,000
Accruals 12,600 12,000
Notes payable 19,929 6,480
Total current liabilities $66,129 $50,480
Long-term debt 67,662 58,320
Total liabilities $133,791 $108,800
Common stock 183,793 178,440
Retained Earnings 62,075 40,000
Total common equity $245,868 $218,440
Total liabilities and equity $379,659 $327,240
Joshua & White Technologies December 31 Income Statements
(Thousands of Dollars)
2010 2009
Sales $420,000 $400,000
Expenses excluding depr. and amort. 327,600 320,000
EBITDA $92,400 $80,000
Depreciation and Amortization 19,660 18,000
EBIT $72,740 $62,000
Interest Expense 5,740 4,460
EBT $67,000 $57,540
Taxes (40%) 26,800 23,016
Net Income $40,200 $34,524
Common dividends $18,125 $17,262
Addition to retained earnings $22,075 $17,262
Other Data 2010 2009
Year-end Stock Price $90.00 $96.00
# of shares (Thousands) 4,052 4,000
Lease payment (Thousands of Dollars) $20,000 $20,000
Sinking fund payment (Thousands of Dollars) $0 $0
Ratio Analysis 2010 2009 Industry Avg
Liquidity Ratios
Current Ratio 2.38 2.52 2.58
Quick Ratio 1.17 1.41 1.53
Asset Management Ratios
Inventory Turnover 1.11 1.22 7.69
Days Sales Outstanding 45.63 43.80 47.45
Fixed Assets Turnover 1.92 2.00 2.04
Total Assets Turnover 3.81 5.64 1.23
Debt Management Ratios
Debt Ratio 32.1%
Times-interest-earned ratio 15.33
EBITDA coverage ratio 4.18
Profitability Ratios
Profit Margin 9.57% 8.63% 8.86%
Basic Earning Power 19.16% 18.95% 19.48%
Return on Assets 10.59% 10.55% 10.93%
Return on Equity 21.87% 19.35% 16.10%
Market Value Ratios
Earnings per share NA
Price-to-earnings ratio 10.65
Cash flow per share NA
Price-to-cash flow ratio 7.11
Book Value per share NA
Market-to-book ratio 1.72
a. Has Joshua & White's liquidity position improved or worsened? Explain.
The position of JW has worsend because there ration has fallen from 1.41 to 1.17
b. Has Joshua & White's ability to manage its assets improved or worsened? Explain.
c. How has Joshua & White's profitability changed during the last year?
d. Perform an extended Du Pont analysis for Joshua & White for 2008 and 2009.
ROE = PM x TA Turnover x Equity Multiplier
2010
2009
e. Perform a common size analysis. What has happened to the composition
(that is, percentage in each category) of assets and liabilities?
Common Size Balance Sheets
Assets 2010 2009
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Net fixed assets
Total assets
Liabilities and equity 2010 2009
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity
Total liabilities and equity
Common Size Income Statements 2010 2009
Sales
Expenses excluding depr. and amort.
EBITDA
Depreciation and Amortization
EBIT
Interest Expense
EBT
Taxes (40%)
Net Income
f. Perform a percent change analysis. What does this tell you about the change in profitability
and asset utilization?
Percent Change Balance Sheets Base
Assets 2010 2009
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Net fixed assets
Total assets
Base
Liabilities and equity 2010 2009
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity
Total liabilities and equity
Base
Percent Change Income Statements 2010 2009
Sales
Expenses excluding depr. and amort.
EBITDA
Depreciation and Amortization
EBIT
Interest Expense
EBT
Taxes (40%)
Net Income
Joshua & White Technologies: December 31 Balance Sheets
(Thousands of Dollars)
Assets 2010 2009
Cash and cash equivalents $21,000 $20,000
Short-term investments 3,759 3,240
Accounts Receivable 52,500 48,000
Inventories 84,000 56,000
Total current assets $161,259 $127,240
Net fixed assets 218,400 200,000
Total assets $379,659 $327,240
Liabilities and equity
Accounts payable $33,600 $32,000
Accruals 12,600 12,000
Notes payable 19,929 6,480
Total current liabilities $66,129 $50,480
Long-term debt 67,662 58,320
Total liabilities $133,791 $108,800
Common stock 183,793 178,440
Retained Earnings 62,075 40,000
Total common equity $245,868 $218,440
Total liabilities and equity $379,659 $327,240
Joshua & White Technologies December 31 Income Statements
(Thousands of Dollars)
2010 2009
Sales $420,000 $400,000
Expenses excluding depr. and amort. 327,600 320,000
EBITDA $92,400 $80,000
Depreciation and Amortization 19,660 18,000
EBIT $72,740 $62,000
Interest Expense 5,740 4,460
EBT $67,000 $57,540
Taxes (40%) 26,800 23,016
Net Income $40,200 $34,524
Common dividends $18,125 $17,262
Addition to retained earnings $22,075 $17,262
Other Data 2010 2009
Year-end Stock Price $90.00 $96.00
# of shares (Thousands) 4,052 4,000
Lease payment (Thousands of Dollars) $20,000 $20,000
Sinking fund payment (Thousands of Dollars) $0 $0
Ratio Analysis 2010 2009 Industry Avg
Liquidity Ratios
Current Ratio 2.38 2.52 2.58
Quick Ratio 1.17 1.41 1.53
Asset Management Ratios
Inventory Turnover 1.11 1.22 7.69
Days Sales Outstanding 45.63 43.80 47.45
Fixed Assets Turnover 1.92 2.00 2.04
Total Assets Turnover 3.81 5.64 1.23
Debt Management Ratios
Debt Ratio 32.1%
Times-interest-earned ratio 15.33
EBITDA coverage ratio 4.18
Profitability Ratios
Profit Margin 9.57% 8.63% 8.86%
Basic Earning Power 19.16% 18.95% 19.48%
Return on Assets 10.59% 10.55% 10.93%
Return on Equity 21.87% 19.35% 16.10%
Market Value Ratios
Earnings per share NA
Price-to-earnings ratio 10.65
Cash flow per share NA
Price-to-cash flow ratio 7.11
Book Value per share NA
Market-to-book ratio 1.72
a. Has Joshua & White's liquidity position improved or worsened? Explain.
The position of JW has worsend because there ration has fallen from 1.41 to 1.17
b. Has Joshua & White's ability to manage its assets improved or worsened? Explain.
c. How has Joshua & White's profitability changed during the last year?
d. Perform an extended Du Pont analysis for Joshua & White for 2008 and 2009.
ROE = PM x TA Turnover x Equity Multiplier
2010
2009
e. Perform a common size analysis. What has happened to the composition
(that is, percentage in each category) of assets and liabilities?
Common Size Balance Sheets
Assets 2010 2009
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Net fixed assets
Total assets
Liabilities and equity 2010 2009
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity
Total liabilities and equity
Common Size Income Statements 2010 2009
Sales
Expenses excluding depr. and amort.
EBITDA
Depreciation and Amortization
EBIT
Interest Expense
EBT
Taxes (40%)
Net Income
f. Perform a percent change analysis. What does this tell you about the change in profitability
and asset utilization?
Percent Change Balance Sheets Base
Assets 2010 2009
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Net fixed assets
Total assets
Base
Liabilities and equity 2010 2009
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity
Total liabilities and equity
Base
Percent Change Income Statements 2010 2009
Sales
Expenses excluding depr. and amort.
EBITDA
Depreciation and Amortization
EBIT
Interest Expense
EBT
Taxes (40%)
Net Income