MFIN1021 Lecture Notes - Lecture 2: Human Capital, Option Contract, Profit Margin

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viridiancamel50

23 Jan 2018

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= market value of equity - book value of equity. Market value of equity = shares * price. If market value is higher than book value has been created. How much wealth has been generated from shareholders initial investments. = market value of equity / book value of equity. Value stock: low market to book ratio. What kind of financial ratios help analyze investment and financing decisions. Shareholder value is based on good investment and financing decisions. No correct value for any of the ratios. How much of sales become expensive vs. how much become profit. = total revenue - costs - depreciation. Current assets/ liquid assets: can quickly be turned into cash. Net working capital = current assets - current liabilities. Fixed assets: stay longer - real estate. Book value vs. market value of assets. Book value: based on what you paid for the assets. Must be shown on balance sheet and adjusted for depreciation.

Related Questions

What is the market price of a share of stock for a firm that pays dividends of $1.20 per share, has a P/E of 14, and a dividend payout ratio of 0.4?

The Market Value Added (MVA) is the ____.

indicator of how successful a firm has been at increasing its financing its assets
return on total capital minus cost of capital
indication of an increase in operating efficiency
positively related to the present value of all expected future EVA.

For our purpose, Shareholders' Value Maximization will be the preferred goal for all of the following reasons EXCEPT:

The shareholders' value maximization goal deals with accounting profit, while the profit maximization goal attempts to make cash available to meet financial needs.
Shareholders' value maximization is a long-run goal and the public image of the corporation may be of deep concern to shareholders including the wealth effect
The effects of all financial decisions are reflected in the price of the stock being traded in efficient markets
The complexities and uncertainties in the external environment are all absorbed in the value of the stock.

salmoncicada724

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

redyak732

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

redyak732

MFIN1021 Lecture Notes - Lecture 2: Human Capital, Option Contract, Profit Margin

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