fe323 final
Accounts Payable days
(Accounts Payable / COGS) x 365 the higher the number the better
Accounts Receivable days
(Accounts Receivable/Sales) x 365 the lower the number the better
what to not include in incremental costs
-exclude sunk costs -exclude administrative costs -exclude debt
getting accounts payable amount of money (in $$ not days) from channels (volume sales x days) independent stores 10% of sales - 30 days term best buy 30% of sales - 45 day terms walmart 60% of sales - 50 days terms
-independent stores = 30 x 0.10 = 3 days -best buy = 45 x 0.30 = 13.5 days -walmart = 50 x 0.60 = 30 total = 46.5 accounts payable days COGS = 2,756 = (46.5/365) x 2,756 = $351 in accounts recieveable
getting accounts recievable amount of money from channels (volume sales x days) independent stores 10% of sales - 30 days term best buy 30% of sales - 45 day terms walmart 60% of sales - 50 days terms
-independent stores = 30 x 0.10 = 3 days -best buy = 45 x 0.30 = 13.50 -walmart = 50 x 0.60 = 30 total = 46.5 sales = 2,756 = (46.5/365) 2,756 = $351 in accounts recieveable
what includes debt in calculating the enterprise value?
-long term bonds -notes payable -bank notes -long-term debt
When assets are greater than liability + equity
-u need to externally fund
Comparable Companies multiples method
-used for private companies -
1. what is the NPV of the cashflows w 12% i/r year 1- 100 year 2-150 year 3-180 year 4-100 year 5- 90 2. what is the IRR return of cfj in question 1 if u paid 500 in time 0?
1. cfj 0, 100, 150, 180, 100, 90 i/r 12% =451.6 2. cfj -500, 100, 150, 180, 100, 90 irr -> 7.91%
What is the IRR and NPV of the following problem Sales are $2.1 Billion per year for 4 years. Initial investment in equipment is $1.1 Billion (straight line depreciation over 4 years). The equipment can be sold for $200 million at the end (pretax). Initial investment in net working capital is $75 million. There is an additional investment in net working capital of $50 million at the end of the first year. $20 million in net working capital is liquidated at the end of the third year. Costs excluding depreciation are $1.7 Billion per year. Tax rate is 40%. The Discount Rate is 10%.
2,100 (amount in millions) -1,100 -275 -------- EBIT: 125 Tax: (125*40) -50 --------- earning after tax: 75 +depreciation: 275 ---------------- OCF: 350 FCF calculation (in millions) year 0: -1100 - 75
expected profit is 23,187.50. dividend payout ratio is 30%. how much r they giving out in dividends? what is the increase in retained earnings?
23,187.50 * 0.30= 6,956 increase in retained earnings = expected profit - dividends given out 23,187.50 - 6,956.25 = 16,231
3. What is the change in net working capital to be used in a capital budgeting problem (as in inflow or outflow) year 1 inventory - 100 year 1 A/R - 80 year 1 A/P - 60 NWC Balance year 1: 100 + 80 - 60 = 120 year 2 inventory - 120 year 2 A/R - 90 Year 2 A/P - 65 NWC balance year 2: 120 + 90 - 65 = 145 change in NWC = balance of year before - balance current year year 1 = 0-120 = (120) year 2 = 120 - 145 = (25) <---- answer
25,000
Your company had $10 million in sales last year. Its cost of goods sold was $7 million and its average inventory balance was $1,200,000. What was its average days inventory?
= inventory/cogs x 365 1,200,000/7,000,000 x 365 = 62.6 days
Which of the following is a project cash inflow? Ignore tax effects A. Decrease in accounts receivable B. Decrease in accounts payable C. Increase in inventory
A. Decrease in accounts receivable
What is the cash flow impact of depreciation?
A. It reduces taxes by Depreciation x tax rate
The BU Store is considering a project that will require additional inventory of $216,000 and will increase accounts payable by $181,000. Accounts receivable are currently $525,000 and are expected to increase by 9%. What is the project's initial cash flow for net working capital?
Additional inventory: - $216,000 - Increase in accounts payable: - $181,000 - Increase in accounts receivable: $ 47,250 Project's initial cash flow: -216,000 - (- 181,000) - 47,250 = - $ 82,250
Maggie's Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $302,000. Today that lot has a market value of $340,000. At the time of the purchase, the company spent $15,000 to level the lot and another $20,000 to install storm drains. The company now wants to build a new facility on that site. The facility cost will be $1.51 million. What amount should be used as the initial cash flow for this project?
Amount to be used as the initial cash flow for this project: CF0 = Market value of lot - Cost of building CF0 = -$340,000 (opportunity cost)- $1,510,000 (cost if u went forward w the project) = -$1,850,000
Balance Sheet
Asset: gross fixed assets - accumulated depreciation -------------------- = net fixed assets + accounts recievable + inventories --------------------- = total assets --------------------- + accounts payable - debt (0) ---------------------- = total liabilities + paid in capital + retained earnings ------------------------ + total shareholder equity ------------------------ total liabilities + SH equity --------------------------- difference (Assets - (L+E))
The stand-alone principle advocates that project analysis should be based solely on which of the following costs? A. Fixed B. Incremental C. Variable
B. Incremental
Your firm's CFO presents you with two capital budgeting analyses: one for a new microcomputer for the Payroll department and one for a 3-ton metal stamping press for use on the plant floor. This is an example of a decision involving: A. Mutually exclusive projects. B. Independent projects. C. Payback projects. D. Dependent projects. E. None of the above.
B. Independent projects.
A company's net profit margin increased compared to a previous year. What is NOT a possible reason for this? A. The company's gross margin improved B. The company's cost of goods sold increased C. The company's operating income margin improved D. The company's interest expense as percent of sales decreased
B. The company's cost of goods sold increased
When computing the net present value of a project, the net amount received from salvaging the fixed assets used in the project is: A. subtracted from the initial cash outlay. B. included in the final cash flow of the project. C. excluded from the analysis since it occurs only when the project ends. D. subtracted from the original cost of the assets.
B. included in the final cash flow of the project.
Which of the following should NOT be included in a NPV calculation? A. depreciation expense B. interest expense C. increase in accounts receivable D. changes in fixed costs
B. interest expense
Three years ago, company LMN purchased a machine for a 3-year project. The machine is being depreciated straight-line to zero over a 5-year period. Today, the project ended, and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate) A. Sale price + (Sale price-book value) x T B. Sale price + (Sale price - book value) x (1-T) C. Sale price + (book value-sale price) x T
C. Sale price + (book value-sale price) x T
An increase in which of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used. I. annual salary for the firm's president II. contribution margin per unit III. cost of equipment required by a project IV. variable cost per unit A. I and III only B. I and IV only C. II and III only D. I, III, and IV only E. I, II, and IV only
D. I, III, and IV only
Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement? A. capital break-even B. cash break-even C. accounting break-even D. NPV break-even E. internal break-even
D. NPV break-even
A firm's external financing need is financed by which of the following? A. retained earnings B. net working capital and retained earnings C. net income and retained earnings D. debt or equity E. owners' equity, including retained earnings
D. debt or equity
Decreasing which one of the following will increase the acceptability of a project? A. sunk costs B. salvage value C. depreciation tax shield D. inventory
D. inventory
Generous Beach has 38,000 shares outstanding and the stock is selling for $20 per share. The company has earnings of $30,400 and dividends of $10,000. What is the company's price earnings ratio?
EPS = 30,400//38,000 = 0.80/share P/E = price per share/eps =20/0.80 = 25x
Revenue multiple
EV/Revenue of comparable company then multiply the multiple by your company's revenue
EBITDA
Earnings before interest, taxes, depreciation, and amortization Ebit + Depreciation
EBITDA Multiple
Enterprise Value / EBITDA then multiply Multiple by your company's ebitda to get your enterprise value to get equity value, subtract debt from EV
Your company has EBITDA of $10 million. You are trying to determine your company's enterprise value based on comparables. You have 8 million shares outstanding. The next closest comparable has EBITDA of $100 million. It has 40 million shares outstanding. The comparable company has an Enterprise Value of $700 million. What is your best estimate of your company's Equity Value per share. Neither company has any debt or excess cash.
Enterprise Value of comparable company = $ 700 M EBITDA of comparable = $ 100 M EV/ EBITDA ratio of comparable = 700 / 100 = 7 times EBITDA of your company = $ 10 M EV of your company = (EV / EBITDA) * EBITDA = 7 * 10 = $ 70 M MV of your company = EV - Debt + Cash = $ 70 M Number of shares outstanding = 8 M Equity Value per share = MV of Equity / Number of shares o/s = 70 / 8 = $ 8.75
the expected sales for next year is $437,500. the profit margin is 5.3%. what is expected profit for next year?
Expected Profit = Sales*Profit Margin = 437500*5.3% = 23,187.50
capital expenditures
Expenditures on equipment the business will use for many years. will depreciate after year 1
Gross Margin Ratio
Gross margin (revenue- cost of goods sold) divided by revenue also called gross profit ratio. gross margin/revenue
margin of safety
How much output or sales level can fall before a business reaches its breakeven point. MOS % =units sold-breakeven/break even x 100 MOS = sales - breakeven
Monica is analyzing a project that currently has a projected NPV of zero. Which of the following changes that she is considering will help that project produce a positive NPV instead? Consider each change independently. I. increase the quantity sold II. decrease the investment in equipment III. decrease the labor hours needed to produce one unit IV. increase the sales price
I. increase the quantity sold II. decrease the investment in equipment III. decrease the labor hours needed to produce one unit IV. increase the sales price
Inventory Days
Inventory/COGS X 365 the lower the number the better
Enterprise Value
Market Value of Equity + Debt - Cash
Net Margin
Net Income/Sales
return on assets
Net Income/Total Assets
return on equity
Net Income/Total Equity
Return on Equity (ROE)
Net Income/Total Equity how much income was generated for each dollar invested in the company
Return on Assets (ROA)
Net income / Average total assets. Measures how profitably a company uses its assets.
new retained earnings
Old Retained Earnings + Net Income - Dividends
Cash Cycle
Operating Cycle - Accounts Payable Period
gross fixed assets (CAPEX)
Original cost of depreciable assets before any depreciation expense has been taken to find it for the next year forecast, u add previous year gross fixed asset to the next year and get total
Growing perpuity - terminal value
PVTV= c/r-g
perputity method - terminal value
PVtv= c/r
A Core Project Product sells for $175 each. The variable cost to produce it is $54. If their Fixed costs are $235,000 and have an additional $32,000 in Depreciation, what is their EBIT breakeven Revenues, rounded up (in dollars)?
Q(p-vc)=fixed costs + Depreciation Q(175-54)=235,000 + 32,000 121Q=267,000 Q= 2,206 UNITS 2,206 x 175 =386,157
Company XYZ is evaluating a project that will increase annual sales by $138,000 and annual costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the 4-year life of the project. The applicable tax rate is 32%. What is the Free Cash Flow for this project in year 1?
Sales $ 138,000 - Costs (94,000) -Depreciation (27,500) --------------------------- EBIT 16,500 - Taxes (5,280) (EBIT*0.32 tax rate) --------------------------- Net Income $ 11,220 +Deprec. 27,500 ----------------------------- NCF 38,720
The Cookie Shoppe expects sales of $437,500 next year. The profit margin is 4.8 percent and the firm has a 30 percent dividend payout ratio. What is the projected increase in retained earnings?
Sales = 437500 Expected Profit = Sales*Profit Margin = 437500*4.8% =21,000 Less Dividends = Expected Profit*Dividend Payout Ratio = 23187.50*0.30 = 69,56.25 Projected Increase in Retained Earnings = Expected Profit - Dividends = =21,000 - 69,56.25 = 14,700 Income after dividend payment is transferred to retained earnings and hence it will increase by that amount.
Shelly's Boutique is evaluating a project which will increase annual sales by $70,000 and annual costs by $40,000. The project will initially require $100,000 in fixed assets which will be depreciated straight-line to a zero book value over the 5-year life of the project. The applicable tax rate is 34 percent. What is the free cash flow for this project?
Sales: 70,000 COGS: -40,000 Depreciation: -20,000 --------- EBIT: 10,000 Tax: -3400 ------------ Net income: 6600 +addback depreciation: 20,000 --------------------- fcf: 26,600
Portage Bay Enterprises has $1Million in Excess Cash, no debt, and is expected to have a $6 million Free Cash flow next year. In year 2 it expects its free cash flow will be $10 million and thereafter is then expected to grow at a rate of 3% forever. If Portage Bay's equity cost of capital is 11% and it has 5 million shares outstanding what is the Price per share of Portage Bay stock?
TV = Last FCF * (1+g)/(r-g) = 10 * (1.03) / (0.08) = 128.75 then add that to most recent fcf (10) to get 138.75 then do cfj 0, 6, 138.75 i/r 11% ---> 118.02 (ENTERPRISE VALUE) to get equity u do enterprise value - debt + cash no debt so enterprise value + cash = 118.02 + 1 = 119.02 equity price per share = equity/shares outstanding =119.02/5 = 23.80/share
1. how to calculate the Terminal value and find the pv of the perputity of a DCF
TV = fcf yr 5 x (1+ growth rate) / discount - growth then add TV to FCF year 5 and use cfj to find npv of cash flows and IRR = ENTERPRISE VALUE
Sensitivity Analysis
a special case of what-if analysis, is the study of the impact on other variables when one variable is changed repeatedly
Seaside Cycle has accounts payable days of 80, inventory days of 50 and accounts receivable days of 30. What is its cash conversion cycle?
cash conversion cycle = inventory + AR days - ap days 50 + 30 - 80 0 days
when AP goes up
cash inflow goes up
when cash AR goes up
cash outflow goes up
when inventory goes up
cash outflow goes up
Company RCN is analyzing a proposed project. The company expects to sell 2,100 units, give or take 5 percent. The expected variable cost per unit is $260 and the expected fixed costs are $589,000. Cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $129,000. The sales price is estimated at $750 per unit, give or take 2 percent. What is the contribution margin per unit under the best-case scenario?
contribution margin per unit = selling price - variable cost Best case selling price: 750 * 1.02 = 765 best case variable cost: 260 * 0.96 = 249.60 =765-249.60 =515.40
what do we include incremental costs
costs that would be associated w moving forward w a project -opportunity costs -canniablization
working capital balance
current assets - current liabilities
increase in nwc
decrease in cash
depreciation shield
depreciation * tax rate
equity value
enterprise value - debt
bottoms up forecasting
fundamental, primary research driven diffucult for outside investors to use
decrease in nwc
increase in cash
NPV break-even point
level of sales at which project NPV becomes positive
Price per share
market cap/# of shares or equity value/# of shares=
enterprise value if there isnt debt
market value of equity + cash
Statement of Cash Flows
net income + depreciation -cash impact of change in NWC - capex -------------------- = free cash flow investment needed: free cash flow ^
incremental earnings
net income after tax
Profit Margin Ratio
net income/net sales
when Liabilites (total debt + accounts payable) + Equity is LESS than assets
new financing is needed (shortfall) -reduce dividends -borrow (external fund) -issue new equity
NWC cash flows
nwc balance of year before - nwc balance of current year say year 1 nwc balance is 67,200 nwc cashflow would be 0-67,200 = -67,200
net profit margin
operating income - (1 - tax rate) net income/net sales
Operating Margin
operating income/sales
Market Capitalization
price per share x # of shares
Working Capital cash flows
raw materials, finished products ar + inventory - payable
Simple Cash Flow Statement
revenue -cogs ---------- (gross margin) -SG&A -depreciation -tax -------------- =net profit + addback depreciation -------------- =operating cash flow -capex -change in net working capital ---------------- =free cash flow
Operating Margin Ratio
revenue-cogs (gross profit) - SG&A / revenue
when liabilities (total debt + accounts payable) + Equity is MORE than assets
surplus in cash available -retain it as extra cash (increase assets) -pay more dividends -repay debt -repurchase shares
salvage value
the estimated value of a fixed asset at the end of its useful life (will be included within cash flows).
terminal value
the future value of a cash flow stream, not real cash flow
ebit breakeven
the level of sales for which a project's EBIT is 0 Q(p-vc)=fixed costs + Depreciation
cash breakeven
the sales level that results in a zero operating cash flow Q(p-vc)= fixed costs
Accumulated Depreciation
the total amount of depreciation expense that has been recorded since the purchase of a plant asset (starts in yr 1) prior year value + depreciation expense
when u sell an equipment for less than its book value (after its been fully depreciated)
then u get a tax gain gain on tax = book value *(1-tax rate) =selling price + tax gain
when u sell an equipment for more than its book value (after its been fully depreciated)
then u have to pay tax on it tax u have to pay = book value * (1-tax rate) selling price - tax u have to pay
find enterprise value -equity value = 500 mill -long term debt = 200 mill -notes payable = 50 mill -accounts payable = 75 mill -accounts recievable = 100 mill cash = 30 million
total debt = long term debt + notes payable = 200 + 50 = 250 mil - cash (30 mil) = 220 mill equity + net debt = 720 million AP and AR are trade credit, not debt
P/E multiple
total equity/net income of comparable company then multiply the multiple by your company net income to get equity value of your company
I sell $2,550,000 of product through retailers and $1,350,000 on the internet. If my retailers pay me in 30 days and my online sales take an average of 5 days to collect, what is my total accounts Receivable?
total sales = 2,550,000 + 1,350,000 = 3,900,000 volume of retail sales = 2,500,000/3,900,000 x 100 = 0.65 volume of online sales = 1,350,000/3,900,000 x 100 = 0.35 average retail ar days sales = 30 x 0.65 = 19.5 average online ar days sales = 5 x 0.35 = 1.75 ar days = 21 21/365 * 3,900,000 = 224,383
Scenario Analysis
typically base, best, worst
when forecasting, how do u find next year's tax if they dont give u a tax rate?
u divide current year taxes/ebit (earnings before taxes) x 100 then do next years ebit by whatever that answer was ^
top-down approach forecasting
use high-level indicators such as growth rates or margins to forecast
breakeven
what is the lowest certain variable go before we are no longer NPV positive
