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Statement of Cash Flows Financial Planning Professor André Farber
Sources of Cash Inflow and Cash Outflow Operating Activities Sales of goods and services Investing Activities Sale of fixe...
Statement of Cash Flows <ul><li>Cash Flow from Operating Activities </li></ul><ul><li>+ </li></ul><ul><li>Cash Flow from I...
Summarized (managerial) balance sheet   Assets Fixed assets (FA) Working capital requirement (WCR) Cash (Cash) Liabilities...
Notations <ul><li>Income statement </li></ul><ul><li>REV Revenue </li></ul><ul><li>CGS Cost of goods sold </li></ul><ul><l...
Income statement and balance sheet <ul><li>Income statement </li></ul><ul><ul><ul><li>EBIT = REV - CGS - SGA - Dep </li></...
Cash flow statement : indirect method <ul><ul><ul><li> FA +   WCR +   CASH =   SE +   D  </li></ul></ul></ul><ul><ul>...
Statement of cash flows: direct method <ul><li>+ Cash collection from customers </li></ul><ul><li>- Cash payment to suppli...
Free Cash Flow <ul><li>Free Cash Flow =  Cash flow from operating activities </li></ul><ul><li>+ Cash flow from investing ...
Financial Forecasting EBITDA -Depreciation =EBIT -Taxes +Net Income Income Statement Statement of Cash Flows CF from opera...
Financial Planning <ul><li>Based on  ∆Revenues </li></ul><ul><li>Assumptions on key ratios relating   Revenues to: </li><...
Data <ul><li>Revenues year 0: 2,000 </li></ul><ul><li>Growth rate year 1: 25% </li></ul><ul><li>Balance sheet end year 0 <...
Step 1: Income statement 390 Net Income 260 Taxes i × D -1 40 Interests 690 EBIT d  × NFA -1 60 Depreciation m  ×  Rev 750...
Step 2: Statement of Cash Flows 0 ∆ Cash -140 CF from financing Plug 55 ∆ Debt Assumption 0 Stock Issues/buy back p  × Net...
Step 3: Update balance sheet 1,250 1,000 1,250 1,000 D -1  +    D 455 400 Debt BEq -1 +SI + NI – DIV 795 600 Book Equity ...
The Full Model
Sustainable growth <ul><li>What growth rate can a company achieve without requirement additional external equity? </li></u...
Sustainable Growth: example <ul><li>Back to previous example: </li></ul><ul><ul><li>a+w  = 0.30 </li></ul></ul><ul><ul><li...
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Financial planning

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Transcript of "Financial planning"

  1. 1. Statement of Cash Flows Financial Planning Professor André Farber
  2. 2. Sources of Cash Inflow and Cash Outflow Operating Activities Sales of goods and services Investing Activities Sale of fixed assets Sales of LT financial assets Financing Activities Issuance of stocks and bonds LT and ST borrowing Operating Activities Purchase of supplies Selling, general and administrative expenses Tax expenses Investing Activities Capital expenditures and acquisitions LT financial investments Financing Activities Repurchage of stocks and bonds Repayment of debt Dividend payment CASH CF from operating activities CF from investing activities CF from financing activities
  3. 3. Statement of Cash Flows <ul><li>Cash Flow from Operating Activities </li></ul><ul><li>+ </li></ul><ul><li>Cash Flow from Investing Activities </li></ul><ul><li>= </li></ul><ul><li>Free Cash Flow </li></ul><ul><li>+ </li></ul><ul><li>Cash Flow from Financing Activities </li></ul><ul><li>= </li></ul><ul><li>Change in Cash </li></ul>
  4. 4. Summarized (managerial) balance sheet Assets Fixed assets (FA) Working capital requirement (WCR) Cash (Cash) Liabilities Stockholders' equity (SE) Interest-bearing debt (D) FA + WCR + Cash = SE + D Working capital requirement : definition + Accounts receivable + Inventories + Prepaid expenses - Account payable - Accrued payroll and other expenses Interest-bearing debt: definition + Long-term debt + Current maturities of long term debt + Notes payable to banks
  5. 5. Notations <ul><li>Income statement </li></ul><ul><li>REV Revenue </li></ul><ul><li>CGS Cost of goods sold </li></ul><ul><li>SGA Selling, general and administrative expenses </li></ul><ul><li>Dep Depreciation </li></ul><ul><li>EBIT Earnings before interest and taxes </li></ul><ul><li>Int Interest expenses </li></ul><ul><li>TAX Taxes </li></ul><ul><li>T c Tax rate </li></ul><ul><li>NI Net income </li></ul><ul><li>Balance sheet </li></ul><ul><li>FA Fixed assets, net </li></ul><ul><li>AR Accounts receivable </li></ul><ul><li>INV Inventories </li></ul><ul><li>CASH Cash & cash equivalents </li></ul><ul><li>SE Equity capital </li></ul><ul><li>LTD Long term debt </li></ul><ul><li>AP Accounts payable </li></ul><ul><li>STD Short-term borrowing </li></ul><ul><li>Statement of retained income </li></ul><ul><li>DIV Dividendes </li></ul>
  6. 6. Income statement and balance sheet <ul><li>Income statement </li></ul><ul><ul><ul><li>EBIT = REV - CGS - SGA - Dep </li></ul></ul></ul><ul><ul><ul><li>TAX = T c (EBIT - Int) </li></ul></ul></ul><ul><ul><ul><li>NI = EBIT - Int - TAX </li></ul></ul></ul><ul><li>Balance sheet equation </li></ul><ul><ul><ul><li>FA + AR + INV + CASH = SE + LTD + AP + STD </li></ul></ul></ul><ul><ul><li>Working capital requirement: WCR  AR + INV - AP </li></ul></ul><ul><ul><li>=(Current assets - CASH) - (Current liabilities - STD) </li></ul></ul><ul><ul><li>Summarised balance sheet: </li></ul></ul><ul><ul><ul><li>FA + WCR + CASH = SE + D (D = LTD + STD) </li></ul></ul></ul>
  7. 7. Cash flow statement : indirect method <ul><ul><ul><li> FA +  WCR +  CASH =  SE +  D </li></ul></ul></ul><ul><ul><ul><ul><li> FA = AQ - Dep </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>AQ = Acquisitions - Disposals (investing & divesting) </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li> SE = NI - DIV +  K </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li> K = New issuance of capital </li></ul></ul></ul></ul></ul><ul><li>(NI + Dep -  WCR) - (AQ) + (  K +  D -DIV) =  CASH </li></ul>Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities + + =
  8. 8. Statement of cash flows: direct method <ul><li>+ Cash collection from customers </li></ul><ul><li>- Cash payment to suppliers and employees </li></ul><ul><li>- Cash paid for interest </li></ul><ul><li>- Cash paid for taxes </li></ul><ul><li>= Cash flow from operating activities </li></ul><ul><li>+ Cash flow from investing activities </li></ul><ul><li>+ Cash flow from financing activity </li></ul><ul><li>=  CASH </li></ul><ul><li>REV -  AR </li></ul><ul><li>CGS +  INV + SGA -  AP </li></ul><ul><li>Int </li></ul><ul><li>TAX </li></ul><ul><li>(REV-CGS-SGA-Int-TAX)-  WCR </li></ul><ul><li>-AQ </li></ul><ul><li> K +  D - DIV </li></ul>NI+Dep-  WCR (NI + Dep -  WCR) + (-AQ) + (  K +  D - DIV) =  CASH
  9. 9. Free Cash Flow <ul><li>Free Cash Flow = Cash flow from operating activities </li></ul><ul><li>+ Cash flow from investing activities </li></ul><ul><li>Calculating free cash flows of all equity firm: </li></ul><ul><ul><ul><ul><li>Free Cash Flow = EBIT(1-T C ) + Dep -  WCR - AQ </li></ul></ul></ul></ul><ul><li>Statement of cash flows for all-equity firm: </li></ul><ul><ul><ul><ul><li>Free Cash Flow = DIV -  K +  Cash </li></ul></ul></ul></ul>
  10. 10. Financial Forecasting EBITDA -Depreciation =EBIT -Taxes +Net Income Income Statement Statement of Cash Flows CF from operating activities Update Balance Sheet CF from investing activities CF from financing activities
  11. 11. Financial Planning <ul><li>Based on ∆Revenues </li></ul><ul><li>Assumptions on key ratios relating  Revenues to: </li></ul><ul><ul><ul><li>Gross margin: m = EBITDA /Revenues </li></ul></ul></ul><ul><ul><ul><li>Working capital requirement: w =  WCR /  Revenues </li></ul></ul></ul><ul><ul><ul><li>Net fixed assets: a =  NFA /  Revenues </li></ul></ul></ul><ul><li>Financial policy: </li></ul><ul><ul><ul><li>Payout ratio p = DIV/Net Income </li></ul></ul></ul><ul><ul><ul><li>Depreciation d = Depreciation / Fixed Assets -1 </li></ul></ul></ul><ul><li>Environment: </li></ul><ul><ul><ul><li>Tax rate T C </li></ul></ul></ul><ul><ul><ul><li>Cost of debt i </li></ul></ul></ul>
  12. 12. Data <ul><li>Revenues year 0: 2,000 </li></ul><ul><li>Growth rate year 1: 25% </li></ul><ul><li>Balance sheet end year 0 </li></ul>Gross margin: m = 30% WCR: w = 20% Net fixed assets: a = 30% Payout ratio p = 50% Depreciation d = 10% Tax rate T C = 40% Cost of debt i = 10% 1,000 Total Liabilities + Stockholders’ equity 400 Debt (financial) 600 Book Equity 1,000 Total Assets 0 Cash 400 Working Capital Requirement 600 Net Fixed Assets
  13. 13. Step 1: Income statement 390 Net Income 260 Taxes i × D -1 40 Interests 690 EBIT d × NFA -1 60 Depreciation m × Rev 750 EBITDA Rev -1 (1+ g ) 2,500 2,000 Sales Year 1 Year 0
  14. 14. Step 2: Statement of Cash Flows 0 ∆ Cash -140 CF from financing Plug 55 ∆ Debt Assumption 0 Stock Issues/buy back p × Net Income 195 Div -210 CF from investing 60 Depreciation a ×  Revenues 150 ∆ NFA 350 CF from operations w ×  Revenues 100 ∆ WCR From Income Stat. 60 Depreciation From Income Stat. 390 Net Income Year 1 Year 0
  15. 15. Step 3: Update balance sheet 1,250 1,000 1,250 1,000 D -1 +  D 455 400 Debt BEq -1 +SI + NI – DIV 795 600 Book Equity Cash -1 +  Cash 0 0 Cash WCR -1 +  WCR 500 400 Working Capital NFA -1 + Inv – Dep 750 600 Net Fixed Assets Year 1 Year 0
  16. 16. The Full Model
  17. 17. Sustainable growth <ul><li>What growth rate can a company achieve without requirement additional external equity? </li></ul><ul><li> Assets = ( a+w )  Revenues </li></ul><ul><li> Assets =  Book Equity +  Debt </li></ul><ul><li>=  Book Equity +   Book Equity </li></ul><ul><li>= Net Income (1 – Payout)(1 +  ) </li></ul><ul><li>= (Revenues) (Profit Margin)(1-Payout)(1+  ) </li></ul><ul><li>g =  Revenues / Revenues </li></ul><ul><li>= (Profit Margin)(1 – Payout)(1+  ) / ( a+w ) </li></ul>
  18. 18. Sustainable Growth: example <ul><li>Back to previous example: </li></ul><ul><ul><li>a+w = 0.30 </li></ul></ul><ul><ul><li>Net Profit margin = 15% </li></ul></ul><ul><ul><li>Payout ratio = 50% </li></ul></ul><ul><ul><li> =  Debt /  Book Equity = 2/3 </li></ul></ul><ul><ul><li>g = [15% (1 - 0.50) (1+2/3) ] / 0.30 = 41.67% </li></ul></ul>
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