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Financial Planning & Capital Investment Evaluation

Financial Planning & Capital Investment Evaluation

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Financial planning & capital investment evaluation Financial planning & capital investment evaluation Presentation Transcript

  • PICPA 2nd General Membership Meeting & Capital Investment Evaluation 23rd February 2012, Thursday, 5:00PM – 10:00PM 1
  • Agenda o Hierarchy of Planning o Strategic Planning o Financial Goal o Financial Planning o Capital Budgeting o Investment Decisions o Financing Decisions o Evaluation Techniques
  • Plan a Destination 3
  • Mission Strategic Planning Goals Long-Range Planning (Capital Investment) Objectives Operational Planning (Income Statement) Output: Mission Statement Basic Question. What business are we in? Output: The Five-Year Plan Basic Question. What are the major components of our business? Output: Budget & Forecast Basic Question. What specific tasks must be done to achieve the results stated in the long-range plan? 4
  • Mission Strategic Planning Goals Long-Range Planning (Capital Investment) Objectives Operational Planning (Income Statement) Output: Mission Statement Basic Question. What business are we in? Output: The Five-Year Plan Basic Question. What are the major components of our business? Output: Budget & Forecast Basic Question. What specific tasks must be done to achieve the results stated in the long-range plan? 5
  • Determine the current financial position Periodic review and revise the financial plan Identify and set financial goal Financial Planning Process Create & Implement a financial action plan Identify suitable investment avenues Evaluate alternative & strategize 7
  • Determine the current financial position Periodic review and revise the financial plan Identify and set financial goal Financial Planning Process Create & Implement a financial action plan Identify suitable investment avenues Evaluate alternative & strategize 8
  • Financial Goal of the Corporation The primary financial goal is shareholder wealth maximization, which translates to maximizing stock price. Current stock price relies upon current earnings, as well as future earnings and cash flow.
  • Factors that affect stock price • Projected cash flows to shareholders • Timing of the cash flow stream • Riskiness of the cash flows
  • Basic Valuation Model CF1 CF2 CFn Value     1 2 (1  k) (1  k) (1  k) n n CFt  . t t 1 (1  k)  To estimate an total enterprise value (asset’s value), one estimates the cash flow for each period t (CFt), the life of the asset (n), and the appropriate discount rate (k)
  • Net Present Value Future Value PV = ----------------(1 + i)n Where i = interest rate n = number of years  The PV of Php1 @ 10% in 1 years time is 0.9090  If you invested 0.9090 centavos today and the interest rate was 10% you would have Php1 in a year’s time  Process referred to as: ‘Discounting Cash Flow’
  • Factors that Affect the Level and Riskiness of Cash Flows • Decisions made by financial managers: 1. Investment decisions 2. Financing decisions (the relative use of debt financing) 3. Dividend policy decisions
  • Capital Budgeting Within The Firm The Position of Capital Budgeting Financial Goal of the Firm: Wealth Maximisation Investment Decison Long Term Assets Short Term Assets Financing Decision Dividend Decision Debt/Equity Mix Dividend Payout Ratio Capital Budgeting 14
  • Principles of Corporate Finance 1. Invest in projects that yield a return greater than the minimum acceptable hurdle rate with adjustments for project riskiness. 2. Choose a financing mix that minimizes the hurdle rate. 3. If there are not enough investments that earn the hurdle rate, return the cash to stockholders. 4. These decision criteria will be consistent with the objective of the firm: Maximize the Value of the Firm
  • Strategic Financial Decisions 16
  • Strategic Planning 17
  • GAP Analysis Planning Diversification New market development gap New product development Improve current operations 18
  • Product Market Matrix Markets Present New Products Present New Momentum Market Development Product Development Diversification 19
  • SWOT Analysis Strong leadership Financial soundness Innovative product design Breakthrough technology Product development Strong market position Strengths 20
  • SWOT Analysis Internal Factors Strengths (S) Weaknesses (W) Opportunities (O) SO Strategies WO Strategies External opportunities goes here Strategies use strength that take advantage of the opportunities Strategies use opportunities by overcoming weaknesses Threats (T) ST Strategies WT Strategies External threats goes here Strategies use strength to avoid threats Strategies minimize weaknesses and avoid threats External Factors 21
  • Marketing Strategy Boston Consulting Group (BCG) • BCG Growth/Share Matrix – Analyzes business opportunities according to growth rate and market share (Build) (Hold) ? (Divest) (Harvest)
  • Marketing Strategy Market Positioning Market Targeting Market Segmentation 23
  • Marketing Mix Target Market 24
  • Mission Strategic Planning Goals Long-Range Planning (Capital Investment) Objectives Operational Planning (Income Statement) Output: Mission Statement Basic Question. What business are we in? Output: The Five-Year Plan Basic Question. What are the major components of our business? Output: Budget & Forecast Basic Question. What specific tasks must be done to achieve the results stated in the long-range plan? 25
  • P&L Plan (SR’000) 11A 12P 13P 14P 15P 16P 17P Sales 69.0 79.3 103.2 118.7 136.4 156.9 180.4 COGS 27.6 31.7 41.3 47.5 54.6 62.8 72.2 Gross Profit 41.4 47.6 61.9 71.2 81.8 94.1 108.2 SG&A Expense 13.8 15.9 20.6 23.7 27.3 31.4 36.1 Depreciation 0.5 0.5 20.5 20.5 20.5 20.5 20.5 Other Income 0.1 0.1 0.1 0.1 0.1 0.1 0.1 27.1 31.3 20.9 27.0 34.2 42.4 51.8 Interest Expense 0.0 14.0 11.2 8.4 5.6 2.8 0.0 Taxes 8.1 5.2 2.9 5.6 8.6 11.9 15.5 19.0 12.1 6.8 13.0 20.0 27.7 36.2 EBIT Net Profit 26
  • Balance Sheet Plan (SR’000) 11A 12P 13P 14P 15P 16P 17P Cash 54.6 79.0 72.5 70.8 76.8 90.4 112.7 Receivables 37.5 43.1 56.1 64.5 74.1 85.3 98.1 Inventories 2.8 3.2 4.1 4.7 5.5 6.3 7.2 Fixed Assets 5.0 205 205 205 205 205 205 Accum. Deprn. 0.5 1.0 21.5 42.0 62.5 83.0 103.5 Total Assets 99.3 329.3 316.2 303.0 298.8 304.0 319.5 Payables & Accruals 30.4 48.2 63.3 72.1 82.9 95.4 109.7 Bank Loans 35.0 175.0 140.0 105.0 70.0 35.0 0.0 Equity 34.0 106.1 112.9 125.9 145.9 173.6 209.9 Total Liab. & Equity 99.3 329.3 316.2 303.0 298.8 304.0 319.5 27
  • Cash Flow Statement Plan (SR’000) 11A Net Income 12P 13P 14P 15P 16P 17P 19.0 12.1 6.8 13.0 20.0 27.7 36.2 0.5 0.5 20.5 20.5 20.5 20.5 20.5 (9.9) 11.8 1.2 (0.2) 0.4 0.5 0.6 9.6 24.4 28.5 33.3 40.9 48.7 57.3 Investment (5.0) (200.0) 0.0 0.0 0.0 0.0 0.0 Financing 50.0 Net Cash Flow 54.6 24.4 (6.5) (1.7) 5.9 13.7 22.3 0.0 54.6 79.0 72.5 70.8 76.7 90.4 54.6 79.0 72.5 70.8 76.7 90.4 112.7 Non Cash Item Changes in WC Operating Cash Flow Cash at Beginning Cash at Ending 200.0 (35.0) (35.0) (35.0) (35.0) (35.0) 28
  • Intimidated by report that full of numbers? 29
  • Do you know how to deal with numbers? 30
  • Financial numbers? 31
  • Financial information? 32
  • Financial knowledge? 33
  • Financial intelligence? 34
  • Financial Information Income Statement (SR Thousand) Year Ended Dec. 31, 2012 EBIT = 39.5% Net Profit = 15.3% Sales 79,350 Cost of Goods Sold 31,740 Gross Profit 47,610 SG&A expense Gross Margin = 60.0% 15,870 Depreciation 500 Other income 100 EBIT 31,340 Interest expense 14,000 Taxes Net profit Financial Knowledge 5,202 12,138 Financial 35 Numbers
  • “I was very creative with my accounting, but not creative enough.” Finance is an Art 36
  • Financial Planning Art and science of managing money. What are your financial goals? Means different things to different people. 37
  • Financial Planning Art of managing the financial resources of a business. 38
  • Determine the current financial position Periodic review and revise the financial plan Identify and set financial goal Financial Planning Process Create & Implement a financial action plan Identify suitable investment opportunities Evaluate alternative & strategize 39
  • XYZ Restaurant 40
  • Key Assumptions • • • • • • • • • • • • • • • Population and Growth Rate Inflation Rate Exchange Rate Market Share Industry Growth Rate Company Growth Rate Segmented Projected Sales Segmented Sales Mix% Pricing and Costing Days Level Headcount Capital Expenditure Project and Time Dimensions Capital Structure (Financing Mix) WACC (Cost of Debt + Cost of Equity) 41
  • Financial Assumptions 11A A. Growth Rate 0% 12P 13P 14P 15P 16P 17P 15% 30% 15% 15% 15% 15% B. Sales (Meals) Segment A 80 92 120 138 158 182 209 Segment B 120 138 179 206 237 273 314 C. Sales Mix% Segment A 40% 40% 40% 40% 40% 40% 40% Segment B 60% 60% 60% 60% 60% 60% 60% 42
  • Financial Assumptions 11A 12P 13P 14P 15P 16P 17P Segment A 9 9 9 9 9 9 9 Segment B 14 14 14 14 14 14 14 D. Pricing (SR) E. Costing (% of Sales) F. 40% 40% 40% 40% 40% 40% 40% Days Level DSO 30 30 30 30 30 30 30 DIL 3 3 3 3 3 3 3 DPO 45 45 45 45 45 45 45 43
  • Financial Assumptions 11A G. CAPEX (SR‘000) I. 12P 13P 14P 15P 16P 17P 200 Capital Structure Debt Financing 70% Equity Financing 30% J. WACC 6.7% 44
  • P&L Plan (SR’000) 11A 12P 13P 14P 15P 16P 17P Sales 69.0 79.3 103.2 118.7 136.4 156.9 180.4 COGS 27.6 31.7 41.3 47.5 54.6 62.8 72.2 Gross Profit 41.4 47.6 61.9 71.2 81.8 94.1 108.2 SG&A Expense 13.8 15.9 20.6 23.7 27.3 31.4 36.1 Depreciation 0.5 0.5 20.5 20.5 20.5 20.5 20.5 Other Income 0.1 0.1 0.1 0.1 0.1 0.1 0.1 27.1 31.3 20.9 27.0 34.2 42.4 51.8 Interest Expense 0.0 14.0 11.2 8.4 5.6 2.8 0.0 Taxes 8.1 5.2 2.9 5.6 8.6 11.9 15.5 19.0 12.2 6.8 13.0 20.0 27.7 36.2 EBIT Net Profit 45
  • Balance Sheet Plan (SR’000) 11A 12P 13P 14P 15P 16P 17P Cash 54.6 79.0 72.5 70.8 76.8 90.4 112.7 Receivables 37.5 43.1 56.1 64.5 74.1 85.3 98.1 Inventories 2.8 3.2 4.1 4.7 5.5 6.3 7.2 Fixed Assets 5.0 205 205 205 205 205 205 Accum. Deprn. 0.5 1.0 21.5 42.0 62.5 83.0 103.5 Total Assets 99.3 329.3 316.2 303.0 298.8 304.0 319.5 Payables & Accruals 30.4 48.2 63.3 72.1 82.9 95.4 109.7 Bank Loans 35.0 175.0 140.0 105.0 70.0 35.0 0.0 Equity 34.0 106.1 112.9 125.9 145.9 173.6 209.9 Total Liab. & Equity 99.3 329.3 316.2 303.0 298.8 304.0 319.5 46
  • Cash Flow Statement Plan (SR’000) 11A Net Income 12P 13P 14P 15P 16P 17P 19.0 12.2 6.8 13.0 20.0 27.7 36.2 0.5 0.5 20.5 20.5 20.5 20.5 20.5 (9.9) 11.8 1.2 (0.2) 0.4 0.5 0.6 9.6 24.5 28.5 33.3 40.9 48.7 57.3 Investment (5.0) (200.0) 0.0 0.0 0.0 0.0 0.0 Financing 50.0 Net Cash Flow 54.6 24.5 (6.5) (1.7) 5.9 13.7 22.3 0.0 54.6 79.0 72.5 70.8 76.7 90.4 54.6 79.0 72.5 70.8 76.7 90.4 112.7 Non Cash Item Changes in WC Operating Cash Flow Cash at Beginning Cash at Ending 200.0 (35.0) (35.0) (35.0) (35.0) (35.0) 47
  • Corporate Finance Functions 1. Allocation of financial resources What long-term investments should the firm engage in? 2. Procurement of funds How can the firm raise money for the required investments? 3. Efficient and effective utilization of financial resources. How much short-term cash flow does a company need to pay its bills? 48
  • Investment Decisions 49
  • The Balance-Sheet Model of the Firm Total Value of Assets: Total Firm Value to Investors: Current Liabilities Current Assets Long-Term Debt Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity 50
  • The Balance-Sheet Model of the Firm The Capital Budgeting Decision (Investment Decision) Current Liabilities Current Assets Long-Term Debt Non Current Assets 1 Tangible 2 Intangible What longterm investments should the firm engage in? Shareholders’ Equity 51
  • Capital and Capital Budgeting Capital: is the stock of assets that will generate a flow of income in the future. Capital budgeting:  is the planning process used to determine the cash inflow and cash outflow of the long term investment (more than single accounting period) and based on that it measure viability of the project. 52
  • Restaurant Example How much to invest in Equipment? SR 200,000- When to invest? 4Qtr 2012 How long to invest? 5 years 53
  • Cash Flows during a Capital Budgeting Project Cash Inflow Cash Flows Initiation Operation Project Disposals Cash Outflow 54
  • Initiation Cash Flows (SR’000) 12P + + Net Profit Or + Increase or Decrease of Working Capital Depreciation NOPAT Cash Flow + Post Tax Interest Expense Unlevered Operating Cash Flow Cost of New Assets Tax on Gain on Sale of Old Assets + = Proceeds from Sale of Old Assets Unlevered Operating FCFF (Initiation Cash Flow) 12.2 0.5 11.8 24.5 9.8 34.3 (200) 0.0 0.0 165.7 The cost of new equipment is SR200M and released of working capital by SR11.8M. Pretax interest expense is SR14M. Net profit is SR12.2M and depreciation of existing fixed asset is SR0.5M. (Tax rate is 30%) 55
  • Operational Cash Flows (SR’000) 13P + Net Profit + Depreciation or + Increase or Decrease of WC NOPAT Cash Flow + Post Tax Interest Expense = Unlevered Operating FCFF 6.8 20.5 1.2 28.5 7.8 36.3 XYZ company will generate net profit of SR6.8M in year 2013 and planned to release working capital of SR1.2M of the same year. It has a pretax interest expense of SR11.2M. The fixed assets of SR205M will be depreciated over 10 years. (Tax rate is 30%) 56
  • Operational Cash Flows (SR’000) 13P Gross Profit 61.9 Operating Expenses (excluding depreciation) 20.6 = Incremental Cash Flow 41.3 = Incremental Cash Flow after Tax 28.9 + Depreciation Tax Shield 6.2 or + Increase or Decrease of WC 1.2 + = Unlevered Operating FCFF 36.3 XYZ company planned to have an incremental margin of SR61.9M in year 2013 and will incur operating expenses (excluding depreciation) of SR20.6M. The pretax interest expense is SR11.2M as the cost of debt. Fixed assets of SR205M will be depreciated over 10 years. Decrease in working capital is SR1.2M. (Tax rate is 30%) 57
  • Disposal Cash Flows (SR’000) 13P Proceeds from Selling of disposed assets +0.0 or + Net tax effect due to gain on asset disposal -0.0 or + Increase or Decrease of Working Capital +0.0 + = Incremental Cash Flow at Disposal 0.0 58
  • OFCFF 11A Net Profit 12P 13P 14P 15P 16P 17P 19.0 12.2 6.8 13.0 20.0 27.7 36.2 0.5 0.5 20.5 20.5 20.5 20.5 20.5 (9.9) 11.8 1.2 (0.2) 0.4 0.5 0.6 NOPAT Cash Flow 9.6 24.5 28.5 33.3 40.9 48.7 57.3 Add Post Tax Interest Expense 0.0 9.8 7.8 5.9 3.9 2.0 0.0 Unlevered Operating Cash Flow 9.6 34.3 36.3 39.2 44.8 50.7 57.3 Capital Spending (5.0) (200.0) 0.0 0.0 0.0 0.0 0.0 Unlevered OFCF 4.6 (165.7) 36.3 39.2 44.9 50.6 57.3 Add Depreciation Changes in WC 59
  • Cash Flows •Initiation (165.7) •Operation 228.3 •Disposals 0.0 Net Value = (165.7) + 228.3 = SR62.6 60
  • Company value  Value is what investors & lenders consider worth paying NOW for the company’s expected future income  Value NOW — called ‘present value’  This must exceed the cost of raising capital from investors & lenders 61
  • Time Value of Money (Timing of Cash Flow) Value of SR1 = Today SR1 Today Value of SR1 After One Year = SR0.91 Today 62
  • NPV of OFCFF 12P Unlevered OFCFF 13P 14P 15P 16P 17P (165.7) 36.3 39.2 44.9 50.6 57.3 1.00 0.937 0.878 0.823 0.772 0.723 (165.7) 34.0 34.4 36.9 39.1 41.4 WACC (6.7%) PV of 1 NPV PV of Cash Flows •Initiation (165.7) •Operation 185.9 •Disposals 0.0 63
  • Cash Flow Analysis (Evaluating Capital Investment) • Net Present Value (SR Amount) • Internal Rate of Return (%) • Payback Method (# of years) • Profitability Index (Profit/SR1 of investment) 64
  • Net Present Value (Evaluating Capital Investment) • NPV = PV of Future OFCFF – Initial Investment Cash Flows •Initiation (SR165.7M) •Operation SR185.9M •Disposals SR0.0 NPV= 185.9 – 165.7 = SR20.2M 65
  • Net Present Value (Evaluating Capital Investment) Decision Criteria: NPV > SR0 Project Return>Required Return NPV = SR0 Project Return>Required Return NPV< SR0 Project Return<Required Return 66
  • Internal Rate of Return (Evaluating Capital Investment) Cash Flows •Initiation (SR165.7M) •Operation SR185.9M •Average Cash Returns SR45.7M Required rate of return: 6.7% PV Annuity Factor =Initial Investment/Annual Cash Returns = SR165.7M / SR45.7M = 3.6296 3.6296 = 11.9% Periods 11% 12% 14% 5 3.6959 3.60478 3.43308 67
  • Internal Rate of Return Decision Criteria: If the IRR > Cost of Capital, accept the project If the IRR = Cost of Capital, accept or reject If the IRR < Cost of Capital, reject the project 68
  • Payback Method (Evaluating Capital Investment) Payback Period is the number of years needed to recover the net initial investment. Simple Payback Method Payback Period = Yrs until full recovery+Unrecovered Cost at the Beg. of LY Cash Flow During the Year 0 OFCF 4.6 (165.7) 1 2 3 4 5 36.3 39.2 44.9 50.6 57.3 3 Years Returns = 36.3+39.2+44.9 = SR120.3M Unrecovered Cost = 45.4M / 44.9 = 0.90 Year Payback Period = 3.9 Years 69
  • Profitability Index (PI) (Evaluating Capital Investment) PI measures how much profit each SR1 of investment will generate. PI = PV of Future Cash Flows / Initial Investment •Initiation •Operation •Disposals (SR165.7M) SR185.9M SR0.0 PI = SR 185.9M / 165.7M = 1.12 70
  • Cash Flow Analysis (Evaluating Capital Investment) • Net Present Value (SR 20.2M) • Internal Rate of Return (11.9%) • Payback Method (3.9 years) • Profitability Index (1.12) 71
  • Financing Decisions 72
  • The Balance-Sheet Model of the Firm The Capital Budgeting Decision (Financing Decision) Current Liabilities Current Assets Long-Term Debt Non Current Assets 1 Tangible 2 Intangible How can the firm raise the money for the required investments? Shareholders’ Equity 73
  • Capital Structure The value of the firm can be thought of as a pie. 50% Debt The goal of the 25% Debt 30% Equity manager is to increase 70% Debt the size of the pie. 75% 50% Equity The Capital Structure decision can be viewed as how best to slice up a the pie. If how you slice the pie affects the size of the pie, then the capital structure decision matters. 74
  • Capital Structure :Debt and Equity • The basic feature of a debt is that it is a promise by the borrowing firm to repay a fixed amount of by a certain date. • The shareholder’s claim on firm value is the residual amount that remains after the debtholders are paid. • If the value of the firm is less than the amount promised to the debtholders, the shareholders get nothing. 75
  • Weighted Average Cost of Capital (WACC) Cost of debt (rd): interest rate paid to creditors net of taxes Cost of equity (re): rate of return to shareholders in order to induce them to invest in the firm WACC : rd (1-tax) D (D + E) + re  E (D + E) 76
  • Weighted Average Cost of Capital (WACC) WACC : rd (1-tax) Component Amount D (D + E) Weight + re  Pretax Cost E (D + E) Pretax WACC LT Debt 35,000 0.70 10% 7.0% Equity 15,000 0.30 6% 1.8% Total 50,000 1.00 Tax Rate 30% WACC 4.9% 1.8% 6.7% 77
  • Sources and Uses of Funds Financing Mix Amount (SR’000) Uses of Funds Equipment 200 Sources of Funds Debt 70% 140 Equity 30% 60 Total 100% 200 78
  • Debt Service Coverage Ratio (DSCR) 11A Unlevered OFCF 4.6 12P (165.7) 13P 14P 15P 16P 17P 36.3 39.2 44.9 50.6 57.3 Financing Debt 140.0 Equity 60.0 Cash Flow before Debt Service 34.3 36.3 39.2 44.9 50.6 57.3 Loan Repayment 0.0 35.0 35.0 35.0 35.0 35.0 Interest 14.0 11.2 8.4 5.6 2.8 0.0 Total 14.0 46.2 43.4 40.6 37.8 35.0 2.45 0.79 0.90 1.10 1.34 1.64 DSCR 0.0 79
  • KPIs 11A 12P 13P 14P 15P 16P 17P Debt-to-Equity (TLiab/Equity) 1.92 2.10 1.80 1.41 1.05 0.75 0.52 Debt Ratio (TLiab/T.A) 0.66 0.68 0.64 0.58 0.51 0.43 0.34 Long-term Debt to Equity Ratio 1.03 1.65 1.24 0.83 0.48 0.20 0 Equity Ratio (Equity/T.A) 0.34 0.32 0.36 0.42 0.49 0.57 0.66 Financial Leverage Index (TA/Equity) 2.92 3.10 2.80 2.41 2.05 1.75 1.52 Degree of Operating Leverage (DOL) 2.55 2.53 4.94 4.39 3.99 3.70 3.49 Time Interest Earned Ratio 3.33 6.02 7.20 4.83 3.99 3.57 3.33 Debt Service Coverage Ratio (DSCR) 0.00 2.45 0.79 0.90 1.10 1.34 1.64 Leading Financial Indicators • Debt ratio is high which indicates creditors are not well protected. • LT Debt-to-equity ratio (Yr 2012) indicates relying heavily in the use of debt financing. • Declining Financial Leverage Index commencing year 2013 shows an increasing Equity Ratio. 80 • Year 2013-2014 DSCR is below 1.
  • Financial Leverage Cost of Capital (percent) e Debt-to-Equity Ratio 81
  • KPIs 11A 12P 13P 14P 15P 16P NPV (SR‘000) 17P 20.2 IRR (%) 11.9% Profitability Index (PI) 1.12 Payback Period (years) 3.9 Current Ratio 3.12 2.60 2.10 1.94 1.89 1.91 1.99 12 10 13 14 14 14 14 EVA 121.0 352 354.0 350.0 356.0 373.0 400.0 Profit Ratio 27.5% 15.3% 6.6% 11% 14.7% 17.6% 20.1% Liquidity Index (Days) ROE 0.0 11.4% 6.0% 10.4% 13.7% 15.9% 17.3% Leading Financial Indicators • • • • • Sound financial position with a conservative current ratio greater than 1.0 The capital investment has a positive Net Present Value. The IRR is higher than WACC. The Profitability Index is greater than 1, hence it is acceptable investment. The Economic Value Added is positive, hence the company is earning more than the 82 cost of capital.
  • The Balance-Sheet Model of the Firm The Net Working Capital Investment Decision (Financial Decision) Current Liabilities Current Assets Net Working Capital Non Current Assets 1 Tangible 2 Intangible How much short-term cash flow does a company need to pay its bills? Long-Term Debt Shareholders’ Equity 83
  • Aggressive Financing Policy 84
  • Conservative Financing Policy 85
  • Dividend Policy Decisions 86
  • Dividends and stock buybacks • The two major means of returning cash to shareholders is dividends and stock buybacks • Effects of buybacks: – Reduces the number of shares outstanding
  • Cash available to be returned • The Free Cash Flow to Equity (FCFE) is a measure of how much cash is left in the business after non-equity claimholders (debt and preferred stock) have been paid, and after any reinvestment needed to sustain the firm’s assets and future growth. This is the cash available for dividend payouts. Free cash flow to equity = Net Income + Depr&Amort – Chg in WC – Cap Exp + (New Debt Issue – Debt Repay) – Pref. Dividends
  • Intimidated by reports full of numbers? Do you know how to deal with numbers? Financial numbers? Financial information? Financial knowledge? Financial intelligence? 89
  • The Continuum of Understanding Know Why Know How Know What Know nothing 90
  • Q&A [30 min] 91
  • Q&A instructions 1 min 1 min • Break into small groups • Work with your group to answer question. • Discussion of answer as entire class 92
  • 1. Art and science of managing financial resources of a business. Ans: Financial Planning 2. Process of mapping the organization’s future direction to attain desired goals. Ans: Planning 3. Fill the gap between ‘where are now?’ and ‘where do we want to go? Ans: Gap Analysis 93
  • 4. Also called the current state analysis that provides a means to organize the data gathered in the detailed internal and external analysis Ans: SWOT Analysis 5. Cash inflow in Depreciation Ans: Depreciation Tax Shield 6. Rate of return wherein Net Present Value is equal to zero. Ans: Internal Rate of Return 94
  • 7. Present Value of future cash flows less initial investment. Ans: Net Present Value 8. Number of years needed to recover the initial investment. Ans: Payback Period 9. Measure of how much profit each SR1 of investment will generate. Ans: Profitability Index 95
  • 10. Planning process used to determine the cash inflow and cash outflow of the long term investment. Ans: Capital Budgeting 11. Analyzes business opportunities according to growth rate and market share Ans: BCG Growth / Share Matrix 12. Mix of long-term debt and equity financing. Ans: Capital Structure 96
  • 13. Weighted rate of debt and equity Ans: WACC 14. A concept that a 1 peso today is worth that 1 peso received tomorrow. Ans: Time Value Concept 15. It measure in taking advantage the borrowed capital and to enhance earnings per share (EPS) and return on equity (ROE). Ans: Financial Leverage 97
  • 16. Measure of how much cash is left in the business after non-equity claimholders (debt and preferred stock) have been paid Ans: Free Cash Flow to the Equity 17. Cash flow use in the calculation of total enterprise value. Ans: Unlevered Free Cash for the Firm 98
  • “If you fail to plan, then you’re planning to fail” by: Wharton Professor Emeritus Russell Ackoff
  • PICPA 2nd General Membership Meeting 100