essential learning for ctp candidates...session #7 (thur., 9/03, 10:00 –11:00 am) overview of...
TRANSCRIPT
TEXPO Conference 2020:
Essential Learning for CTP CandidatesSession #7 (Thur., 9/03, 10:00 – 11:00 am)
❖ Overview of Basic CTP Math from ETM6
❖ Chap 07: Earnings Credits
❖ Chap 11: Working Capital
❖ Chap 08: Fin. Statements
❖ Chap 09: Financial Analysis
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 1
Essentials of Treasury Management, 6th Ed. (ETM6) is published by the AFP
which holds the copyright and all rights to the related materials.
As a prep course for the CTP exam, significant portions of these lectures are
based on materials from the Essentials text.
ETM6: Calculations
Chapters 7, 11 , 8 & 9
These slides cover most of the basic calculations in ETM6 – Examples include both those from the text and additional problems.
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Due to time constraints, we will
NOT be able to cover all of the
examples in this session.
Students are encouraged to
spend some time on their own
reviewing these problems at a
later date.
ETM6: Chapter 7 CalculationsManaging Relationships with Service Providers
Earnings CreditCollected Balance Required
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Earnings Credit
Where:
EC = Earnings credit
CB = Average collected balances
RR = Reserve requirement
ECR = Earnings credit rate
D = Number of days in the month
−
DEC = CB × (1 RR) × ECR
365
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Earnings CreditAssume the following scenario:
Average ledger balance $250,000Deposit float $ 30,000Reserve requirement 10%Earnings credit rate 1%Service charges for the month $ 1,000Days in month 30
Average Collected Balance Calculation:
Average ledger balance $250,000Less: Deposit float ($30,000)Equals: Average collected balance $220,000
−
−
DEC = CB × (1 RR) × ECR
365
30= $220,000 × (1 0.10) × 0.01
365
= $220,000 × 0.90 × 0.00082192 = $162.76
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Source: ETM6 - © AFP
Collected/Available Balances Required
Where:
CB = Average collected balances required to pay service charges
AB = Average available balances required to pay service charges
SC = Service charges
ECR= Earnings credit rate
RR = Reserve requirement
D = Number of days in the month
−
SCCB =
DECR × × (1 RR)
365
SCAB =
DECR ×
365
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Collected/Available Balances Required
Assume the following scenario:
Monthly service charges $1,000
Earnings credit rate 1%
Reserve requirement 10%
Days in month 30
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Source: ETM6 - © AFP
−
−
SCCB =
DECR × × (1 RR)
365
$1,000=
300.01 × × (1 0.10)
365
=$1,000
= $1,351,716.68(0.0007398)
ETM6: Chapter 7Managing Relationships with Service Providers
Additional Calculations
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Assume ledger balance = $1.2M,
deposit float = $0.4M, R/R = 10%, ECR
= 0.5%, 31 days in the month. Calculate
the earnings credits.
A. $295.89
B. $305.75
C. $339.73
D. $3,057.53
© 2013 - The Treasury Academy, Inc. - All Rights Reserved 9© 2020 - The Treasury Academy, Inc. - All Rights Reserved 9
Earnings CreditAssume the following scenario:
Average ledger balance $1,200,000Deposit float $ 400,000Reserve requirement 10%Earnings credit rate 0.5%Days in month 31
Average Balance Calculations:
Average ledger balance $1,200,000Less: Deposit float ($400,000)Equals: Average collected balance $800,000
Less: Reserve Requirement ($80,000)Equals: Average available balance $720,000
−
−
DEC = CB × (1 RR) × ECR
365
31= $800,000 × (1 0.10) × 0.005
365
= $305.75
DEC = AB × ECR
365
31= $720,000 × 0.005
365
= $305.75
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Assume ledger balance = $1.2M,
deposit float = $0.4M, R/R = 10%, ECR
= 0.5%, 31 days in the month. Calculate
the earnings credits.
A. $295.89
B. $305.75
C. $339.73
D. $3,057.53
No reserve requirement
30 days rather than 31
Used 5% rather than 0.5%
© 2013 - The Treasury Academy, Inc. - All Rights Reserved 11© 2020 - The Treasury Academy, Inc. - All Rights Reserved 11
Assume R/R = 10%, ECR = 0.4%, 30 days in
the month. Calculate the collected balance
required to support $1,200 in services.
A. $392,473
B. $405,555
C. $3,650,000
D. $4,055,555
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Collected/Available Balances Required
Assume the following scenario:
Monthly service charges $1,200
Earnings credit rate 0.4%
Reserve requirement 10%
Days in month 30
−
−
SCCB =
DECR × × (1 RR)
365
$1,200=
300.004 × × (1 0.10)
365
= $4,055,555
SCAB =
DECR ×
365
$1,200=
300.004 ×
365
= $3,650,000
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Assume R/R = 10%, ECR = 0.4%, 30 days in
the month. Calculate the collected balance
required to support $1,200 in services.
A. $392,473
B. $405,555
C. $3,650,000
D. $4,055,555
Calculated Available Balance
Used 4% rather than 0.4%
Used 4% rather than 0.4% & 31 days
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Practicing the Calculations
❖The more times you work through a
calculation, the more comfortable you
will be with it
❖Develop your own versions of the
calculations and double check your math
❖Share calculations with others that are
studying for the exam
❖Make a list of Study Buddies!!
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ETM6: Chapter 11 CalculationsWorking Capital Metrics
Float Neutral CalculationCost of DiscountCash Conversion Cycle (CCC)Days Sales OutstandingAging ScheduleA/R Balance Pattern
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Focus of Treasury on Cash Flow
Timeline
❖Treasury focus is on the payment portion of the cycle
❖Calculation: Float Neutral Calculation
▪ TD = total days difference in payment timing
▪ r = Opportunity cost as an annual rate
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= − +
1Discount 1
r1 TD
365
Float Neutral Calculation Assume r = 12% and TD = 3 days
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1Discount 1
12%1 3
365
11 1 0.99901467
1.0009863
0.00098533
0.001 (Rounded) or 0.10%
= − +
= − = −
=
=
If the buyer is allowed to take a discount of 0.10 %, they would be
indifferent (in present value terms) between paying by check or by
electronic transfer (a speedup of 3 days in loss of value)
Cost of a Buyer Not Taking a Cash Discount
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( ) ( )
( ) ( )
− −
− −
D 365Discount Cost =
100 D N T
2 365=
100 2 30 10
2 365= = .0204 18.25 =.3723 or 37.23%
98 20Where
D = Discount percentage is 2%
N = Net period is 30 days
T = Discount period is 10 days
The cost of not taking the discount can be compared with the
organization’s opportunity cost to borrow short-term funds. If we
assume a rate of 8% for this example, then borrowing cost would
be less than the cost of not taking the discount – so the
organization should borrow the funds and take the discount.
Source: ETM6 - © AFP
When Should a Buyer Forgo an
Offered Discount?
❖Short-term investment rates
above annualized discount rate
❖Buyer’s cost of short-term
borrowing greater than
annualized discount rate
❖Buyer can “stretch” payables
enough to sufficiently lower
annualized discount rate
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Benefit to Seller of Offering a Cash Discount
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( )Disc Pmt
Total Amount of Full Pmt × 1 Disc RatePV
Annual Opp Cost1 Days in Disc Period ×
365
− = +
( )
( )
− = =
+ +
= =
Disc Pmt
$1,000 1 .02 $980PV
1 .00137.051 10
365
$980$978.66
1.00137
Assume credit terms of 2/10, net 30 and opp. cost = 5%
Present Value of Receiving Discounted Payment Amount
21Source: ETM6 - © AFP
Benefit to Seller of Offering a Cash Discount
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Assume credit terms of 2/10, net 30 and opp. cost = 5%
Present Value of Receiving Full Payment Amount
Full Pmt
Total Amount of Full PmtPV
Annual Opp Cost1 Days in Net Period ×
365
= +
( )Full Pmt
$1,000 $1,000PV
1 .00411.051 30
365
$1,000$995.91
1.00411
= = + +
= =
NPV = PVDay 10 – PVDay 30 = $978.66 – $995.91 = – $17.25
22
Source: ETM6 © AFP
Cash Conversion Cycle (CCC)
❖Days’ Inventory
❖Days’ Receivables
❖Days’ Payables
❖Calculations of the Cash Conversion
Cycle (CCC)
❖Cash Turnover Ratio
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Days’ Inventory Days’ Receivables
Days’ Payables Cash Conversion Cycle
“Working Capital Gap”
Cash Conversion Cycle
Elements in the cash
conversion cycle:
Days’ Inventory
Days’
Receivables
Days’ Payables
Inventory
365Cost of Goods Sold
Accounts Receivable
365Sales
Accounts Payable
365Cost of Goods Sold
24© 2020 - The Treasury Academy, Inc. - All Rights Reserved
Cash Conversion Cycle
Elements in the cash
conversion cycle:
Days’
Inventory
Days’
Receivables
Days’
Payables
Days 103.15 3659,200
2,600 365
COGS
Inv==
Days 41.36 36515,000
1,700 365
Sales
A/R==
Days 63.48 3659,200
1,600 365
COGS
A/P==
25© 2020 - The Treasury Academy, Inc. - All Rights Reserved
Source: ETM6 - © AFP
Cash Conversion Cycle (CCC)
Calculates the time required
to convert cash outflows
(necessary to produce
goods) into cash inflows
(through the collection of
accounts receivable)
CCC Days' Inv. Days' Rec. - Days' Pay.
103.15 41.36 63.48 81.03 Days
= +
= + − =
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Source: ETM6 - © AFP
365 DaysCash Turnover =
Cash Conversion Cycle
365= = 4.5 Times
81.03 Days
Days’ Sales Outstanding (DSO) Assume that a company has outstanding
receivables of $285,000 at the end of the
first quarter and credit sales of $310,000 for
the quarter. Using a 90-day averaging
period, the DSO for this company can be
computed as follows:
Sales During Period $310,000Avg. Daily Credit Sales = = = $3,444.44
Number of Days in Period 90
Outstanding A/R $285,000DSO = = = 82.74 Days
Avg. Daily Credit Sales $3,444.44
−
−
Average Past Due = DSO Avg. Days of Credit Terms
= 82.74 Days 30 Days = 52.74 Days
If the company’s credit terms are net 30, the average past due is
computed as follows:
27© 2020 - The Treasury Academy, Inc. - All Rights Reserved
Source: ETM6 - © AFP
Aging Schedule
Separates A/R into current and past-due receivables in
30-day increments (on a customer or aggregate basis)
and can determine the percent past due
Age of A/R Amount of A/R % of Total A/R
Current $1,750,000 70%
1-30 Days Past Due 375,000 15%
31-60 Days Past Due 250,000 10%
Over 60 Days Past Due 125,000 5%
Total $2,500,000 100%
28© 2020 - The Treasury Academy, Inc. - All Rights Reserved
Source: ETM6 - © AFP
A/R Balance Pattern for March
29© 2020 - The Treasury Academy, Inc. - All Rights Reserved Source: ETM6 - © AFP
ETM6: Chapter 11 CalculationsWorking Capital Metrics
Additional Calculations
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Assume a company is offered a 1.3%
discount for paying on day 30 rather
than day 90. At what opportunity cost
would the company be indifferent
between these two payment dates?
A. 4%
B. 6%
C. 8%
D. 10%
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 31
Assume a company is offered a 1.3%
discount for paying on day 30 rather
than day 90. At what opportunity cost
would the company be indifferent
between these two payment dates?
A. 4%
B. 6%
C. 8%
D. 10%
Example of just trying all
the answers to find the
correct one.
Alternative approach is
to use discount cost
formula
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Float Neutral Calculation Assume: r = 8% and TD = 60 days
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1Discount 1
8%1 60
365
11 1 0.98702
1.01315
0.01298 = 1.3% (Rounded)
= − +
= − = −
=
If the buyer is allowed to take a discount of 1.3 %, they would be
indifferent (in present value terms) between paying electronically
today or on day 60 by check (a speedup of 60 days in loss of value)
A company is offered terms of 1/10,
Net 40, but routinely takes 50 days to
pay without incurring any penalties.
What is the cost of not taking this
discount?
A. 7.4%
B. 7.9%
C. 9.2%
D. 12.3%
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 34
Cost of a Buyer Not Taking a Cash
Discount
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( ) ( )
( ) ( )
− −
− −
D 365Discount Cost =
100 D N T
1 365=
100 1 50 10
1 365= = .0101 9.125 = .09216 or 9.2%
99 40Where
D = Discount percentage is 1%
N = Net period is 50 days
T = Discount period is 10 days
The cost of not taking the discount can be compared with the
organization’s opportunity cost to borrow short-term funds. If we
assume a rate of 8% for this example, then borrowing cost would
be less than the cost of not taking the discount – so the
organization should borrow the funds and TAKE the discount.
A company is offered terms of 1/10,
Net 40, but routinely takes 50 days to
pay without incurring any penalties.
What is the cost of not taking this
discount?
A. 7.4%
B. 7.9%
C. 9.2%
D. 12.3%
Example of being sure to
read the problem. Use
the actual days taken,
not the stated terms.
Used 40 day net period
Did not take out discount period
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 36
ETM6: Chapter 8
Financial Accounting & Reporting
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Sample Balance Sheet
“Snapshot”
Assets:Current assets
Fixed assets
Depreciable fixed
assets
Intangible assets
Liabilities:Current liabilities
Long-term
liabilities
Equity
Assets = Liabilities +
Shareholders’
Equity
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 38Source: ETM6 - © AFP
Sample Income Statement
A record of
revenues and
expenses
Shows the net
change in
shareholders’
equity from
operations over
a specified
period
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 39Source: ETM6 - © AFP
Sample Statement of Cash Flows
Shows sources and
uses of cash
Sections:
Operating
Investing
Financing
Cash from
operations
calculated by
adding back non-
cash charges
(e.g.,
depreciation)
Cash, not earnings,
repays debt
This example shows
the indirect format
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 40Source: ETM6 - © AFP
ETM6: Chapter 9 CalculationsFinancial Planning and Analysis
Time Value (PV & FV)
Breakeven Point
NPV, IRR, PI
Ratios & Ratio Analysis
Liquidity, Efficiency, Debt Management,
Performance, DuPont
Return vs. Residual Income Measures
Operating and Financial Leverage
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Future Value
n
2
Future Value = PV × (1 + i)
= $100 × (1 + .10)
= $100 × 1.21 = $121
What is the future value of $100 if it can be invested for
two years, compounded annually, at a rate of 10% per
year?
Where:
FV = Future value
PV = Present value
i = Periodic interest rate
n = Number of periods
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Alt Example: $100, 5 yrs, 10%
$100 x (1.10)5
$100 x (1.10)(1.10)(1.10)(1.10)(1.10)
$100 x 1.61051 = $161.05
Present Value
What is the present value of $2,382 to be received after
three years, discounted at a rate of 6.00% annually?
Where:
FV = Future value
i = Periodic interest rate
n = Number of periods
( ) ( )n 3
$2,382FVPresent Value = =
1 + i 1 + 0.06
$2,382= = $2,000
1.191
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PV of a Stream of Payments
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31 2 n
1 2 3 n
CC C CPV ... ...
(1 i) (1 i) (1 i) (1 i)= + + + +
+ + + +
1 2 3
$200 $400 $600PV
(1 .12) (1 .12) (1 .12)
$200 $400 $600
1.12 1.2544 1.4049
$178.57 $318.88 $427.08 $924.53
= + ++ + +
= + +
= + + =
As an example, assume the following annual cash
flows: $200 in year one, $400 in year two and $600
in year three. If the appropriate discount rate is
12%, then the PV of the stream would be:
Breakeven Analysis
−
−
Fixed CostsUnit B /E Point =
Selling Price Per Unit Variable Cost Per Unit
$10,000=
$10 $6
= 2,500 Units
Breakeven point: Level of activity for
an operation at which costs exactly
equal benefits
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 45
Source: ETM6 - © AFP
Net Present Value (NPV)
Evaluates the present value
(PV) of all inflows and
outflows of a project using
the weighted average cost of
capital as a discount rate
If the only cash outflow takes place in the present
:
−NPV = PV of Cash Inflows PV of Cash Outflows
−
−31 2 n
1 2 3 n
NPV = PV of Cash Inflows Cash Cost
CC C CNPV = + + + ... + Cost
(1+ i) (1+ i) (1+ i) (1+ i)© 2020 - The Treasury Academy, Inc. - All Rights Reserved 46
Net Present Value (NPV)
−
−
A 1 2 3 4 5
B 1 2 3 4 5
$300 $300 $400 $100 $100NPV = + + + + $1,000
(1 + .10) (1 + .10) (1 + .10) (1 + .10) (1 + .10)
= $ 48.42
$1,000 $1,000$300 $300 $400NPV = + + + +
(1 + .10) (1 + .10) (1 + .10) (1 + .10) (1 + .10) − $1,000
= $1,124.98
Year 1 Year 2 Year 3 Year 4 Year 5
Project A $300 $300 $400 $100 $100
Project B $300 $300 $400 $1,000 $1,000
Assume an initial outlay of $1,000 and a cost of capital of 10%
47© 2020 - The Treasury Academy, Inc. - All Rights Reserved
Source: ETM6 - © AFP
Profitability Index (PI)
Present Value of Cash InflowsProfitability Index =
Present Value of Cash Outflows
Ratio of the PV gained to the cost required to
obtain that value; shows value gained per
dollar of investment
If the only cash outflow is in the present (period 0):
A
B
$951.57PI = = 0.952
$1,000
$2,124.98PI = = 2.125
$1,000
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 48
Internal Rate of Return (IRR)
Discount rate (i) for NPV = 0
or
PV of Cash Inflows = PV of Cash Outflows
=
−
−
A 1 2 3 4 5
B 1 2
NPV = PV of Cash Inflow Cost = 0
$300 $300 $400 $100 $100NPV = + + + + $1,000 0
(1 + i) (1 + i) (1 + i) (1 + i) (1 + i)
i = 7.7%
$300 $300 $400NPV = + +
(1 + i) (1 + i) (1 + i = −
3 4 5
$1,000 $1,000+ + $1,000 0
) (1 + i) (1 + i)
i = 38.1%
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 49
Source: ETM6 - © AFP
Capital Expenditure Analysis Summary
Method
Project
Acceptance
Criterion
Project A Project B
Net Present
Value (NPV)NPV > 0 $ – 48.43 $1.124.98
Profitability
Index (PI)PI > 1 0.952 2.2125
Internal
Rate of
Return
(IRR)
IRR > WACC* 7.7% 38.1%
* Weighted Average Cost of Capital (WACC) = 10% in the example
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Source: ETM6 © AFP
Liquidity or Working Capital
Current Ratio
Measures the degree to
which current
obligations are covered
by current assets
Total Current AssetsCurrent Ratio =
Total Current Liabilities
$8,000= = 2.35
$3,400
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 51
Source: ETM6 - © AFP
Liquidity or Working Capital:
Quick Ratio
Measures the degree to
which a company’s current
liabilities are covered by its
most liquid current assets
(Cash) + (S-T Investments) + (A/R)Quick Ratio =
Total Current Liabilities
($1,500 + $1,300 + $1,700)= = 1.32
$3,400
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 52
Source: ETM6 - © AFP
Liquidity or Working Capital:
Working Capital
Indicates the dollar amount by which
current assets exceed current liabilities
−
−
Working Capital = Current Assets Current Liabilities
= $8,000 $3,400 = $4,600
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 53
Source: ETM6 - © AFP
Days Cash Held
Provides a measure of a firm’s liquidity as it
shows how long a firm can continue to pay
operating expenses without any additional
revenue
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 54
Source: ETM6 - © AFP
= =−
CashDays Cash Held =
Operating Expenses - Noncash Expenses
365
$1,500144 Days
$4,000 $200
365
New to ETM6
Efficiency and Asset Management:
Total Asset Turnover
RevenuesTotal Asset Turnover =
Total Assets
$15,000= = 0.938 Times
$16,000
Measures how many
times the asset base
is turned over with
the flow of revenue
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 55Source: ETM6 - © AFP
Efficiency and Asset Management:
Fixed Asset Turnover
RevenueFixed Asset Turnover =
Net Property, Plant & Equip
$15,000= = 2.0 Times
$7,500
Focuses on how
efficiently fixed
assets, or plant
and equipment,
are used
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 56Source: ETM6 - © AFP
Efficiency and Asset Management:
Current Asset Turnover
RevenuesCurrent Asset Turnover =
Current Assets
$15,000= = 1.88 Times
$8,500
Measures how many
times the stock of
most liquid assets is
turned over with the
flow of revenue
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 57
Source: ETM6 - © AFP
Efficiency and Asset Management:
Cash Conversion Efficiency
Cash ConversionCash Flow from Operations
Efficiency = Sales
$550=
$15,000
= 0.37 or 3.7%
Measures the efficiency
with which a company
converts sales into
cash
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 58Source: ETM6 - © AFP
Debt Management:
Total Liabilities to Total Assets
Total LiabilitiesTotal Liabilities to Total Assets =
Total Assets
$7,300= = .456 or 45.6%
$16,000
Measures the
percentage of
all liabilities
relative to total
investments or
total assets
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 59Source: ETM6 - © AFP
Debt Management:
Long-Term Debt to Capital
( ) ( )
( )
-
-
Long Term DebtL / T Debt to Capital =
Long Term Debt + Equity
$3,900= = .310 or 31.0%
$3,900 + $8,700
Measures the percentage
of a company’s
capitalization that is
provided by long-term
debt
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 60Source: ETM6 - © AFP
Debt Management:
Debt to Equity
Total DebtDebt to Equity =
Total Equity
$1,800 + $3,900= = .655 or 65.5%
$8,700
Measures the degree of
debt financing used per
dollar of equity capital
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 61Source: ETM6 - © AFP
Debt Management:
Debt to Tangible Net Worth
( )
( )
( )
−
−
Total DebtDebt to Tangible N/W =
Total Equity Intangible Assets
$1,800 + $3,900= = .695 or 69.5%
$8,700 $500
Measures a
company’s debt as a
percentage of its
tangible net worth
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 62
Source: ETM6 - © AFP
Debt Management/Coverage:
Times Interest Earned (TIE) Ratio
Operating ProfitTIE =
Interest Expense
EBIT =
Interest Expense
$1,600= = 5.33 Times
$300
Measures a firm’s ability to service debt
through interest payments
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 63
Source: ETM6 - © AFP
Debt Management/Coverage:
Fixed Charge Coverage Ratio
EBIT + Lease PmtsFixed Charge Coverage =
Interest Expense + Lease Pmts
$1,600 + $500 $2,100= = = 2.625 Times
$300 + $500 $800
Measures a firm’s ability to
service all fixed-charge
items with operating
profits
* Assuming $500 of annual lease payments
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 64
Source: ETM6 - © AFP
Profitability: Gross Profit Margin
Gross Profit $5,800Gross Profit Margin = =
Revenues $15,000
= .387 or 38.7%
Measures the
percentage of
revenues remaining
after the cost of goods
sold is deducted from
revenue – it is also a
typical common-size
ratio measure
© 2020 – The Treasury Academy - All Rights Reserved 65Source: ETM6 - © AFP
Profitability:
Operating & EBITDA Profit Margins
EBITOperating Profit Margin =
Revenues
$1,600= = 0.107 or 10.7%
$15,000
Measures the flow of commonly
used operating income
measures in relation to the flow
of revenue
EBITDAEBITDA Margin =
Revenues
$1,800= = 0.120 or 12.0%
$15,000
© 2020 – The Treasury Academy - All Rights Reserved 66Source: ETM6 - © AFP
Profitability:
Net Profit Margin
Net IncomeNet Profit Margin =
Revenues
$850=
$15,000
= .057 or 5.7%
Measures the flow of
net income in
relation to the flow
of revenue
© 2020 – The Treasury Academy - All Rights Reserved 67Source: ETM6 - © AFP
Profitability:
Return on Assets (ROA)
𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑨𝒔𝒔𝒆𝒕𝒔 =𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
=$𝟖𝟓𝟎
$𝟏𝟔, 𝟎𝟎𝟎
= . 𝟎𝟓𝟑 𝒐𝒓 𝟓. 𝟑%
Measures net income in relation to
the stock of assets
© 2020 – The Treasury Academy - All Rights Reserved 68
Source: ETM6 - © AFP
Profitability:
Return on Equity (ROE)
( )
( )
Net IncomeReturn on Equity =
Total Equity
$850= = 0.098 or 9.8%
$8,700
Measures earnings shareholders and is
therefore a measure of the profitability of the
company.
© 2020 – The Treasury Academy - All Rights Reserved 69
Source: ETM6 - © AFP
Profitability:
Return on Common Equity (ROCE)
( )
( )
( )
( )
−
−
−
−
Earnings Avail. to Common S / HsReturn on Common Equity =
Common Equity
Net Income Preferred Dividends=
Total Equity Preferred Stock
$850 0= = 0.098 or 9.8%
$8,700 0
Measures earnings available to common
shareholders (net income less any preferred
stock dividends) expressed as a percentage
of common equity
© 2020 – The Treasury Academy - All Rights Reserved 70
Source: ETM6 - © AFP
Integrated Ratio Analysis: DuPont
Approach
ROE = Return on Sales Asset Turnover Equity Multiplier
Net Income Revenues Avg. Total Assets =
Revenues Avg. Total Assets Avg. Equity
= 0.057 0.938 1.84 = 0.098 = 9.8%
Deconstructs ROE into three key
components for more detailed analysis
© 2020 – The Treasury Academy - All Rights Reserved 71
Source: ETM6 - © AFP
Performance Measurement
Return on Invested Capital
(ROIC)
Residual Income (RI)
Economic Value Added (EVA)
Free Cash Flow (FCF)
72© 2020 – The Treasury Academy - All Rights Reserved
Performance Measurement
Return on Invested Capital (ROIC)
◦ ROIC does not include charge for cost of capital.
◦ Positive NPV project can be rejected if it lowers
overall ROIC
◦ ROIC over a partial period may be misleading.
( ) ( )
( ) ( )
Net Income Net IncomeROIC = =
Invested Capital Long-Term Debt + Equity
$850 $850= = = 0.0675 or 6.75%
$3,900 + $8,700 $12,600
© 2020 – The Treasury Academy - All Rights Reserved 73Source: ETM6 - © AFP
Residual Income (RI)
Overcomes two of the limitations of ROIC
◦ It assigns a charge to the invested capital
◦ It is an amount of profit (or loss), whereas ROIC is just a rate of
return
Assume:
◦ Net Income = $850
◦ Invested Capital = $12,600
◦ Cost of Capital = 10%
74© 2020 – The Treasury Academy - All Rights Reserved
−
−
RI = Net Income - (Invested Capital x Cost of Capital)
= $850 ($12,600 x 0.10)
= $850 $1,260 = - $410
More on EVA
EVA is a true measure of
economic profit or loss, and
is accepted in the professional
financial community
There are three generic ways in which EVA can
be increased through intelligent asset
management:◦ Improve operating efficiency so that more EBIT is
generated on the existing asset base
◦ Invest additional capital in assets that earn a rate of
return that exceeds the cost of capital
◦ Eliminate assets that earn a rate of return that is
less than the cost of capital
© 2020 – The Treasury Academy - All Rights Reserved 75
Economic Value Added (EVA)A measure of the incremental value that a
company’s investments add.
What is the EVA for the following company?
▪ Long-term debt of $3,900,000
▪ Equity of $8,700,000
▪ Marginal tax rate of 34.615%
▪ Weighted average cost of capital (WACC) of 9%
▪ Operating income (EBIT) of $1,600,000
− −
− −
−
− −
EVA = EBIT x (1 Tax Rate) (WACC) x (Long-term Debt + Equity)
= $1,600 x (1 .34615) (.09) x ($3,900 + $8,700)
= $1,046 (.09)($12,600)
= $1,046 $1,134 = $88
© 2020 – The Treasury Academy - All Rights Reserved 76Source: ETM6 - © AFP
Performance Measurement:
Basic Free Cash Flow
Free Cash Flow (FCF)◦ Indicates how much cash generated during the
period is available to shareholders and creditors
◦ FCF adjusts net income for noncash charges (i.e.
depreciation and amortization) as well as working
capital and capital expenditures
◦ A commonly used measure of FCF is below
−
− −
FCF = Cash Flow from Operating Activities CapEx
= $550 $900 = $350
© 2020 – The Treasury Academy - All Rights Reserved 77Source: ETM6 - © AFP
Other Measures for
Free Cash Flow
Free Cash Flow to the Firm (FCFF)◦ Represents cash flow that is available to all
providers of long-term capital
Free Cash Flow to Equity (FCFE)◦ Represents cash flow that is available to the
shareholders only
© 2020 – The Treasury Academy - All Rights Reserved 78Source: ETM6 - © AFP
− −
− −
FCFF = CF from Op. Activities + (Interest Exp x (1 Tax Rate)) CapEx
FCFE = FCFF (Interest Exp x (1 Tax Rate)) + Change in Total Debt
Operating and Financial Leverage
79© 2020 - The Treasury Academy, Inc. - All Rights Reserved
Source: ETM6 – Exhibit 9.7 - © AFP
Operating Risk and Leverage (DOL)
Operating risk is a function of the mix of
variable and fixed costs in a company’s
operations
It is assessed by looking at the changes
in a company’s EBIT for given change in
sales
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 80
% Change in EBITDegree of Operating Leverage =
% Change in Sales
33%Degree of Operating Leverage = = 1.65 Times
20%
Using the information from the text Exhibit 9.7
Source: ETM6 - © AFP
Financial Risk and Leverage (DFL)
Financial risk is a function of the
mix of capital sources used to
finance the company
It is assessed by looking at the
changes in a company’s net
income for given change in EBIT
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 81
% Change in Net IncomeDegree of Fin. Leverage =
% Change in EBIT
50%Degree of Fin. Leverage = = 1.515 Times
33%
Using the information from the text Exhibit 9.7
Source: ETM6 - © AFP
Total Leverage (DTL) This is a measure of the total risk of
the company
It is assessed by looking at the relationship between Net Income and Sales
It can also be calculated as:DTL = DOL X DFL
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 82
% Change in Net IncomeDegree of Total Leverage =
% Change in Sales
50%Degree of Total Leverage = = 2.5 Times
20%
or
DTL = DOL X DFL = 1.650 X 1.515 = 2.5 Times
Source: ETM6 - © AFP
ETM6: Chapter 9Financial Planning and Analysis
Additional Calculations
83© 2020 - The Treasury Academy, Inc. - All Rights Reserved
Liquidity or Working Capital: Quick Ratio
Measures the degree to which a company’s current
liabilities are covered by its most liquid current assets
A company currently has Cash of $200,000, ST
Investments of $500,000, A/R of $600,000, and
Inventory of $700,000. If their bank has imposed a
loan covenant which requires the company
maintain a quick ratio of 1.5 or better, what is the
maximum level of current liabilities they can have?
A. $666,667
B. $866,667
C. $1,333,333
D. $2,000,000
84© 2020 - The Treasury Academy, Inc. - All Rights Reserved
Liquidity or Working Capital: Quick Ratio
(Cash) + (S-T Investments) + (A/R)Quick Ratio =
Total Current Liabilities
($200,000 + $500,000 + $600,000)= = 1.50
Total Current Liabilities
$1,300,0001.50 =
Total Current Liabilities
1.50 (Total CL) = $1,300,000
$1,300,000Total CL = = $866,667
1.50
85© 2020 - The Treasury Academy, Inc. - All Rights Reserved
Liquidity or Working Capital: Quick Ratio
Measures the degree to which a company’s current
liabilities are covered by its most liquid current assets
A company currently has Cash of $200,000, ST
Investments of $500,000, A/R of $600,000, and
Inventory of $700,000. If their bank has imposed a
loan covenant which requires the company
maintain a quick ratio of 1.5 or better, what is the
maximum level of current liabilities they can have?
A. $666,667
B. $866,667
C. $1,333,333
D. $2,000,000
86© 2020 - The Treasury Academy, Inc. - All Rights Reserved
Included Inventory
Subtracted Cash from Result B
Just added all items in problem
Practice Calculation
A company has a Return on Total Assets of 20%, Return on Sales of 10% and Net Income of $100,000. What is the level of Total Assets for this company?
A. $ 250,000B. $ 500,000C. $ 750,000D. $1,000,000
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 87
Practice Calculation
A company has a Return on Total Assets of 20%, Return on Sales of 10% and Net Income of $100,000. What is the level of Total Assets for this company?
A. $ 250,000B. $ 500,000C. $ 750,000D. $1,000,000
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 88
Integrated Ratio Analysis: DuPont Equation
Return on Total Assets = Return on Sales Total Asset Turnover
Net Income Total Revenues =
Total Revenues Total Assets
$100,000 Total Revenues 20% =
Total Revenues Total Assets
20% = 0.10 TATO =>
= =
TATO = 2.0
$100,000 Return on Sales = 0.10 =
Total Revenues
Total Revenues = $1,000,000
Total Revenues $1,000,000 TATO = 2.0
Total Assets Total Assets
Total Assets = $500,00089© 2020 - The Treasury Academy, Inc. - All Rights Reserved
Session Wrap-up
90
What did we learn in this session?
What topics do we need to learn more about?
© 2020 - The Treasury Academy, Inc. - All Rights Reserved
TEXPO Conference 2020
Essential Learning for CTP Candidates
End of This Session
We will reconvene at 1:30 pm today.
The topic will be
Let’s Go to the MarketsMoney Markets
Capital Markets
© 2020 - The Treasury Academy, Inc. - All Rights Reserved 91