mf 722 financial management
DESCRIPTION
MF 722 Financial Management. Financial Calculator (optional). Available from amazon.com for $23.38 (+ ship) or from staples.com (more $ but faster shipping) Search on “financial calculators”. Product Market Strategy Finance. Planning Performance Assessment Valuation . - PowerPoint PPT PresentationTRANSCRIPT
MF 722 Financial Management
Financial Calculator (optional)
Available from amazon.com for $23.38 (+ ship) or from staples.com (more $ but faster shipping)
Search on “financial calculators”
Product Market Strategy Finance
3 Functions in Financial Management
• Planning
• Performance Assessment
• Valuation
• How much money do we need & when?
• How can we measure and interpret financial performance?
• How is estimated performance translated into market value?
Separation of Control from Ownership
Managers who set Providers of product market fundsstrategy
What Should be the Objective of Corporate Financial Decisions?
We will work with:Maximizing Shareholder Value
The Importance of Cash Flow
Financial Statements and Cash Flow
How can we derive cash flowing in and out of firm from
• Income Statement• Balance Sheet• Statement of Cash
Flow
Cash Flow Measures
• Cash flow from assets (also called free cash flow): CF(A)
• Cash flow to creditors: CF(B)
• Cash flow to shareholders: CF(S)
CF(A) = CF(B) + CF(S)
Cash Flow from Assets
Operating Cash Flow - Capex - ΔNWC
= EBIT = gross capex = increases in CA+depreciation - asset sales - increases in CL- current taxes
(Note slight difference from cash flow from operations in accounting statement of cash flow – no interest subtracted from earnings here )
Cash Flow to Investors
Cash Flow from Assets
Cash Flow to Creditors Cash Flow to Shareholders = interest paid = dividends
+ debt repaid + stock repurchased - new L.T. debt issued - new stock issued
A Closer Look at Net Working Capital
Let’s focus on:
• Inventory
• Accounts Receivable
• Accounts Payable
THE CASH CONVERSION CYCLE
DAYS SALES IN INVENTORY DAYS SALES IN RECEIVABLES
INVENTORY/(COGS/DAY) RECEIVABLES/(SALES/DAY)
INVENTORIES SALES SUPPLIERS PAID CASH RECEIVEDPURCHASED BOOKED IN CASH FOR SALES
PAYABLES/(COGS/DAY)
DAYS SALES IN PAYABLES CASH CONVERSIONCYCLE
Illustration of Average Collection Period
• Each day, 1 day of sales goes on the belt (A/R)• Each day, 1 day of sales falls off the belt (paid)• The number of days’ sales on the belt at any one
time represents average time to collect on A/R
Cash Conversion Cycle: Selected Companies
Company Inv. Conv. (DSI)
Ave. Coll.
(DSO)Op. Cycle
Pay. Def.
(DPO)
Cash Conv.
Hewlett-Packard 89.8 65.1 154.9 65.9 89
Boeing 74.1 22 96.1 54.4 41.7
Wal-Mart Stores 64.4 2.8 67.2 37.4 29.8
Safeway 33.9 2.8 36.7 35.3 1.4
McDonald's 3.9 7.1 11 62.2 -51.2
3 Functions in Financial Management
• Planning
• Performance Assessment
• Valuation
• How much money do we need & when?
• How can we measure and interpret financial performance?
• How is estimated performance translated into market value?
Financial Forecasting
• How can we use facts and assumptions to construct pro forma financial statements and estimate how much cash we will need?
Steps in Financial Forecasting
• Choosing a model driver• Making reasonable assumptions as needed• Using the discipline of accounting definitions
(e.g., balance sheet must balance)• Making the forecast• Interpreting the results• Sensitivity analysis
Possible Model Drivers
1. Sales• Assets are needed to support
sales, so assets must keep pace with sales and increased assets must be financed
2. Financing Policy• Assets (and thus sales) can only
grow as fast as the company’s ability/willingness to finance them
A Simple, Sales-Driven Model
Assumptions:
• Sales will grow by 50% (to 150) in 2007
• Assets/Sales = 2.0• Costs/Sales = 0.90• Net Income/Sales (Net Profit
Margin) = 0.10• Liabilities/Sales = 1.0• Plowback ratio = 0.60
How much new external funding must be provided to support the forecast 2007 sales growth?
2006 Income StatementSales 100Costs 90Net Income 10Dividends 4Ret. Earnings 6
2006 Balance SheetLiabilities
100Assets 200
Equity 100
2007 Forecasts
2007 Pro Forma Income State.Sales 150Costs 135Net Income 15Dividends 6Ret. Earnings 9
2007 Pro Forma Balance SheetLiabilities 150
Assets 300Equity 109
whoops!
2006 Income StatementSales 100Costs 90Net Income 10Dividends 4Ret. Earnings 6
2006 Balance Sheet
Liabilities 100Assets 200
Equity 100
External Funds Needed (EFN)
2007 Pro Forma Income State.Sales 150Costs 135Net Income 15Dividends 6Ret. Earnings 9
2007 Pro Forma Balance SheetLiabilities 150
Assets 300Equity 109
Total 300 Total 259
• There is a funding shortfall of 41 (A = 300, L&NW = 259)
• This must be made up by:1. Issuing new equity2. Allowing the ratio of
liabilities/sales to rise3. Some combination of (1)
and (2)
EFN More Generally (Eq. 3.22, p. 70)
)6)(.150(10.)50(1)50(241
))((Pr
besojectedSalPMSalesSales
sLiabilitieSalesSalesAssetsEFN
Sustainable Growth Rate
• Growth rate in sales = g (i.e., S1 = (1+g)S0 and ΔS = S1 – S0 = gS0
• At what rate can we grow without issuing new equity or allowing liabilities/sales to increase (e.g., EFN = 0)?
ROEbROEbgPMbPMb
salesequityg
PMbPMbsalesliab
salesassetsg
bSgPMgSsalesliabgS
salesassetsEFN
1)(
).(
)1(.0 000