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TECHNIQUES OF FINANCIAL ANALYSIS, 10th Edition by ERICH A. HELFERT

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© Modernsoft Inc., 1999

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Interactive Templates designed by Modernsoft Inc. 1999 and distributed with permission by McGraw Hill.

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Techniques of Financial Analysis, 10th Edition by Erich A Helfert, copyright Irwin/McGraw-Hill, 2000


All rights reserved

READMEREADME

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Chapter 1: The Business System - An Overview Income Statement

Key Assumptions Balance Sheet Cash Flow 12 The Business System

Volume (units) 1,000 NewFixed costs 2,000 investmentVariable costs - % sales 70% 1,230Depreciation - % fixed assets 5% Depreciation

25% effect Dis-investmentCurrent liabilities - % costs 15% 400 Investment 250Capital expenditures 750 baseDis-investment 250 8,900

10% Work cap. change Investment change Cap. ExpendituresTax rate 40% 480 580 750Dividend payout 60%Debt/equity ratio - targeted 60%Debt as % of capitalization 37%

Price VolumeIncome Statement Period 1 12 Costs 1,000Sales 12,000 (fixed & variable)Costs 10,400 10,800Depreciation 400Operating profit (EBIT) 1,200Interest 343Profit before taxes 857Taxes 343 Operating profit InterestNet income 514 Dividends after taxes (tax adjusted)Dividends 309 309 720 206Retained earnings 206

Retainedearnings

Balance Sheet Base Period Period 1 206Current assets 2,500 3,000Fixed assets 8,000 8,100 Shareholders'Assets 10,500 11,100 equity Long-term debt

5,925 3,555Current liabilities 1,600 1,620 Change in stock Funds surplus Change in debtLong-term debt 3,300 3,555 119 (deficit) 255Shareholders' equity 5,600 5,925 -191Liabilities and equity 10,500 11,100 Funding

potentialWorking capital 900 1,380 389Capitalization 8,900 9,480

Cash Flow StatementOperating Activities:Net income 514Depreciation 400Change in working capital -480Cash provided by operating activites 434

Investing Activities:Capital expenditures -750Dis-investments 250Cash (used in) investing activities -500

Financing Activities:Debt proceeds (repayments) 255Dividends paid -309Stock proceeds (repurchase) 119Cash from financing activites 66

Change in cash 0

© Modernsoft Inc., 1999All rights reserved

Operations: Price (per unit)

Investment: Current assets - % sales

Financing: Interest rate

-1,000 -500 0 500 1,000 1,500

-750

250

-480

914

255

119

-309

Cash Flow

Income (cash basis)

Uses Sources

Working capital

Capital expenditures

Dis-investments

Proceeds from debt

Proceeds from stock

Dividends

OperatingInvesting Financing

Investment

Financing

Operations

K7

Capital expenditures plus change in working capital. Note: New investment is equal to the "Investment potential" when the Funds surplus (deficit) (see below) is equal to zero

D9

Current assets, in this simplified example, is based on sales levels (expressed as a percent of sales).

D10

Current liabilities, in this example, is related to (total) costs (variable, fixed and depreciation).

K12

Investment base (beg. balance) = Capitalization = Net assets

K14

Investment change (net) = New investment - Depreciation effect - Dis-investment. .

E17

Given: D/E = t , Solve for D/C = D/(D+E). D/C = t / (1 + t )

K22

Costs include depreciation

E23

Depreciation based on beginning balance fixed assets (assumes capital expenditures and dis-investments placed in service at end of period.

E24

Operating profit = EBIT = Earnings before interest and taxes

K29

Profits before interest, but after taxes.

K33

Net income less dividends paid.

B34

Cash assumed to be zero in this example.

I37

The level of total shareholders' equity needed to achieve the targeted debt-to-equity ratio; the change in shareholders' equity from the prior period is equal to retained earnings plus change in stock.

M37

The level of long-term debt needed to achieve the targeted debt-to-equity ratio.

E39

Debt to equity levels based on targeted ratio

I39

Change in stock (net) = proceeds from stock issued (less stock retired)

M39

Net proceeds from long-term debt after repayments.

E40

D + E = Capitalization D / E= target ratio = t E = C / (1 + t)

K40

"Funds surplus / (deficit)" is the difference between the "investment change" and the derived "funding potential". It represents the under / (over) invested position given profitability levels and targeted capital structure (debt / equity ratio).

K43

Based on targeted debt to equity ratio; includes actual equity financing from retained earnings and stock proceeds, plus actual proceeds from long-term debt, plus funds surplus (deficit) arising from "under / (over)" invested position. Note: A change in the targeted capital structure (i.e. debt / equity ratio) can generate additional (or less) funding potential, even in the absence of changes in profitability. The existence of a funds (deficit) indicates that the business is investing at a level in excess of what is "sustainable".

B44

= Investment base = Net assets.

B51

Excluding cash.

E51

Excluding cash. Note: The Cash Flow Statement includes changes in working capital as part of operating activities, whereas, the Business System treats working capital as an investment.

B65

Cash assumed to be constant in this example (I.e. no change in cash).

Chapter 3: System View of Key Ratios and their Elements

Key Assumptions Income Statement / Balance Sheet Ratios Chart Cash Flow Statement

Key Assumptions EBITOperations: margin

Price (per unit) 12 10.0% OperatingVolume (units) 1,000 Operating decisions profit marginFixed costs 2,000 Income tax 6.0%Variable costs - % sales 70% rate

Investment: 40.0% Return onCurrent assets - % sales 25% investmentCurrent liabilities - % sales 15% 7.74%Capital expenditures 750 Working capitalDis-investment 250 turnoverDepreciation % fixed assets 5% 10.0 Capital

Financing: Investment decisions turnoverInterest rate 10% Fixed asset 1.3 Tax rate 40% turnoverDividend payout 60% 1.5 Return on equityDebt/equity ratio - targeted 60% (ROE)Debt as percent of capitalization 37% 8.88%

Long-term Debt proceedsIncome Statement Period 1 debt 188Sales 12,000 3,488 Leverage Net leverageCosts 10,400 Financing decisions proportions contributionDepreciation 400 Payout/ 60.0% 1.14%Operating profit (EBIT) 1,200 retention Stock proceeds Interest rateInterest 339 40.0% 6 after taxProfit before taxes 861 Equity Ret. earnings 5.84%Taxes 344 5,813 207 "Spread"Net income 516 1.90%Dividends 310Retained earnings 207

Balance Sheet Base Period Period 1 Note: For purposes of illustration, all calculations in the chart aboveCurrent assets 2,500 3,000 (except for interest expense/rate) are based on year end balances.Fixed assets 8,000 8,100Assets 10,500 11,100 In practice, using average balance might be more appropriate.

Current liabilities 1,600 1,800Long-term debt 3,300 3,488Shareholders' equity 5,600 5,813Liabilities and equity 10,500 11,100

Working capital 900 1,200Capitalization 8,900 9,300

Cash Flow Statement

Operating Activities:Net income 516Depreciation 400Change in working capital -300Cash provided by operating activites 616

Investing Activities:Capital expenditures -750Dis-investments 250Cash (used in) investing activities -500

Financing Activities:Debt proceeds (repayments) 188Dividends paid -310Stock proceeds (retirements) 6Cash from financing activites -116

Change in cash 0© Modernsoft Inc., 1999All rights reserved

I8

Earnings before interest and taxes (Operating profit) as percent of Sales

K10

Operating profit after taxes = Operating profit x ( 1 - tax rate)

I12

Provision for income taxes as percent of Profit before taxes = Tax rate

M14

Operating profit after taxes / Net assets = EBIT margin * Capital turnover

I17

Sales / Working capital

K19

Sales / Net assets

I21

Sales / Fixed assets

E23

Given: D/E = t Solve for D/C = D/(D+E) D/C = t / (1 + t )

O23

ROE = Net income / Equity = ROI plus Net leverage contribution

K24

Net change in long-term debt: (repayments) plus new borrowings

E28

Depreciation based on beginning balance fixed assets (assumes capital expenditures and dis-investments placed in service at end of period.

K28

Debt / Equity: targeted levels

M28

D/E x (ROI - Aftertax interest rate)

K29

Proceeds from new stock issued less (retirements)

M29

The interest rate after taxes is modified here to reflect that when debt amounts change, interest is paid on the average debt for the year; if no change in debt takes place, the interest rate after taxes will be the stated rate adjusted for taxes.

E30

Interest is paid on the average debt outstanding.

I30

Earnings retention after payout of dividends expressed as percent of Net income =[(1 - Preferred dividends - Common dividends)/ Net income]

K31

Retained earnings for period: Net income less dividends

M31

Interest rate on debt x (1 - tax rate) = Interest expense / Debt x (1 - tax rate)

M33

Spread between ROI and Cost of debt = (ROI - aftertax interest rate)

B38

Cash assumed to be zero in this example.

E43


E44

D + E = Capitalization D / E= target ratio = t E = C / (1 + t)

B48


B55

Excluding cash.

E55


B69

Cash assumed to be constant in this example (I.e. no change in cash).

Chapter 4: Projection of Financial Requirements - Cash Budgets

Key Assumptions Accounts Receivable Pro forma income statements

Cash Budget by Month Inventory Analysis Pro forma balance sheets

Collection Pattern - Sales Accrued Liabilities

KEY ASSUMPTIONS Aug Sep (e) Oct Nov Dec Jan Current sales and forecast 1,925,000 2,050,000 2,175,000 2,300,000 2,450,000 2,625,000

Current purchases and forecast 750,000 675,000 650,000 650,000 650,000 650,000 Terms: net (days) 45 45 45 45

63 60 50 50 40 40 31 30 20 31

Materials usage 825,000 825,000 825,000 825,000 Wages and salaries (paid as incurred) 215,000 215,000 215,000 215,000 Other manufacturing expenses (paid as incurred) 420,000 420,000 420,000 420,000 Depreciation 43,000 43,000 43,000 43,000 Cost of goods sold as percent of sales 70.0% 70.0% 70.0% 70.0% Selling and administrative expenses % sales 15.0% 15.0% 14.0% 14.0% Payments on note payable 750,000 Interest due 300,000 Dividends payable 25,000 25,000 Income taxes due 375,000 Income tax rate 50.0% 50.0% 50.0% 50.0%

XYZ COMPANY Cash Budget by Month Six Months Ended March 31, 2002 ($000's)

Oct Nov Dec Jan Cash receipts:

Collections 2,608 2,092 2,983 2,400

Cash disbursements: Payments for purchases 1.50 months lag 713 663 650 650 Wages 215 215 215 215 Other expenses 420 420 420 420 Selling and administrative expense 326 345 343 368 Note repayments - 750 - - Interest payments - - - 300 Dividend payments 25 - - 25 Tax payments - - - 375

Total disbursements 1,699 2,393 1,628 2,353

Net cash receipts (disbursements) 910 (301) 1,355 48

Cumulative cash flow 910 609 1,964 2,012

Collection Pattern - Sales ($000's) Month of sale

Timing of collections Days Aug Sep Oct Nov Dec Jan Oct. 1-10 60 642 - - Oct. 11-20 60 642 - - Oct. 21-31 50 642 683 - Nov. 1-10 50 - 683 - - Nov. 11-20 50 - 683 - -

Collection period (days):Date change effective (e.g. 31 = 31st of month )

B14

This template will only accept values between 10 - 90 days. Also, do NOT change values between months by more than 30 days.

C15

Model assumes any collection change will occur on the last day of the month unless value overridden.

Nov. 21-30 50 - - 725 - Dec. 1-10 50 - 725 - - Dec. 11-20 40 - 725 767 - Dec. 21-31 40 - - 767 - Jan. 1-10 40 - 767 - - Jan. 11-20 40 - - 817 - Jan. 21-31 40 - - 817 - Feb. 1-10 40 - 817 - Feb. 11-20 40 - - 875 Feb. 21-28 40 - - 875 Mar. 1-10 40 - 875 Mar. 11-20 40 - - Mar. 21-31 40 - -

Accounts Receivable ($000's) % $000's

August sales 100.0% 1,925 September sales 100.0% 2,050

Sept. 30, 2001 3,975 60 days

October sales 0.0% - November sales 33.3% 767 December sales 100.0% 2,450

Dec. 31, 2001 3,217 40 days

January sales 0.0% - February sales 33.3% 917 March sales 100.0% 2,850

March 31, 2002 3,767 40 days

Inventory Analysis ($000's)

12/31/2001 3/31/2002 Raw materials: Beginning balance (ending 9/30/01) 3 month average 2,725 2,725 6 month average Purchases 650 per mo. 1,950 3,900 650

4,675 6,625 Withdrawals 825 per mo. 2,475 4,950 825 Ending balance 2,200 1,675

Finished goods: Beginning balance (ending 9/30/01) 3 month average 6,420 6,420 6 month average Materials 825 per mo. 2,475 4,950 825 Wages 215 per mo. 645 1,290 215 Other expenses 420 per mo. 1,260 2,520 420 Depreciation 43 per mo. 129 258 43

10,929 15,438 Cost of goods sold reported 4,848 10,605 Ending balance 6,082 4,833

Accrued Liabilities ($000's)

12/31/2001 3/31/2002

Beginning balance (ending 9/30/01) 2,875 2,875 Accrued interest 75 150 Accrued taxes (income statement) 494 1,171

D62

Greater than 90 days collection; template is limited from 10 - 90 days collection.

H81

Due to limited historic data, do not enter value greater than 60 days accounts receivable for 9/30/01. (Input values in table above.)

H86

Template allows for values from 0 - 90 days on 12/31/98. (Input values in table above.)

H91

Template allows for values between 0 - 90 days on March 31, 1999. (Input values in table above)

E99

per Balance Sheet for period ended Sept. 30, 2001.

E100

for 3 months since 9/30/01)

G100

for 6 months since 9/30/01

E112

Sales x Cost of goods sold as percent of sales for period.

E120

see 9/30/01 balance sheet

E121

Assume interest of $300 covers one year. Thus, by 9/31/01 $225 must have been accrued ($75 per quarter).

3,444 4,196 Interest payment - 300 Tax payment - 375 Balance shown 3,444 3,521

XYZ COMPANY Pro Forma Income Statements ($000's)

3 months ended 6 months ended 12/31/2001 3/31/2002

Sales 6,925 15,150 Cost of goods sold 4,848 10,605 Gross margin 2,078 4,545 Selling and administrative 1,014 2,054 Interest 75 150 Assume annual interest of Profit before taxes 988 2,341 Income taxes 494 1,171 Net income 494 1,171 Net income: 1/1/02 - 3/31/02

XYZ COMPANY Pro Forma Balance Sheets ($000's)

9/30/01 (e) 12/31/2001 3/31/2002 Cash 740 2,704 4,035 Accounts receivable 3,975 3,217 3,767 Raw materials 2,725 2,200 1,675 Finished goods 6,420 6,082 4,833 Plant and equipment (net) 7,210 7,081 6,952 Other assets 1,730 1,730 1,730

Total assets 22,800 23,013 22,991

Accounts payable 1,050 975 975 45 Notes payable 4,120 3,370 2,620 Accrued liability 2,875 3,444 3,521 Long-term debt 5,250 5,250 5,250 Preferred stock 1,750 1,750 1,750 Common stock 5,000 5,000 5,000 Retained earnings 2,755 3,224 3,876

Total liabilities 22,800 23,013 22,991

E147

Beginning cash + cumulative cash flow for period from Cash Budget.

B151

Since no new capital expenditures are assumed, subtract depreciation for period from beginning balance

E152

assume no change

E158

no change

E159

no change

E160

no change

E161

prior period retained earnings + net income - dividends

Collections calculation:

Lag Sales Sales 000's Collectx Change Date 10 Aug. 1-10 641,667 641.7 20 Aug. 11-20 641,667 641.7 30 Aug. 21-31 641,667 641.7 40 Sep. 1-10 683,333 683.3 60.0 50 Sep. 11-20 683,333 683.3 60.0 60 Sep. 21-30 683,333 683.3 60.0 70 10 Oct. 1-10 725,000 725.0 50.0 31 10 80 20 Oct. 11-20 725,000 725.0 50.0 31 20 90 40 Oct. 21-31 725,000 725.0 50.0 31 31 100 50 Nov. 1-10 766,667 766.7 50.0 30 10 110 60 Nov. 11-20 766,667 766.7 50.0 30 20 120 70 Nov. 21-30 766,667 766.7 50.0 30 31 130 80 Dec. 1-10 816,667 816.7 40.0 20 10 140 100 Dec. 11-20 816,667 816.7 40.0 20 20 150 110 Dec. 21-31 816,667 816.7 40.0 20 31 160 120 Jan. 1-10 875,000 875.0 40.0 31 10 170 130 Jan. 11-20 875,000 875.0 40.0 31 20 180 140 Jan. 21-31 875,000 875.0 40.0 31 31 190 150 Feb. 1-10 916,667 916.7 40.0 28 10 200 160 Feb. 11-20 916,667 916.7 40.0 28 20 210 170 Feb. 21-28 916,667 916.7 40.0 28 31 220 180 Mar. 1-10 950,000 950.0 40.0 31 10 230 190 Mar. 11-20 950,000 950.0 40.0 31 20 240 200 Mar. 21-31 950,000 950.0 40.0 31 31 250 250 260 260 270 270 280 280 290

10 20

Collection all preceding periods; fill in gaps 30 in sequencing (10-40) 40

50

Lag Diff Lag Calc Lag 1 Lag 2 Lag 3 Lag 4 60 10 10 10 10 - - - 70 20 10 20 20 - - - 80 40 20 30 30 40 - - 90 50 10 50 50 - - - 100 60 10 60 60 - - - 110 70 10 70 70 - - - 120 80 10 80 80 - - - 130 100 20 90 90 100 - - 140 110 10 110 110 - - - 150 120 10 120 120 - - - 160 130 10 130 130 - - - 170 140 10 140 140 - - - 180 150 10 150 150 - - - 190

160 10 160 160 - - - 200

170 10 170 170 - - - 210

180 10 180 180 - - - 220

190 10 190 190 - - - 230

200 10 200 200 - - - 240

Payment of purchases - 30 60 90 120 150 180 July (e) Aug Sep (e) Oct Nov Dec Jan Feb

750,000 750,000 675,000 650,000 650,000 650,000 650,000 650,000

- - 45 45 45 45 45

payment 712,500 662,500 650,000 650,000 650,000

1 2 3 4 5 vlookup Terms: - 1 2 3 Month lag

15 0.5000 0.5000 30 1.0000 45 0.5000 0.5000 15 60 1.0000 90 1

Pro forma income statements

Pro forma balance sheets

Feb Mar 2,750,000 2,850,000

650,000 650,000 45 45

40 40 28 31

825,000 825,000 215,000 215,000 420,000 420,000 43,000 43,000

70.0% 70.0%12.0% 12.0%

750,000

50.0% 50.0%

Feb Mar Total

2,567 2,708 15,358

650 650 3,975 215 215 1,290 420 420 2,520 330 342 2,054 750 - 1,500 - - 300 - - 50 - - 375 2,365 1,627 12,064

202 1,081 3,295

2,213 3,295

Feb Totals: 15,358

2,608

2,092

2,983

2,400

- - 2,567 - - 917 2,708 917

6 month average per mo.

per mo.

6 month average per mo. per mo. per mo. per mo.

Assume annual interest of 300

Net income: 1/1/02 - 3/31/02 677

days

© Modernsoft Inc., 1999All rights reserved

Change? Collect

60 60 60 Aug Sep Oct Nov Dec Jan Feb

- 60 Oct. 1-10 642 - - - 60 Oct. 11-20 642 - - 1 50 Oct. 21-31 642 683 - - 50 Nov. 1-10 - 683 - - - 50 Nov. 11-20 - 683 - - 1 50 Nov. 21-30 - - 725 - - 50 Dec. 1-10 - 725 - - 1 40 Dec. 11-20 - 725 767 - - 40 Dec. 21-31 - - 767 - - 40 Jan. 1-10 - 767 - - - 40 Jan. 11-20 - - 817 - 1 40 Jan. 21-31 - - 817 - - 40 Feb. 1-10 - 817 - - - 40 Feb. 11-20 - - 875 - 1 40 Feb. 21-28 - - 875 - - 40 Mar. 1-10 - 875 - - 40 Mar. 11-20 - - 917 1 40 Mar. 21-31 - - 917

10 20 30 40 50 60 70 80 90 Sales: 642 642 642 683 683 683 725 725 725

Aug. 1-10 Aug. 11-20 Aug. 21-31 Sep. 1-10 Sep. 11-20 Sep. 21-30 Oct. 1-10 Oct. 11-20 Oct. 21-31 Aug. 1-10

Aug. 11-20

Aug. 21-31

Sep. 1-10

Sep. 11-20

P342

Grey cells indicate sales paid in advance.

M344

To slow down collections, enter sales collections in green cells below.

N344

To speed up sales collections, enter sales in cells above (white cells only).

Sep. 21-30

Oct. 1-10 641.7 - - - - - - - - Oct. 11-20 - 641.7 - - - - - - - Oct. 21-31 - - 641.7 683.3 - - - - - Nov. 1-10 - - - - 683.3 - - - - Nov. 11-20 - - - - - 683.3 - - - Nov. 21-30 - - - - - - 725.0 - - Dec. 1-10 - - - - - - - 725.0 - Dec. 11-20 - - - - - - - - 725.0 Dec. 21-31 - - - - - - - - - Jan. 1-10 - - - - - - - - - Jan. 11-20 - - - - - - - - - Jan. 21-31 - - - - - - - - - Feb. 1-10 - - - - - - - - -

Feb. 11-20 - - - - - - - - -

Feb. 21-28 - - - - - - - - -

Mar. 1-10 - - - - - - - - -

Mar. 11-20 - - - - - - - - -

Mar. 21-31 - - - - - - - - -

210 Mar

650,000 Purchases 45 Terms 650,000

100 110 120 130 140 150 160 170 180 190 767 767 767 817 817 817 875 875 875 917 Nov. 1-10 Nov. 11-20 Nov. 21-30 Dec. 1-10 Dec. 11-20 Dec. 21-31 Jan. 1-10 Jan. 11-20 Jan. 21-31 Feb. 1-10

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 766.7 - - - - - - - - - - 766.7 - - - - - - - - - - 766.7 - - - - - - - - - - 816.7 - - - - - - - - - - 816.7 - - - - - - - - - - 816.7 - - - -

- - - - - - 875.0 - - -

- - - - - - - 875.0 - -

- - - - - - - - 875.0 -

- - - - - - - - - 916.7

- - - - - - - - - -

200 210 220 230 240 917 917 950 950 950 Feb. 11-20 Feb. 21-28 Mar. 1-10 Mar. 11-20 Mar. 21-31

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

- - - - -

- - - - -

- - - - -

- - - - -

916.7 - - - -

Chapter 5: Break-Even Analysis Key Assumptions Profit and Losses as a Function of Volume Changes

Operating Break-Even Chart

Key Assumptions Contribution per unit

Revenue 750

Variable costs 250

Contribution 500

Fixed costs 200

Break-even volume 400

Profits and losses as a function of volume changes of 25.0%

Profits and Losses as a Function of Volume Changes of 25.0%

Volume Increase Profits Increase 400 - 500 25.0% 50,000 625 25.0% 112,500 125% 781 25.0% 190,625 69% 977 25.0% 288,281 51% 1,221 25.0% 410,352 42%

Volume Decrease Losses Decrease 400 25.0% - 300 25.0% 50,000 225 25.0% 87,500 75% 169 25.0% 115,625 32% 127 25.0% 136,719 18% 95 25.0% 152,539 12%

0 100 200 300 400 500 600 700 800 900 1000 1100 1200

-

100

200

300

400

500

600

700

800

900

1,000

200


Total revenue

Variable costs

Fixed costs

Volume

$ T

ho

us

an

ds

Profit and Losses as a Function of Volume Changes Operating Break-Even Chart


All rights reserved

0 100 200 300 400 500 600 700 800 900 1000 1100 1200

-

100

200

300

400

500

600

700

800

900

1,000

200


Total revenue

Variable costs

Fixed costs

Volume

$ T

ho

us

an

ds

Volume Revenue Variable Fixed0 - 200 200

100 75 225 200 200 150 250 200 300 225 275 200 400 300 300 200 500 375 325 200 600 450 350 200 700 525 375 200 800 600 400 200 900 675 425 200

1000 750 450 200 1100 825 475 200 1200 900 500 200

Chapter 5: Basic Financial Growth Model

Key Assumptions

Net assets (capitalization) 500.0 Results Sustainable Growth Equation Debt as percent of capitalization 50.0% Income Statement The Business System - Overview Gross return on net assets 10.0% Balance Sheet Cash Flow (graph) Interest rate (before tax) 6.0% Cash Flow Statement Tax rate 33.3%

Dividend payout 0.0%

Capital structure:

Debt as percent of capitalization 50.0%

Debt to equity ratio 100.0%

Debt 250.0 ROS Equity 250.0 20.0% Net assets (capitalization) 500.0 Debt to equity x

ROC 100.0% Sustainable Sales / assetsProfitability (after taxes): 10.0% x growth rate 40.0% Gross return on net assets 10.0% x + = = x Amount of profit 50.0 Retention rate 6.0% 16.0% Financial leverage Interest rate (before tax) 6.0% 100.0% x 200.0% Tax rate 33.3% Retention rate x Interest rate (tax-adjusted) 4.0% 100.0% Retention rate Amount of interest (tax-adjusted) 10.0 100.0% Profit after interest 40.0

Disposition of profit:

Dividend payout 0.0% The Business System Dividends paid - Reinvestment of profit 40.0

105Financing: Additional debt 40.0 Funding potential 80.0 25 #REF!

Cash flow implications: 500 Amount of aftertax profit 40.0 Work cap. change Investment change Cap. Expenditures Depreciation effect 25.0 80 Cash flow from operations 65.0 Dividends paid - Cash flow available for reinvestment 65.0 Additional debt 40.0 Total investment potential 105.0

Results: Net return on net assets 8.0% Return on equity 16.0% Growth in equity 16.0%

Income Statement Period 1Sales 200Costs 100Depreciation 25Operating profit 75 0 50 10Interest 15Income before taxes 60Taxes 20Net income 40 40Dividends 0Retained earnings 40

Balance Sheet Period 0 Period 1 290 290Current assets Change in stock Funds surplus Change in debtFixed assets 0 (deficit) 40Assets 500 580 0

Current liabilitiesLong-term debt 250 290 80Shareholders' equity 250 290Liabilities and equity 500 580

Working capitalCapitalization 500 580

Cash Flow StatementOperating Activities:Net income 40Depreciation 25Change in working capitalCash provided by operating activites 65

Investing Activities:Capital expenditures -105Dis-investmentsCash (used in) investing activities -105

Financing Activities:Debt proceeds (repayments) 40Dividends paid 0Stock proceeds (repurchase) 0Cash from financing activites 40

Increase (decrease) in cash 0Beginning cash 0Ending cash 0

( ROC - i )

Investment

Financing

Operations

-120 -100 -80 -60 -40 -20 0 20 40 60 80

-105

65

40

0

0

Cash FlowUses Sources

OperatingInvesting Financing

Cash flow from operations

Investment potential

Debt

Stock

Dividends

Sustainable Growth Equation

New investment

Investment base

Depreciation effect

Dis-investment

Price Volume

Costs(fixed & variable)

Dividends Operating profitafter taxes

Interest (tax-adjusted)

Retained earnings

Shareholders' equity

Long-term debt

Funding potential

E4

Base period balance

I4

Capital structure Profitablility (after taxes) Disposition of profit Financing Cash flow implications Results

E5

Debt as percent of Debt + Equity

B6

Profits before interest, after taxes related to net assets (capitalization)

E6

After tax basis

E9

Dividends as percent of Net income

E13

D / C = t D / (D+E) = t Solve for D / E: D / E = t / (1 - t)

O14

Return on sales after tax = Net income/sales = P / S. Note: Sales and costs are inferred from given assumptions.

E16

Base period balance

K16

Financial leverage as measured by D / E.

I17

Return on capitalization = Gross return on net assets, before interest, after taxes = r.

O17

Asset turnover as measured by Sales / Net assets = S / A.

M18

Sustainable growth in equity = rp + D/E ( r - i) p.

B19


K19

Difference between return on capitalization and the interest cost of debt funds (tax adjusted) = ( r - i ).

I20

Retention rate of earnings = ( 1 - dividend payout) = p

O20

Financial leverage as measured by Net assets / Shareholders' equity = A / E.

K22

Retention rate of earnings = ( 1 - dividend payout) = p.

O23

Retention rate of earnings = ( 1 - dividend payout) = p

K31

Total "investment potential" reinvested in capital expenditures plus change in working capital.

K36

Investment base (beg. balance) = Capitalization = Net assets

K38

New investment - Depreciation effect - Dis-investment

B46

Profits after interest and taxes related to net assets.

B48

Growth in recorded equity based on earnings reinvested after payment of dividends.

E51

Inferred sales based on costs, depreciation and operating profit levels.

E52

Assumed cost level. There are infinite combinations of costs and sales for any given assumptions for depreciation and operating profit.

K54

Profits before interest, but after taxes.

B62

Current assets, current liabilites and fixed assets not broken out separately.

I62

Based on targeted debt-to-equity ratio

M62

Based on targeted debt-to-equity ratio

I64

Change in stock (net) = proceeds from stock issued (less stock retired)

M64

Net proceeds from long-term debt after repayments.

K65

"Funds surplus / (deficit)" is the difference between the "investment change" and the derived "funding potential". It represents the under / (over) invested position given profitability levels and targeted capital structure (debt / equity ratio).

E68


K68

Based on targeted debt to equity ratio; includes actual equity financing from retained earnings and stock proceeds, plus actual proceeds from long-term debt, plus "funds surplus (deficit)".

B72

Working capital detail not shown separately.

B73


E79


E83

Assume total "investment potential" reinvested in capital expenditures. In other words, this example does not break out investment in working capital from investment in fixed assets (capital expenditures).

Chapter 5: Financial Growth Model - Impact of Different Policies

Policy assumption inputs Capital structure Financing (next year)

Profitablity (after taxes) Cash flow implications

Disposition of profit Results

POLICY ASSUMPTION INPUTS: Case I Case II Case III Case IV Case V Case VI Case VII

Net assets (capitalization) 500.0 500.0 500.0 500.0 500.0 500.0 500.0

Debt as percent of capitalization 0.0% 50.0% 50.0%

Gross return on net assets 10.0% 10.0% 10.0%

Interest rate (before tax) 0.00% 6.00% 6.00%

Tax rate 33.3% 33.3% 33.3%

Dividend payout 0.0% 0.0% 50.0%

Depreciation effect 25.0 25.0 25.0

Capital structure: Case I Case II Case III Case IV Case V Case VI Case VII

Debt as percent of capitalization 0.0% 50.0% 50.0% 0.0% 0.0% 0.0% 0.0%

Debt to equity ratio 0.0% 100.0% 100.0% 0.0% 0.0% 0.0% 0.0%

Debt - 250.0 250.0 - - - -

Equity 500.0 250.0 250.0 500.0 500.0 500.0 500.0

Net assets (capitalization) 500.0 500.0 500.0 500.0 500.0 500.0 500.0

Profitability (after taxes):

Gross return on net assets 10.0% 10.0% 10.0% 0.0% 0.0% 0.0% 0.0%

Amount of profit 50.0 50.0 50.0 - - - -

Interest rate (before tax) 0.00% 6.00% 6.00% 0.00% 0.00% 0.00% 0.00%

Tax rate 33.3% 33.3% 33.3% 0.0% 0.0% 0.0% 0.0%

Interest rate (tax-adjusted) 0.00% 4.00% 4.00% 0.00% 0.00% 0.00% 0.00%

Amount of interest (tax-adjusted) - 10.0 10.0 - - - -

Profit after interest 50.0 40.0 40.0 - - - -

Disposition of profit:

Dividend payout 0.0% 0.0% 50.0% 0.0% 0.0% 0.0% 0.0%

Dividends paid - - 20.0 - - - -

Reinvestment of profit 50.0 40.0 20.0 - - - -

Financing:

Additional debt - 40.0 20.0 - - - -

Funding potential 50.0 80.0 40.0 - - - -

Cash flow implications:

Amount of aftertax profit 50.0 40.0 40.0 - - - -

Depreciation effect 25.0 25.0 25.0 - - - -

Cash flow from operations 75.0 65.0 65.0 - - - -

Dividends paid - - 20.0 - - - -

Cash flow available for reinvestment 75.0 65.0 45.0 - - - -

Additional debt - 40.0 20.0 - - - -

Total investment potential 75.0 105.0 65.0 - - - -

Results:

Net return on net assets 10.0% 8.0% 8.0% 0.0% 0.0% 0.0% 0.0%

Return on equity 10.0% 16.0% 16.0% 0.0% 0.0% 0.0% 0.0%

Growth in equity 10.0% 16.0% 8.0% 0.0% 0.0% 0.0% 0.0%

D10

Profits before interest and after taxes as a percent of Net assets (Capitalization)

E10

Aftertax percent

E18

D / C = t D / (D+E) = t Solve for D / E: D / E = t / (1 - t)

B24


B51

Profits after interest and taxes related to net assets.

B53


Policy assumption inputs Capital structure Financing (next year)

Profitablity (after taxes) Cash flow implications

Disposition of profit Results ($ thousands)

POLICY ASSUMPTION INPUTS: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Net assets (capitalization) 900.0

Debt as percent of capitalization 33.3% 43.0% 43.0% 50.0% 50.0% 50.0%

Gross return on net assets 8.0% 7.0% 8.0% 8.0% 9.0%

Interest rate (before tax) 6.00% 6.00% 6.00% 6.75% 6.75%

Tax rate 33.3% 33.3% 33.3% 33.3% 33.3%

Dividend payout 60.0% 50.0% 50.0% 50.0% 40.0%

Depreciation effect 40.0 46.0 50.0 65.0 72.0

($ thousands)

Capital structure: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Debt as percent of capitalization 33.3% 43.0% 43.0% 50.0% 50.0% 50.0%

Debt to equity ratio 50.0% 75.4% 75.4% 100.0% 100.0% 100.0%

Debt 300.0 470.7 492.5 688.9 728.5 787.5

Equity 600.0 624.0 652.9 688.9 728.5 787.5

Net assets (capitalization) 900.0 1,094.7 1,145.4 1,377.7 1,457.0 1,575.0

Profitability (after taxes): Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Gross return on net assets 8.0% 7.0% 8.0% 8.0% 9.0% 0.0%

Amount of profit 72.0 76.6 91.6 110.2 131.1 -

Interest rate (before tax) 6.00% 6.00% 6.00% 6.75% 6.75% 0.00%

Tax rate 33.3% 33.3% 33.3% 33.3% 33.3% 0.0%

Interest rate (tax-adjusted) 4.00% 4.00% 4.00% 4.50% 4.50% 0.00%

Amount of interest (tax-adjusted) 12.0 18.8 19.7 31.0 32.8 -

Profit after interest 60.0 57.8 71.9 79.2 98.3 -

Disposition of profit: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Dividend payout 60.0% 50.0% 50.0% 50.0% 40.0% 0.0%

Dividends paid 36.0 28.9 36.0 39.6 39.3 -

Reinvestment of profit 24.0 28.9 36.0 39.6 59.0 -

Financing (next year): Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

New debt, old ratio 12.0 21.8 27.1 39.6 59.0 -

New debt, revised ratio 158.7 - 169.2 - - (787.5)

Funding potential 194.7 50.7 232.3 79.2 118.0 (787.5)

Cash flow implications: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Amount of aftertax profit 60.0 57.8 71.9 79.2 98.3 -

Depreciation effect 40.0 46.0 50.0 65.0 72.0 -

Cash flow from operations 100.0 103.8 121.9 144.2 170.3 -

Dividends paid 36.0 28.9 36.0 39.6 39.3 -

Cash flow available for reinvestment 64.0 74.9 86.0 104.6 131.0 -

Additional debt 170.7 21.8 196.3 39.6 59.0 (787.5)

Chapter 5: Five-Year Projection - Effect of Policy Changes

J7

This template allows the projection to be extended to 8 years.

Total investment potential 234.7 96.7 282.3 144.2 190.0 (787.5)

Results: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Net return on net assets 6.7% 5.3% 6.3% 5.8% 6.7% 0.0%

Return on equity 10.0% 9.3% 11.0% 11.5% 13.5% 0.0%

Growth in equity 4.0% 4.6% 5.5% 5.8% 8.1% 0.0%

Earnings per share 100,000 0.60 0.58 0.72 0.79 0.98 -

Dividends per share 0.36 0.29 0.36 0.40 0.39 -

B55


D56

Common shares outstanding

Chapter 6 - 7: Comparing Alternatives - Present Value Analysis

Present Value Analysis Project Cash Flows Chart

Key Assumptions TOTALS 0 1 2 3 4 5 6 7 8 9 10

Net investment outlay & recovery -10,500 -11,500 1,000

Annual benefits 28,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000

Depreciation 1,500 1,500 1,500 1,500 1,500 1,500 1,500

Tax rate 36.0%

PV Factor 14.0%

TOTALS 0 1 2 3 4 5 6 7 8 9 10

Tax rate @36% 36% 36% 36% 36% 36% 36% 36% 36% 36% 36%

Aftertax benefits 17,920 2,560 2,560 2,560 2,560 2,560 2,560 2,560 0 0 0

Depreciation tax shield 3,780 540 540 540 540 540 540 540 0 0 0

Total project cash flows (incl. recovery) 11,200 -11,500 3,100 3,100 3,100 3,100 3,100 3,100 4,100 0 0 0

PV Factor @ 14% 1.000 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351 0.308 0.270

Present value of investment cash flows -11,100 -11,500 0 0 0 0 0 0 400 0 0 0

Present value of operating cash flows 13,294 2,719 2,385 2,092 1,835 1,610 1,412 1,239 0 0 0

Present value of total cash flows -11,500 2,719 2,385 2,092 1,835 1,610 1,412 1,639 0 0 0

Cumulative present value -11,500 -8,781 -6,395 -4,303 -2,467 -857 555 2,193 2,193 2,193 2,193

Net present value @ 14% 2,193

Profitability index (BCR) @ 14% 1.20

Internal rate of return 19.9%

Present value payback @ 14% 6 Year * *

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

-15000

-10000

-5000

0

5000

10000

Project Cash Flows

Depreciation tax shield

Annual benefits - aftertax

Net investment outlay & recovery

Year

$

D7

Time of initial outlay.

K7

Example has a project life of only 7 years. Template provides for data entry for project life up to 15 years.

B8

Express "outlays" as negative number; "recovery" as positive number.

B9

before tax basis

E9

before tax basis

E10

Enter annual depreciation here on a pretax basis; example assumes constant for all years. User should feel free to override depreciation figures to reflect alternative method (e.g. accelerated).

C11

Enter "tax rate" here; assume constant for entire project life

C12

Enter present value rate here as decimal.

E17

Depreciation shield = Aftertax benefits from depreciation = (Annual depreciation x tax rate).

Chapter 9: Analysis of Financing Choices

Key Assumptions Recap of EPS Analyses

Balance Sheet Zero EPS Calculation

Range of EBIT and EPS Chart EPS Calculation - Original

Key Assumptions ($000's)

Operations: Original New

EBIT - before new product 7,999

EBIT - incremental from new product 2,000

Investment:

Current assets 15,000

Fixed assets (net) 29,000

Other assets 1,000

Current liabilities 7,000

Financing:

New financing (debt/preferred/common) 10,000

Tax rate 34.0% 34.0%

Interest rate 11.5%

Preferred dividend rate 12.5%

Dividends per share $ 2.50 $ 2.50

Common shares O/S (000's) 1,000 1,275

Price per common share (net) $ 10.00 $ 36.36

Cost of capital 13.25%

Retained earnings 28,000

Balance Sheet (original)

Current assets 15,000

Fixed assets 29,000

Other assets 1,000

Assets 45,000

Current liabilities 7,000

Long-term debt 0

Preferred stock 0

Common stock 10,000

Retained earnings 28,000

Liabilities and equity 45,000

ABC CORPORATION Recap of EPS Analyses with new Product ($000's)

New Financing of $10 Million

Original Debt Preferred Common

Earnings before interest and taxes (EBIT) 7,999 9,999 9,999 9,999

Less: Interest charges on long-term debt 0 1,150 0 0

Earnings before income taxes 7,999 8,849 9,999 9,999

Less: Incomes taxes at 34% 2,720 3,009 3,400 3,400

0.00 2.00 4.00 6.00 8.00 10.00 12.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

$2.50

$5.28

4.53

2.75

ABC CORPORATION: Range of EBIT and EPS Chart

OriginalBondsPreferredCommonOrig. EPS

EBIT ($millions)

EPS ($)

D23

Inferred "book value" per common share

F23

New issue price (net)

F24

Based of cost of capital with CAPM (Capital Asset Pricing Model): Risk free return of 6.5% and beta of 0.9, and the expected average return per S&P 500 of 14.0% = Cost of capital of 13.25%. See TFA text for detailed explanation.

E42

Schedules below provide details for this recap.

Earnings after income taxes 5,279 5,840 6,599 6,599

Less: Preferred dividends 0 0 1,250 0

Earnings available for common stock 5,279 5,840 5,349 6,599

Common shares outstanding (000's) 1,000 1,000 1,000 1,275

Earnings per share (EPS) $ 5.28 $ 5.84 $ 5.35 $ 5.18

Less: Common dividends per share $ 2.50 $ 2.50 $ 2.50 $ 2.50

Retained earnings per share $ 2.78 $ 3.34 $ 2.85 $ 2.68

Retained earnings in total 2,779 3,340 2,849 3,412

Original EPS change (before new product) -14.4% -23.7% -21.6%

Final EPS change (with new product) 10.6% 1.3% -2.0%

Specific cost 7.59% 12.50% 13.25%

ABC CORPORATION Zero EPS Calculation ($000's)

New Financing of $1 Million

Original Debt Preferred Common

Earnings per share (EPS) 0 0 0 0

Common shares outstanding (000's) 1,000 1,000 1,000 1,275

Earnings available for common stock 0 0 0 0

Preferred dividends 0 0 1,250 0

Earnings after taxes 0 0 1,250 0

Incomes taxes at 34% 0 0 644 0

Earnings before income taxes 0 0 1,894 0

Interest charges on long-term debt 0 1,150 0 0

EBIT or zero EPS 0 1,150 1,894 0

ABC CORPORATION ABC CORPORATION Earnings per Share Calculation - Original ($000's) Earnings per Share with New Bond Issue ($000's)

Original

Earnings before interest and taxes (EBIT) 7,999 Earnings before interest and taxes (EBIT)

Less: Interest charges on long-term debt Less: Interest charges on long-term debt

Earnings before income taxes 7,999 Earnings before income taxes

Less: Incomes taxes at 34% 2,720 Less: Incomes taxes at 34%

Earnings after income taxes 5,279 Earnings after income taxes

Less: Preferred dividends Less: Preferred dividends

Earnings available for common stock 5,279 Earnings available for common stock

Common shares outstanding (000's) 1,000 Common shares outstanding (000's)

Earnings per share (EPS) $ 5.28 Earnings per share (EPS)

Less: Common dividends per share $ 2.50 Less: Common dividends per share

Retained earnings per share $ 2.78 Retained earnings per share

Retained earnings in total 2,779 Retained earnings in total

Original EPS

Change in EPS

Percent change in EPS

F60

Aftertax interest rate

H60

Preferred dividends rate is by definition aftertax.

J60

Presumed cost of capital (see TFA text for detail explanation).

ABC CORPORATION ABC CORPORATION Earnings per Share with New Preferred Stock Issue ($000's) Earnings per Share with New Common Stock Issue ($000's)

Before New With New

Product Product

Earnings before interest and taxes (EBIT) 7,999 9,999 Earnings before interest and taxes (EBIT)

Less: Interest charges on long-term debt 0 0 Less: Interest charges on long-term debt

Earnings before income taxes 7,999 9,999 Earnings before income taxes

Less: Incomes taxes at 34% 2,720 3,400 Less: Incomes taxes at 34%

Earnings after income taxes 5,279 6,599 Earnings after income taxes

Less: Preferred dividends 1,250 1,250 Less: Preferred dividends

Earnings available for common stock 4,029 5,349 Earnings available for common stock

Common shares outstanding (000's) 1,000 1,000 Common shares outstanding (000's)

Earnings per share (EPS) $ 4.03 $ 5.35 Earnings per share (EPS)

Less: Common dividends per share $ 2.50 $ 2.50 Less: Common dividends per share

Retained earnings per share $ 1.53 $ 2.85 Retained earnings per share

Retained earnings in total 1,529 2,849 Retained earnings in total

Original EPS $ 5.28 $ 5.28 Original EPS

Change in EPS -$ 1.25 $ 0.07 Change in EPS

Percent change in EPS -23.7% 1.3% Percent change in EPS

EPS Calculation with New Bond Issue

EPS Calculation with New Preferred Stock Issue

EPS Calculation with New Common Stock Issue

EPS = [(E - i)(1 - t) - d]/sE = EBITi = interest $t = tax rated = preferred dividends $s = shares outstanding

E(1-t)/s(E-i)(1-t)/s(E(1-t)-d)/sE(1-t)/s

0.00 2.00 4.00 6.00 8.00 10.00 12.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

$2.50

$5.28

4.53

2.75

ABC CORPORATION: Range of EBIT and EPS Chart

OriginalBondsPreferredCommonOrig. EPS

EBIT ($millions)

EPS ($)

Earnings per Share with New Bond Issue ($000's) Before New With New

Product Product

Earnings before interest and taxes (EBIT) 7,999 9,999

Less: Interest charges on long-term debt 1,150 1,150

6,849 8,849

2,329 3,009

4,520 5,840

- 0

Earnings available for common stock 4,520 5,840

Common shares outstanding (000's) 1,000 1,000

$ 4.52 $ 5.84

Less: Common dividends per share $ 2.50 $ 2.50

$ 2.02 $ 3.34

2,020 3,340

$ 5.28 $ 5.28

-$ 0.76 $ 0.56

-14.4% 10.6%

Earnings per Share with New Common Stock Issue ($000's) Before New With New

Product Product

Earnings before interest and taxes (EBIT) 7,999 9,999

Less: Interest charges on long-term debt 0 0

7,999 9,999

2,720 3,400

5,279 6,599

0 0

Earnings available for common stock 5,279 6,599

Common shares outstanding (000's) 1,275 1,275

$ 4.14 $ 5.18

Less: Common dividends per share $ 2.50 $ 2.50

$ 1.64 $ 2.68

2,092 3,412

$ 5.28 $ 5.28

-$ 1.14 -$ 0.10

-21.6% -2.0%


All rights reserved

EPS = [(E - i)(1 - t) - d]/s

d = preferred dividends $s = shares outstanding

BREAKEVEN data source for graphingEPS=

EBIT 0.00 5.32 8.76 11.00Original 0.00 3.51 5.78 7.26Bonds -0.76 2.75 5.02 6.50Preferred -1.25 2.26 4.53 6.01Common 0.00 2.75 4.53 5.69Orig. EPS $ 5.28 $ 5.28 $ 5.28 $ 5.28 Div/Sh $ 2.50 $ 2.50 $ 2.50 $ 2.50

Chapter10-11: Total Company Valuation

Totals

Key Assumptions Year: 0 1 2 3 4 5 6 7 8 9

EBIT x (1 - t) 10,000 12,000 13,000 12,000 13,500 12,500

Add: write-offs and non-cash items 6,500 7,000 8,600 9,300 9,900 11,900

Less: net new working capital -1,200 -1,400 -1,800 500 -1,600 -2,000

Less: net new capital investments -8,000 -15,000 -10,200 -11,000 -22,000 -10,000

Add/less: significant non-operating items 500 -300 400 1,200 -800 0

Free cash flow 7,800 2,300 10,000 12,000 -1,000 12,400 0 0 0

Ongoing value 187,500

Present value factors @ 12.0% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361

Present value of free cash flow 6,964 1,834 7,118 7,626 -567 6,282 0 0 0

Present value of ongoing value 0 0 0 0 0 94,993 0 0 0

Cumulative present value 124,250 6,964 8,798 15,916 23,542 22,974 124,250 124,250 124,250 124,250

Firm value 124,250

Non-operating assets 5,700

Total value 129,950

Value of long-term debt outstanding 40,000

Value of company equity 89,950

B5

EBIAT: Earnings before interest, after taxes

C12

Enter Present Value Rate here as decimal.

B18

Cash, marketable securities, etc.

Chapter 11: An Illustration of Economic Profit, CFROI, and Earnings Measures ($000's)

Key Assumptions The Divergence of Accounting and Cash Flow Measures (graph) Working capital - initial 2,000

Fixed investment - initial 10,000 Economic Profit Analysis Economic life 8 Cash Flow Return on Investment Analysis Cost of capital 10.0% Other Measures Net present value factor 10.0%

NOPAT 824.4 Note: The simplified example here shows a company earning exactly its cost of capital.

Capital amortization 874.4 In other words, the net present value of Economic profits when discounted at the Cost of

Depreciation effect 1,250 capital equals zero; likewise the DCF-ROI or IRR equals the Cost of capital.

Economic Profit Analysis 0 1 2 3 4 5

Book value of fixed investment (beg.) 10,000 8,750 7,500 6,250 5,000

Working capital 2,000 2,000 2,000 2,000 2,000

Total book value 12,000 10,750 9,500 8,250 7,000

Cost of capital 10.0% 10.0% 10.0% 10.0% 10.0%

Capital charge @ 10% 1,200 1,075 950 825 700

NOPAT 824 824 824 824 824

Economic profit (EVA) -376 -251 -126 -1 124

Present value factor @ 10% 1.000 0.909 0.826 0.751 0.683 0.621

Net PV of economic profits @ 10% 0 -341 -207 -94 0 77

Cash Flow Return on Investment Analysis 1 2 3 4 5

NOPAT 824 824 824 824 824

Add back depreciation effect 1,250 1,250 1,250 1,250 1,250

Operating cash flow generated 2,074 2,074 2,074 2,074 2,074

Initial investment 12,000 12,000 12,000 12,000 12,000 12,000

Cost of capital 10.0% 10.0% 10.0% 10.0% 10.0%

Capital charge @ 10% 1,200 1,200 1,200 1,200 1,200

Capital amortization @ 10% 874 874 874 874 874

Terminal recovery of working capital 0 0 0 0 0

Total cash flow requried -12,000 2,074 2,074 2,074 2,074 2,074

Present value of future cash flows 12,000 1,886 1,714 1,559 1,417 1,288

Net present value @ 10% 0

Other Measures 0 1 2 3 4 5

ROE 6.9% 7.7% 8.7% 10.0% 11.8%

ROCE / RONA 6.9% 7.7% 8.7% 10.0% 11.8%

ROGI 17.3% 17.3% 17.3% 17.3% 17.3%

CFROI 10.0% 10.0% 10.0% 10.0% 10.0%

1 2 3 4 5 6 7 80.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

10.0%

10.0%

6.9%

25.4%

17.3%

The Divergence of Accounting and Cash Flow MeasuresProject/business IRRCost of capitalAccounting ROAAccounting ROGI

Year

Rat

e o

f re

turn

C8

In this example, NOPAT is discounted at the cost of capital.

B9

Net operating profit after taxes - assumed to be level during economic life.

C9

This particular example is a special case: this is the level of NOPAT ("constant payment") that will produce a net present value of zero for economic profits (EVA); i. e. the company is earning exactly its cost of capital. This figure can be derived given the Initial investment and the cost of capital / present value factor.

C10

A periodic amount which would "recover" initial fixed investment --- on a discounted / present value basis. In effect, the capital amortization is a "recovery" capital (fixed), adjusted for the time value of money. Note: Working capital is "recovered" at the end of the economic life of the project/business. The value for NOPAT in this example represents a special case: the constant level of NOPAT to arrive at a net present value of zero -- i.e. the company is earning exactly its cost of capital.

C11

Annual depreciation effect assuming straight line over economic life (gross fixed assets / economic life)

D16

Beginning balance shown

D21

Assume level over economic life.

C36

Investment = negative cash flow

C37

Total of discounted future cash flows, excludes initial investment.

D37

Discounted cash flow using Present value factors (see above).

C38

Initial investment plus present value of future cash flows.

D41

If no debt, ROE = RONA (ROCE)

B43

Return on gross investment, a surrogate for cash flow return on gross investment (initial investment in this case).

B44

Otherwise known as IRR (Internal Rate of Return): rate at which net present value = 0

Graph Data1 2 3 4 5 6

Project/business IRR 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

Cost of capital 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

Accounting ROA 6.9% 7.7% 8.7% 10.0% 11.8% 14.3%

Accounting ROGI 17.3% 17.3% 17.3% 17.3% 17.3% 17.3%

1 2 3 4 5 6 7 80.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

10.0%

10.0%

6.9%

25.4%

17.3%


Year

Rat

e o

f re

turn

The Divergence of Accounting and Cash Flow Measures (graph)

Note: The simplified example here shows a company earning exactly its cost of capital.

In other words, the net present value of Economic profits when discounted at the Cost of

capital equals zero; likewise the DCF-ROI or IRR equals the Cost of capital.

6 7 8 9 10 11 12 13 14 15

3,750 2,500 1,250 0 0 0 0 0 0 0

2,000 2,000 2,000 0 0 0 0 0 0 0

5,750 4,500 3,250 0 0 0 0 0 0 0

10.0% 10.0% 10.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

575 450 325 0 0 0 0 0 0 0

824 824 824 0 0 0 0 0 0 0

249 374 499 0 0 0 0 0 0 0

0.564 0.513 0.467 - - - - - - -

141 192 233 0 0 0 0 0 0 0

6 7 8 9 10 11 12 13 14 15

824 824 824 0 0 0 0 0 0 0

1,250 1,250 1,250 0 0 0 0 0 0 0

2,074 2,074 2,074 0 0 0 0 0 0 0

12,000 12,000 12,000 0 0 0 0 0 0 0

10.0% 10.0% 10.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

1,200 1,200 1,200 0 0 0 0 0 0 0

874 874 874 0 0 0 0 0 0 0

0 0 2,000 0 0 0 0 0 0 0

2,074 2,074 4,074 0 0 0 0 0 0 0

1,171 1,065 1,901 0 0 0 0 0 0 0

6 7 8 9 10 11 12 13 14 15

14.3% 18.3% 25.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

14.3% 18.3% 25.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

17.3% 17.3% 17.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

10.0% 10.0% 10.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

1 2 3 4 5 6 7 80.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

10.0%

10.0%

6.9%

25.4%

17.3%


Year

Rat

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f re

turn


All rights reserved

7 8

10.0% 10.0%

10.0% 10.0%

18.3% 25.4%

17.3% 17.3%

1 2 3 4 5 6 7 80.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

10.0%

10.0%

6.9%

25.4%

17.3%


Year

Rat

e o

f re

turn

These templates are intended to be used as a companion to TECHNIQUES OF FINANCIAL ANALYSIS (TFA),by Dr. Erich Helfert, 10th Millennium Edition.

Every template is taken from specific examples/exercises in the text book. References to the book arefound on the Main Menu. As such, these templates should be used along side the book which explainsthe relevance and design of each exercise.

Insofar as TFA's emphasis is around the concept that any business is essentially a financial system of cash

your understanding of the concepts presented in TFA.

These templates are Microsoft Excel templates (using Excel 97). It is assumed the user has a basicunderstanding of using Excel. All templates follow the schematic shown in the example below.

Sample Template

Key Assumptions

Sales 500.0

Costs as percent of sales 40.0%

Income Statement

Sales Sales 500.0

Costs Costs 200.0

Income Income 300.0

TIPS and TRICKS

VIEWING

SENSITIVITYANALYSIS section for input. Go to table / chart / graph to observe resultant change. Now use the

MODIFYING If you're an experienced Excel user, if you wish you can easily modify and customizeTEMPLATES the template(s) for your own use. Simply unprotect the worksheet. However, be

mess up, don't worry. Simply retrieve the original templates from your program disk.)

Note: Some of the graphics may not appear correctly on your screen. This is NOT a problem with your computer/screen or the template. These templates are optimized fora screen resolution of 1024 x 768.

WELCOME to Interactive Templates for TFA

flows ... these templates allow the user to examine the interrelationships between investment,operating, and financing variables within the financial system. Collectively, they should greatly enhance

Below is a quick reference on How to Use Interactive Templates for TFA and a few Tips and Tricks.

HOW TO USE Interactive Templates for TFA

Zoom in/out with different magnifications to optimize view for your screen.Use split screen and freeze panes commands to view multiple panels.Open new window to view multiple windows simultaneously.

To quickly view the results of changing one input, first enter new value in Assumptions

undo and redo buttons on your toolbar, alternatively, to see before and after impact.

careful not to violate the financial integrity of the interrelationships. (P.S. If you

ALL inputs are made in the Assumptions table found in the upper left part of each worksheet.

Inputs are only allowed in white cells which are unlocked. The remainder of the worksheet is protected and will NOT allow any changes.

Change values here and observe the results in the tables and charts.

Results are displayed in separate tables. Every table is taken directly from TFA. All calculated terms are displayed in shaded cells (which are locked and protected).

-

100.0

200.0

300.0

400.0

500.0

600.0

Sales

Costs

Income

Graphs and charts, also taken directly from TFA, are dynamically linked to the inputs and results. Change the inputs and observe the changes on the graph / chart.

To display comments, rest pointer over cell with red comment indicator in upper-right corner of cell.

Click here to access MAIN MENU. From there you can go to any worksheet by simply clicking on the appropriate button. Alternatively, click on tabs below at any time for direct access to any worksheet / template.

Click on Home button to return to top of template.

Click to view graph / table

START HERE(Try me!)

F31

include all costs including taxes.

tfa templates

Documents