经济学兹维博迪金融学件Chapter03.pptx

1Chapter 3 Contents3.1 Functions of Financial Statements3.2 Review of Financial Statement3.3 Market values v.Book Values3.4 Accounting v.Economic Measures of Income3.5 Return on Shareholders v.Return on Book Equity3.6 Analysis Using Financial Ratios3.7 The Financial Planning Process3.8 Constructing a Financial Planning Model3.9 Growth&the Need for External Financing3.10 Working Capital Mgmt.3.11 Liquidity&Cash Mgmt.23.1 Functions of Financial StatementsFinancial Statements:Provide information to the owners&creditors of a firm about the current status and past performanceProvide a convenient way for owners&creditors to set performance targets&to impose restrictions of the managers of the firmProvide a convenient templates for financial planning33.2 Review of Financial Statements Balance SheetsBalance Sheets Income StatementsIncome Statements Cash-Flow StatementsCash-Flow Statements4The Balance SheetSummarizes a firms assets,liabilities,and owners equity at a moment in timeAmounts measured at historical values and historical exchange ratesPrepared according to GAAP,Generally Accepted Accounting PrinciplesGAAP modified occasionally by the Financial Accounting Standards BoardExchange-listed companies must comply with Securities and Exchange Commission(SEC)rules5The Balance SheetMajor Divisions:AssetsCurrent assets(less than a year)Long-term assets(longer than a yearDepreciationLiabilities and Stockholders EquityLiabilitiesCurrent LiabilitiesLong-term debtEquity6GPC Balance Sheet on December 317The Income StatementSummarizes the profitability of a company during a time periodMajor Divisions:Revenue&cost of goods sold Gross marginGeneral administrative and selling expenses(GS&A)Operating incomeDebt service Taxable incomeCorporate Taxes Net income8The Income StatementImportant Reminders:Retained earnings are not added to the cash balance in the balance sheet,but are added to shareholders equityAccounts show historical values,not market valuesThe shareholders equity may be much higher or lower than the market value of the firm The value of the firms land may have halved or doubled,but this would not be reported in the balance sheet910The Cash-Flow StatementShow the cash that flowed into and from a firm in during a time periodFocuses attention on a firms cash situation A firm may be profitable and short of cashUnlike the balance sheet and income statement,cash flow statements are independent of accounting methods The IRS uses accounting income to compute tax,so accounting rules have a second order effect on cash flows through taxes111213Notes to Financial StatementsExplains accounting methods usedDetails of assets and liabilitiesDetails of equity structureDocuments changes in operationDocuments off-balance-sheet items14Reviewing Published AccountsUsual orderfeel quality of the paper,review picturesread Chairs reportreview accountsread notesproduce estimatesCorrect orderproduce estimatesread notescompare your numbers&reportsread Chairs reportcheck picturesetc.15Reasons for this OrderingForm your own unbiased expectations independently of the latest financial reportNotes to accounts give the numbers more precise meaningCompare your numbers and the firms to tell you where to focus when reading the chairs report.Look for omissions and conflicts Compare the PR-Departments public image with your(now)informed investors view163.3 Market Values v.Book ValuesNot all assets and liabilities are included,and others are understate and/or overstatedIntangible assets such as patents may have some value included,but brand loyalty,technological know-how,or a highly trained loyal workforce will not be valued.Goodwill may be included,but soon loses its connection to market value because of accounting depreciation and market fluctuationsSome contingent liabilities such as law-suits are not routinely disclosed,or only disclosed in the notesAccountants are beginning to mark-to-market the assets of pension funds173.4 Accounting v.Economic Measures of IncomeEconomists Measure of Net IncomeNet cash flow to shareholders plus change in market value of existing shareholders equityAccountants Measure of Net IncomeRevenue Less Expenses Less TaxesThe above two measures would be equal if accountants marked all relevant assets and liabilities to market(they dont!)18Accounting v.Economic Measures of Income:ExampleGPCs accounting net income was plus$23,400,000 in 2001Assume the total market value of the stock fell from$200,000,000 to$187,000,000 from year 2xx0 to 2xx1.We saw earlier that the cash dividend to shareholders was$10,000,000.The economic income in year 2xx1 was minus$2,800,000The Accounting and Economic measures of Income may differ substantially193.5 Returns to Shareholders v.Return on Book EquityRecall our definition in Chapter 2 of the holding period return,and compare this with the economic measure of incomeThis is the Total Shareholder Return20Returns to Shareholders v.Return on Book Equity(Continued)Traditionally,corporate performance has been measured by Return on Equity,ROE21Returns to Shareholders v.Return on Book Equity(Conclusion)Thus,we see that there is no correspondence between a firms ROE in any year&the total rate of return earned by shareholders on their investment in the companys stock223.6 Analysis using Financial RatiosDespite the differences in accounting and financial principles,the published accounts of a firm yield clues about its financial conditionFive aspects of a firms performance:ProfitabilityAsset turnoverFinancial leverageLiquidityMarket value23Profitability24Asset Turnover25Financial Leverage26Liquidity27Market Value28Ratio ComparisonsEstablish Your PerspectiveShareholderEmployee,Management,or UnionCreditorPredator,Customer,Supplier,Competitor,Trade AssociationBenchmarksOther companies ratiosThe firms historical ratiosData extracted from financial marketsSourcesDun&Bradstreet,Robert Morris,Commerce Departments Quarterly Financial Report,Trade Associations29Relationships Amongst RatiosIt is sometimes valuable to decompose ratios into sums,differences,products and quotients of other ratios.Many such schemes start with:30Ratio Analysis Limitations Ratio analysis indicates where you might profitably focus your attention,but it can also mislead youLook for collaborating evidence for the hypotheses you form from the ratiosSound long-term goals of a firm may cause ratios to look awful.Management-by-ratios may not be in the firms long-term interestCompanies in the same industry may have very different distribution channels,and accounting methods,leading to markedly different ratios that are none-the-less appropriate to each company31Comment:Always keep in mind that financial statements are prepared according to accounting standards and traditions,and that they do not fully satisfy the needs of a financial analystsThey do yield useful information if used with care and understanding32Effect of Financial LeverageFinancial leverage simply means the use of borrowed money Shareholders of a firm use financial leverage Shareholders of a firm use financial leverage to boost their ROEto boost their ROE This increases the sensitivity of ROE to This increases the sensitivity of ROE to fluctuations in the firms underlying fluctuations in the firms underlying profitability as measured by its ROAprofitability as measured by its ROA33Illustration(Table 3.7&3.8 of textbook)Consider two firms that are identical except Consider two firms that are identical except that Nodebt is financed using$1,000,000 of that Nodebt is financed using$1,000,000 of equity and Halfdebt is financed using equity and Halfdebt is financed using$500,000 of equity and$500,000 of debt$500,000 of equity and$500,000 of debt further assume that the EBIT of both firms is further assume that the EBIT of both firms is$120,000 and tax is 40%$120,000 and tax is 40%34Case:Borrow at 10%35Case:Borrow at 15%36Case:Borrow at 10%:Effect of Business Cycle on ROE37Conclusion:From the perspective of Creditors:increasing debt is unambiguously Creditors:increasing debt is unambiguously harmful,and bond rating agencies will harmful,and bond rating agencies will downgrade the firms securitiesdowngrade the firms securities Shareholders:may benefit,depending on the Shareholders:may benefit,depending on the sign of(ROA-interest rate)and ROAsign of(ROA-interest rate)and ROA383.7 The Financial Planning Process“I dont give a strawberry what happens.I want you all to stonewall it.Let them plead the Fifth Amendment,cover-up or anything else,if itll save it,save the plan.”Richard Milhous Nixon on Planning(22 Richard Milhous Nixon on Planning(22 March,1973)March,1973)(Bowdlerized to avoid offending accounting students)(Bowdlerized to avoid offending accounting students)39Introduction to PlanningThis section navigates us through the financial planning process,using the historical financial statements for a manufacturing firm as our embarkation pointLater,we discuss short-term planning and the management of working capital40The Financial Planning Process Financial planning is a Financial planning is a dynamicdynamic process that process that follows a cycle of making plans,follows a cycle of making plans,implementing them,and revising them in the implementing them,and revising them in the light of actual resultslight of actual results41The Financial Planning Process Starting point is the strategic planStarting point is the strategic plan Strategy guides the financial planning process Strategy guides the financial planning process by establishing overall business development by establishing overall business development guidelines and growth targetsguidelines and growth targets Which businesses does the firm want to Which businesses does the firm want to enterenter expandexpand contractcontract exitexit and how quickly?and how quickly?42The Financial Planning Process Length of the planning horizonLength of the planning horizon The longer the financial plan,the less The longer the financial plan,the less detailed it should be(in general)detailed it should be(in general)The revision of a financial plan is generally a The revision of a financial plan is generally a function of the length of the planning horizonfunction of the length of the planning horizon Short-term plans are revised frequently,long-term Short-term plans are revised frequently,long-term plans are revised much less frequentlyplans are revised much less frequently43The Financial Planning Process The financial planning horizon may be The financial planning horizon may be broken down into several steps:broken down into several steps:Management forecasts the key external Management forecasts the key external factors,including level of economic activity,factors,including level of economic activity,inflation,interest ratesand the competitions inflation,interest rates,and the competitions output and pricesoutput and prices Based on above,they next forecast revenues,Based on above,they next forecast revenues,expenses,cash flows,and implied need for expenses,cash flows,and implied need for external financingexternal financing44The Financial Planning Process Specific performance targets are generated Specific performance targets are generated for the divisions,functions and key individuals for the divisions,functions and key individuals of the firmof the firm Periodic measurements of performance are Periodic measurements of performance are made,and compared to the plan in order to made,and compared to the plan in order to correct either the plan or performancecorrect either the plan or performance Periodically,key personnel are counseled,Periodically,key personnel are counseled,rewarded or punished,and a new iteration is rewarded or punished,and a new iteration is instigatedinstigated45The Financial Planning Process:Notes Some variables must be forecast well in Some variables must be forecast well in advance because exploitation requires a long advance because exploitation requires a long lead-time,others may be reacted to lead-time,others may be reacted to immediatelyimmediately Some variables are highly volatile,and cant Some variables are highly volatile,and cant be forecast effectively,so the best we can do be forecast effectively,so the best we can do is to plan for the unknown(contingency is to plan for the unknown(contingency planning)planning)46The Financial Planning Process:Notes Planning horizons must be appropriatePlanning horizons must be appropriate For a magazine stand,a two year planning For a magazine stand,a two year planning horizon may be far too longhorizon may be far too long A pharmaceutical business(with long new-A pharmaceutical business(with long new-plant construction lead-times,and long drug plant construction lead-times,and long drug development/testing/approval procedures)development/testing/approval procedures)needs a planning horizon that may be as needs a planning horizon that may be as long a ten yearslong a ten years47The Financial Planning Process:Notes A plan should always lead to A plan should always lead to decisionsdecisions that that justify the cost of its preparationjustify the cost of its preparation Proper planning is,in essence,part of the Proper planning is,in essence,part of the process of decision making.Any part of a process of decision making.Any part of a plan that does not lead to a decision is plan that does not lead to a decision is probably a waste of managerial resourcesprobably a waste of managerial resources48The Financial Planning Process:A plan should make reasonable tradeoffs A plan should make reasonable tradeoffs between flexibility and the cost of flexibilitybetween flexibility and the cost of flexibility Recall that in capital budgeting,options were Recall that in capital budgeting,options were sometimes very valuablesometimes very valuable493.8 Constructing a Financial Planning ModelThe next slide shows the history of GPC50GPC Financial Statements,Years xxx1-xxx3 (Nearest$Million)(Percent of Years Sales)Yearxxx0 xxx1xxx2xxx3xxx1xxx2xxx3Income StatementSales200240288100.0%100.0%100.0%Cost of goods sold11013215855.0%55.0%55.0%Gross margin9010813045.0%45.0%45.0%Selling,general&admin.expenses30364315.0%15.0%15.0%EBIT60728630.0%30.0%30.0%Interest expenses30456415.0%18.8%22.2%Taxes121196.0%4.5%3.1%Net income1816139.0%6.7%4.7%Dividends5542.7%2.0%1.4%Change in shareholders equity131196.3%4.7%3.3%Balance SheetAssets:Cash&equivalents101214176.0%6.0%6.0%Receivables4048586924.0%24.0%24.0%Inventories5060728630.0%30.0%30.0%Property,Plant&equipment500600720864300.0%300.0%300.0%Total Assets6007208641037360.0%360.0%360.0%Liabilities:Payables3036435218.0%18.0%18.0%Short-term debt120221347502110.7%144.6174.2%Long-term debt15015015015075.0%62.5%52.1%Total Liabilities300407540704203.7%225.1%244.3%Shareholders equity300313324333156.3%134.9%115.7%51 (Nearest$Million)Yearxxx0 xxx1xxx2xxx3Income StatementSales200240288Cost of goods sold110132158Gross margin90108130Selling,general&admin.expenses303643EB