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FIN 331 in a Nutshell

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  1. FIN 331 in a Nutshell Financial Management I Review for FIN 431

  2. Time Value of Money • Timelines • Future Value • Present Value • Present Value of Uneven Cash Flows

  3. Time Lines: Timing of Cash Flows 0 1 2 3 I% CF0 CF1 CF2 CF3 • Tick marks occur at the end of periods • Time 0 = today • Time 1 = the end of the first period or the beginning of the second period +CF = Cash INFLOW-CF = Cash OUTFLOWPMT = Constant CF

  4. Basic Definitions • Present Value(PV) • The current value of future cash flows discounted at the appropriate discount rate • Value at t=0 on a time line • Future Value(FV) • The amount an investment is worth after one or more periods. • “Later” money on a time line

  5. Future Value: General Formula • FV = future value • PV = present value • I = period interest rate, expressed as a decimal • N = number of periods • Future value interest factor = (1 + I)N • Note: “yx” key on your calculator FV = PV(1 + I)N

  6. Texas Instruments BA-II Plus • FV = future value • PV = present value • PMT = periodic payment • I/Y = period interest rate • N = number of periods One of these MUST be negative N I/Y PV PMT FV

  7. Excel Spreadsheet Functions • =FV(rate,nper,pmt,pv) • =PV(rate,nper,pmt,fv) • =RATE(nper,pmt,pv,fv) • =NPER(rate,pmt,pv,fv) • Use the formula icon (ƒx) when you can’t remember the exact formula

  8. Future Values – Example • Suppose you invest $100 for 5 years at 10% • How much would you have? Formula Solution: FV =PV(1+I)N =100(1.10)5 =100(1.6105) =161.05

  9. Future Value – Example • Suppose you invest $100 for 5 years at 10%. How much would you have? Calculator Solution • 5 N • 10 I/Y • -100 PV • 0 PMT • CPT FV = 161.05

  10. Future Value:Important Relationship 1 For a given interest rate: • The longer the time period, • The higher the future value FV = PV(1 + I)N For a given I, as N increases, FV increases

  11. Future ValueImportant Relationship 2 For a given time period: • The higher the interest rate, • The larger the future value FV = PV(1 + I)N For a given N, as I increases, FV increases

  12. Present Values • The current value of future cash flows discounted at the appropriate discount rate • Value at t=0 on a time line • Answers the questions: • How much do I have to invest today to have some amount in the future? • What is the current value of an amount to be received in the future?

  13. Present Values FV = PV(1 + I)N • Rearrange to solve for PV PV = FV / (1+I)N PV = FV(1+I)-N • “Discounting” = finding the present value of one or more future amounts

  14. Present Value: One Period Example • You need $10,000 for the down payment on a new car • You can earn 7% annually. • How much do you need to invest today? • 1 N; • 7 I/Y; • 0 PMT; • 10000 FV; • CPT PV = -9345.79 PV = 10,000(1.07)-1 = 9,345.79 =PV(0.07,1,0,10000)

  15. Present Value:Important Relationship 1 For a given interest rate: • The longer the time period, • The lower the present value For a given I, as N increases, PV decreases

  16. Present ValueImportant Relationship 2 For a given time period: • The higher the interest rate, • The smaller the present value For a given N, as I increases, PV decreases

  17. The Basic PV Equation - Refresher PV = FV / (1 + I)N There are four parts to this equation • PV, FV, I and N • Know any three, solve for the fourth • If you are using a financial calculator, be sure and remember the sign convention +CF = Cash INFLOW-CF = Cash OUTFLOW

  18. Multiple Cash FlowsPresent Value • The Basic Formula • The TI BA II+ • Using the PV/FV keys • Using the Cash Flow Worksheet • Excel

  19. Multiple Uneven Cash Flows Present Value • You are offered an investment that will pay • $200 in year 1, • $400 the next year, • $600 the following year, and • $800 at the end of the 4th year. • You can earn 12% on similar investments. • What is the most you should pay for this investment?

  20. 4 0 1 2 3 12% 200 400 600 800 -178.57 -318.88 -427.07 -508.41 What is the PV of this uneven cash flow stream? -1,432.93 = PV

  21. Present Value of an Uneven Cash Flow Stream: Formula

  22. Multiple Uneven Cash Flows – PV Year 1 CF: 1 N; 12 I/Y; 200 FV; CPT PV = -178.57 Year 2 CF: 2 N; 12 I/Y; 400 FV; CPT PV = -318.88 Year 3 CF: 3 N; 12 I/Y; 600 FV; CPT PV = -427.07 Year 4 CF: 4 N; 12 I/Y; 800 FV; CPT PV = -508.41 Total PV = -$1,432.93

  23. Multiple Uneven Cash Flows – Using the TI BAII’s Cash Flow Worksheet • Clear all: • Press CF • Then 2nd • And CLR WORK (above CE/C) • CF0 is displayed and is 0 • Enter the Period 0 cash flow • If it is an outflow, hit “+/-” to change the sign • To enter the figure in the cash flow register, press ENTER

  24. TI BAII+: Uneven CFs • Press the down arrow () to move to the next cash flow register. • Enter the cash flow amount, press ENTER and then down arrow to move to the cash flow counter (Fn). • The default counter value is “1”. • To accept the value of “1”, press the down arrow again. • To change the counter, enter the correct count, press ENTER and then the down arrow.

  25. TI BAII+: Uneven CFs • Repeat for all cash flows, in order. • To find NPV: • Press NPV: I appears on the screen • Enter the interest rate, press ENTER and the down arrow to display NPV. • Press compute “CPT”

  26. TI BAII+: Uneven Cash Flows CF C000ENTER C01200 ENTER F011 ENTER C02400 ENTER  F021 ENTER  C03600 ENTER F031 ENTER C04 800 ENTER  F04 1 ENTER  NPV I12 ENTER  NPV CPT 1432.93 Cash Flows: CF0 = 0 CF1 = 200 CF2 = 400 CF3 = 600 CF4 = 800

  27. Excel – PV of multiple uneven CFs

  28. CHAPTER 3Financial Statements, Cash Flow, and Taxes Key Financial Statements Balance sheet Income statements Statement of cash flows

  29. The Annual Report • Balance sheet • Snapshot of a firm’s financial position at a point in time • Income statement • Summarizes a firm’s revenues and expenses over a given period of time • Statement of cash flows • Reports the impact of a firm’s activities on cash flows over a given period of time

  30. Sample Balance Sheet Assets = Liabilities + Owner’s Equity

  31. Sample Income Statement Net income=Dividends + Retained earnings

  32. Allied Food Products

  33. Allied 2005 Per-Share Ratios

  34. Statement of Cash Flows • Provides information about cash inflows and outflows during an accounting period • Required since 1988 • Developed from Balance Sheet and Income Statement data

  35. Statement of Cash Flows Reconciles the change in Cash & Equivalents

  36. Statement of Cash Flows • Reconciles the Income Statement and Balance Sheet to the flow of cash • The Matching Principle requires estimates and accruals to prepare Financial statements • Financial Analysis is concerned with Cash Flow Why is it important???

  37. Statement of Cash Flows “A positive net income on the income statement is ultimately insignificant unless a company can translate its earnings into cash, and the only source in financial statement data for learning about the generation of cash from operations is the statement of cash flows”

  38. Deficits Covered by new debt and cash

  39. Net Operating Working Capital

  40. Operating Capital (also called Total Net Operating Capital) • Operating Capital = NOWC + Net fixed assets • Operating Capital • (2005) = $800 + $1,000 = $1,800 million • (2004) = $650 + $870 = $1,520 million • Net Investment in Operating Capital = Op Cap (2005) – Op Cap (2004) = $1,800 - $1,520 = $280 million

  41. NOPAT = EBIT(1 - Tax rate) NOPAT05 = $283.8(1 - 0.4) = $170.3 m OCF05 = NOPAT + Deprec + Amort = $170.3 + $100 = $270.3 Net Operating Profit after Taxes (NOPAT) & Operating Cash Flow

  42. EBIT = $283.8 m T = 40% Depreciation = $100 m Capital Expenditures = FA + Deprec = $130+$100 = $230 NOWC = $800 - $650 = $150 m FCF = [$283.8(1-.4)+$100] –[$230-$150] = -$109.7 m Free Cash Flow (FCF) for 2005

  43. CHAPTER 4Analysis of Financial Statements Ratio Analysis Limitations of ratio analysis Qualitative factors

  44. Five Major Categories of Ratios • Liquidity • CR - Current Ratio • QR - Quick Ratio or “Acid-Test” • Asset management • Inventory Turnover • DSO – Days sales outstanding • FAT - Fixed Assets Turnover • TAT - Total Assets Turnover • Debt management • Debt Ratio • TIE – Times interest earned • EBITDA coverage (EC)

  45. Five Major Categories of Ratios • Profitability • PM - Profit margin on sales • BEP – Basic earning power • ROA – Return on total assets • ROE – Return on common equity • Market value • P/E – Price-Earnings ratio • P/CF – Price – cash flow ratio • M/B – Market to book

  46. Liquidity Ratios • CR = Current Ratio = CA/CL • QR = Quick Ratio or “Acid-Test” = (CA-INV)/CL

  47. Asset Management Ratios • Inventory Turnover = Sales/Inventories • DSO = Days sales outstanding = Receivables /(Annual sales/365) • FAT = Fixed Assets Turnover = Sales/Net Fixed Assets • TAT = Total Assets Turnover = Sales/Total Assets

  48. Debt Management Ratios • Debt Ratio = Total Liabilities/Total Assets • TIE = Times interest earned = EBIT/Interest • EBITDA coverage = EC (EBITDA + lease pmts) . (Interest + principal pmts + lease pmts)

  49. Profitability Ratios • PM = Profit margin on sales = NI/Sales • BEP = Basic earning power = EBIT/Total Assets • ROA = Return on total assets = NI/Total Assets • ROE = Return on common equity = NI/Common Equity