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Module 9Finishing the Ratios LINK Excel.Sheet.12 "C:\\Users\\kirch.OHIO\\Desktop\\MFE Summer\\HotDog_expansion.xlsx" "Proformas!R1C1:R36C7" \a \f 4 \h Retention rateEarnings attributable to common shares – common shares dividends / Net income attributable to common shares = 1 – payout ratio20182019 Sustainable growth rateRetention rate X Return on equity2018201938. Book Value per shareCommon stock equity / total shares of common stock outstanding(Total Owners’ Equity – Preferred share amounts) / total shares outstanding20182019Total stock outstanding is as of the date. It is not a weighted average!39. Free cash flow to equity (FCFE)Cash flow from operating activities – investment in fixed capital + Net borrowing2018201940. Free cash flow to the firm (FCFF)Cash flow form operating activities + interest expense X (1 – tax rate) – investment in fixed capital. 20182019Hermi’s Bumbles, Inc.Hermi’s Bumbles is a company that has been in business for three years. The company is a wholesaler of Bumbles. Bumbles are bulbs which grow into beautiful, sweet smelling plant-trees. They are a cross between a hyacinth and a buckeye. They are refrigerated and must be planted within one year of when they are harvested. Hermi buys the bumbles from a grower when they are one month old. Hermi has one location in Columbus, Ohio. It has three refrigerated trucks which deliver the Bumbles throughout Ohio. The financial statements on the previous page summarize Hermi’s operations for its first three years.Hermi began operations with individuals investing $120,000 for 12,000 shares of common stock and a small business loan of $200,000 from the bank. The loan carries interest at 12%. Hermi must pay the interest plus $10,000 on the principal on January 1 of each year. Hermi sells using terms of 2/10 n/30. The latest sale of stock between individuals was yesterday at $85.00 per share. There are more shares available from the other investors for this amount. The tax rate is 30%.The financial statements for Hermi’s are on the following page.Calculate and comment on each of the following ratios for 2018 and 2019.Current Ratio 20182019 272,140 382,770 192,000 248,000 1.42 1.54 You have $1.42 and $1.54 in short-term assets to cover short term liabilitiesThe Quick or “Acid Test” ratio20182019272,140 - 160,000382,770 – 200,000 192,000 248,000 .584.737Accounts Receivable Turn and Average Collection Period 20182019700,000 1,100,00060,000 + 40,000110,000 + 60,000 2 2Receivable Turn1412.94 365 365 1412.94Average collection period26.07 Days 28.20 Days People are not taking advantage of discount – that is worrisomeThe collection period has decreased while sales have increased!!!2/10, n/30 means you may take a 2% discount if you pay within 10 days, otherwise you must pay within 30 days. So you are “paying” 2% by paying in 30 days. Means you are paying 2% for 20 days (30 – discount time), which equals a return (loss to the customer) of 365/20 or 18.25 X 2%, equals 36.5% interestIf don’t take discount, means:Short of CashDon’t understand business math. Inventory Turn and Average Days Sales in Inventory20182019 360,000687,500 80,000 + 160,000 160,000 + 200,000 2 2Inventory Turn 3 3.82 365 365 3 3.82Average Days Sales in Inventory 121.67 95.55Sales have increased substantially and the handling of inventory has gotten much more efficient!This is important because Bumbles rot! Book Value Per Share20182019 130,140 214,770 12,00012,000$10.84$17.90Return on Assets (ROA)20182019 70,140 84,630 402,000 + 502,140502,140 + 632,770 2 215.52%14.91%Return on Equity (ROE)20182019 70,140 84,63064,000 + 130,140130,140 + 214,770 2 272.26%49.07%Debt Ratio Liabilities / Assets(Note CFA ratio uses only debt on which interest is paid)20182019 372,000 418,000 502,140 632,77074.08% 66.06%Debt to Equity 2018 2019372,000 418,000 130,140 214,770 2.86 1.95 Brighthouse FinancialZach’s is saying that the company will earn $8.50 per share this year. The stock is selling for $36.74 which gives a current yield of 23.13%!! What the hell is going on?!?Why would another company which had sufficient cash buy this company up and just liquidate it. Would seem the buying company would net between $100 and $150 per share. we in order to go forward toward“But I think that there’s no magic to evaluating any financial asset. A financial asset means, by definition, that you lay out money now to get money back in the future. If every financial asset were valued properly, they would all sell at a price that reflected all of the cash that would be received from them forever until Judgment Day, discounted back to the present at the same interest rate.”Warren BuffettWe go back to Fixed Income InstrumentsThe coupon rate of a bond is: The % of the face that the bond pays in interest each year.On January 1, 2020, Isabella Company of Las Vegas, Nevada, issues $100,000 of 8% bonds. The bonds pay interest annually and mature in three years. Interest is to be paid on December 31 of each year. (First interest is to be paid 12/31/20)Remember these are unreal examples! Bonds mature in many, many years, not 3! AppliedPrincipalDatePaymentInterest 8%PrincipalBalance1/1/20120100,000.00 12/31/208,000.00 8,000.00 0.00 100,000.00 12/31/218,000.00 8,000.00 0.00 100,000.00 12/31/208,000.00 8,000.00 0.00 100,000.00 12/31/20100,000.00 100,000.00 0.00 What if by the time it got to the market, interest rates had risen to 10%?The purpose of education isn’t knowledge, it is action.Kirch’s 3rd law of the Universe…. You Can’t Change the Deal!!!!How much does Isabella receive?2nd clr tvm8,000 pmt 100,000 fv 3 N10 I/YCpt pv95,026.30Bonds issued for less than the face are said to be issued at discount.Amortize the bond AppliedPrincipalDatePaymentInterest 10%PrincipalBalance1/1/2095,026.30 12/31/208,000.00 9,502.63 (1,502.63)96,528.93 12/31/218,000.00 9,652.89 (1,652.89)98,181.82 12/31/228,000.00 9,818.18 (1,818.18)100,000.01 12/31/22100,000.00 100,000.00 0.01 LINK Excel.Sheet.8 "C:\\Users\\kirch.OHIO\\Desktop\\MFE Summer\\Isabella Bonds.xls" Discount!R47C1:R53C5 \a \f 5 \h \* MERGEFORMAT how the Bond Accounts appear on the Balance Sheet for each year.What about current portion?Balance Sheet202020212020Bond Pay 100,000 100,000 Less Discount(3,471)(1,818)?96,529 98,182 What if the current interest rate was 6%?(3rd law applies!!!)calculate issuance amount, and amortize Bonds sold for an amount higher than the face are said to sell at a p________________. Are you listening, or just reloading?A zero coupon bond isAlso called a D________ D_____________ B________Why issue/buy?Malcom Co. issues a $100,000 zero on December 31, 2018, interest rate 10% per annum, bond is due in three years. How much do they get?Amortize it Module 9, HomeworkProblem 1 Brynnie Company issues a $100,000 on 12/31/19, 15%, bond that matures in 3 years. Interest is paid on December 31st of each year. Calculate how much would be received and amortize this bond issue if it was priced to yield: 10% 15% 20%Problem 2 Charleigh Company issued 8% zero on 12/31/19, due in 3 years, face amount of $100,000. How much would you pay? Amortize it. Problem 3 Ryan Company issues a $100,000 on 8/31/19, 10%, bond that matures in 5 years. Interest is paid on August 31st of each year. How much would you pay to yield: 8% 10% 14% Amortize each of theseProblem 4 Still Ryan Company - How about a zero issued on 5/31/19, due in 4 years, face amount of $100,000. Current market rates are 11%. How much would you pay?Amortize it. Problem 5 Extra Hard!! Go back to the Isabella Company bonds, 8% coupon, issued to yield 10%, – What if the date of issuance is April 1st and not December 31st? What would be the interest expense for the second year?Now do same bonds, 8% coupon, issued to yield 6%. What would be the interest expense for the second year? ................
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