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Table of Contents
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This workbook is used in conjunction with a course that is subject to copyright protection.
You may print, download and use this workbook for your own personal use in conjunction
with this course. You may not reproduce or redistribute this workbook without first
obtaining the express permission of the author:
Matt H. Evans, CPA, CMA, CFM
Email: matt@exinfm.com
Phone: 1-877-807-8756
on to Financial
or easy analysis
ustry averages
estment
Balance Sheet
Year ending
Year ending
12/31/2005
12/31/2006
($ in thousands of dollars)
Assets
Current Assets
Cash
Marketable Securities
Accounts Receivable
Inventories
Total Current Assets
Long-Term Assets
Property & Equipment at cost
Less Accumulated Depreciation
Net Property & Equipment
Total Long-Term Assets
TOTAL ASSETS
2,081
1,625
16,850
26,470
47,026
39,500
9,500
30,000
30,000
2,540
1,800
18,320
27,530
50,190
43,100
11,400
31,700
31,700
77,026
81,890
8,340
5,635
3,150
1,750
2,000
20,875
9,721
8,500
3,200
2,102
2,000
25,523
Liabilities
Current Liabilities
Accounts Payable
Notes Payable @ 10%
Taxes Payable
Other Current Liabilities
Current Portion of Longterm Debt
Total Current Liabilities
Long-Term Liabilities
Mortgage Bonds @ 9.58%
Total Long-Term Liabilities
TOTAL LIABILITIES
24,000
24,000
$
44,875
13,000
10,000
9,151
32,151
22,000
22,000
$
47,523
Equity
Common Stock
Paid in Capital in excess of par value
Retained Earnings
TOTAL EQUITY
###
10,000
11,367
$
34,367
Income Statement
Year ending
12/31/2006
($ in thousands of dollars)
Revenues
Gross Sales Revenues
Allowance for Sales Returned
Net Sales Revenues
TOTAL SALES
116,900
4,140
112,760
112,760
Expenses
Cost of Goods Sold
Gross Profits
Operating Expenses:
Selling & Marketing
General Administrative
Total Operating Expenses
Operating Income
Interest Expenses:
Interest on Loans
Interest on Mortgage Bonds
Total Interest Expenses
Earnings Before Taxes
Federal & State Taxes @ 40%
NET INCOME
85,300
27,460
6,540
9,400
15,940
11,520
850
2,310
3,160
8,360
3,344
5,016
Balance Sheet
Year ending
Year ending
12/31/2005
12/31/2006
(% of Total Assets)
Assets
Cash
Marketable Securities
Accounts Receivable
Inventories
Total Current Assets
2.70%
2.11%
21.88%
34.37%
61.05%
3.10%
2.20%
22.37%
33.62%
61.29%
38.95%
38.71%
100.00%
100.00%
Current Liabilities
27.10%
31.17%
Long-Term Liabilities
31.16%
26.87%
TOTAL LIABILITIES
58.26%
58.03%
TOTAL EQUITY
41.74%
41.97%
100.00%
100.00%
TOTAL ASSETS
Liabilities
Equity
Income Statement
Year ending
12/31/2006
(% of Total Net Sales)
NET SALES
100.00%
75.65%
Gross Margin
Operating Expense
24.35%
14.14%
Operating Margin
Interest Expense
10.22%
2.80%
7.41%
2.97%
NET INCOME
4.45%
1.97
0.89
0.45
6.41
56.14
3.16
113.95
3.66
1.42
Leverage Ratios
10. Debt Ratio = Total Debt / Total Assets
0.58
1.38
12. Times Interest Earned = Earnings Before Interest and Taxes / Interest
3.65
Profitability Ratios
13. Gross Profit or Margin = (Sales - Cost of Goods Sold) / Sales
0.24
0.10
0.04
0.06
0.22
Company
Industry
2002
1.97
1.86
2003
1.94
1.88
2004
1.82
1.80
2005
1.91
1.84
2006
1.97
1.88
Current Ratio
Ratio
2.00
1.95
1.90
Compan
y
Industry
1.85
1.80
1.75
1.70
2002
2003
2004
2005
2006
Year
Company
Industry
2002
0.83
0.80
2003
0.79
0.83
2004
0.77
0.81
2005
0.81
0.77
2006
0.89
0.79
Ratio
0.90
0.85
Compan
y
Industry
0.80
0.75
0.70
2002
2003
2004
Year
2005
2006
0.80
Industry
0.75
0.70
2002
2003
2004
2005
2006
Year
Company
Industry
2002
6.79
7.07
2003
6.71
7.01
2004
6.58
6.98
2005
6.34
6.84
2006
6.41
6.91
Ratio
7.20
7.00
6.80
Compan
y
Industry
6.60
6.40
6.20
6.00
5.80
2002
2003
2004
2005
2006
Year
Company
Industry
2002
51.30
47.26
2003
52.41
48.33
2004
55.73
49.02
2005
57.08
51.44
2006
56.14
50.62
Days
Compan
y
Industry
2003
2004
Year
2005
2006
Company
Industry
2002
3.96
3.80
2003
3.44
3.69
2004
3.72
3.74
2005
3.09
3.97
2006
3.16
3.88
Ratio
Compan
y
Industry
2003
2004
2005
2006
Year
Company
Industry
2002
109.77
108.00
2003
111.08
114.00
2004
116.20
102.00
2005
117.33
111.00
2006
113.95
106.00
Days
120.00
115.00
110.00
Compan
y
Industry
105.00
100.00
95.00
90.00
2002
2003
2004
Year
2005
2006
Company
Industry
2002
1.61
1.70
2003
1.55
1.62
2004
1.39
1.68
2005
1.48
1.59
2006
1.42
1.55
Ratio
Compan
y
Industry
2003
2004
2005
2006
Year
Company
Industry
2002
0.61
0.65
2003
0.67
0.61
2004
0.51
0.63
2005
0.64
0.72
2006
0.58
0.69
Ratio
Debt Ratio
0.75
0.70
0.65
0.60
0.55
0.50
0.45
0.40
0.35
0.30
2002
Compan
y
Industry
2003
2004
Year
2005
2006
Company
Industry
2002
1.36
1.40
2003
1.30
1.48
2004
1.44
1.41
2005
1.33
1.44
2006
1.38
1.50
Ratio
1.60
1.50
1.40
Compan
y
Industry
1.30
1.20
1.10
1.00
2002
2003
2004
2005
2006
Year
Company
Industry
2002
0.29
0.22
2003
0.31
0.28
2004
0.23
0.20
2005
0.28
0.28
2006
0.24
0.29
Margin
Compan
y
Industry
2003
2004
2005
2006
Year
Company
2002
0.07
2003
0.11
2004
0.08
2005
0.14
2006
0.10
Industry
0.14
0.08
0.09
0.11
0.13
M argin
Operating Margin
0.15
0.13
0.11
Company
Industry
0.09
0.07
0.05
2002
2003
2004
2005
2006
Year
Company
Industry
2002
0.06
0.07
2003
0.05
0.08
2004
0.07
0.05
2005
0.04
0.06
2006
0.04
0.05
Return
Return on Sales
0.10
0.09
0.08
0.07
Company
0.06
Industry
0.05
0.04
0.03
2002
2003
2004
2005
2006
Year
Company
Industry
2002
0.09
0.07
2003
0.06
0.11
2004
0.07
0.10
2005
0.10
0.09
Return
Return on Investment
0.15
0.13
2006
0.06
0.08
Return
Return on Investment
0.15
0.13
0.11
Company
Industry
0.09
0.07
0.05
2002
2003
2004
2005
2006
Ye ar
Company
Industry
2002
0.22
0.28
2003
0.20
0.22
2004
0.24
0.23
2005
0.19
0.26
2006
0.22
0.29
Return
Return on Equity
0.32
0.30
0.28
0.26
Company
0.24
Industry
0.22
0.20
0.18
2002
2003
2004
Ye ar
2005
2006
Total Assets to
Shareholder Equity
2.383
Return on
Investment
6.13%
Total Asset
Turnover
Profit Margin
4.45%
Three Lower
Drivers
1.38
Net Income
Sales
$ 5,016
Lowest Level - Accounts
in Financial Statements
$ 112,760
Total Assets
$ 81,890
Income Statement
Balance Sheet
Breakdown of all
major expense accounts
Breakdown of all
asset accounts
40.00%
10.00%
9.58%
60.00%
60.00%
6.00%
5.75%
3. Calculate the cost of equity using the Capital Asset Pricing Model:
a. Risk Free Rate of Return - 10 Year Treasury Bonds
b. Beta Risk Factor for Stock of Company
c. Market Portfolio Returns
Rate of Return for Stock
3.50%
1.22
13.50%
15.70%
4. Assign market values to each of the components of capital and calculate the Weighted Average Cost of Capital:
Notes Payable
Mortagage Bonds
Stock (Equity)
Cost of
Market
Capital
Values
6.00% $
6,000
5.75% $
15,000
15.70% $
45,000
$
66,000
Percents
9%
23%
68%
100%
Weighted
Cost of Cap
0.55%
1.31%
10.70%
12.56%
3,600
10 Years
Year
0
-3,600
Year
1
Year
2
-3,600
-30
400
300
500
1,170
-25
400
300
500
1,175
1.0000
0.8884
0.7893
Discounted Amounts
4 Summarize your results using economic indicators
a. Key Economic Indicator is NPV >
-3,600
1,039
927
c. A third economic indicator is discounted payback period - How long does it take before you recover your inves
-2,561
-1,633
Conclusion: This investment creates positive value for the company, has an estimated rate of return
higher than the cost of capital, and reaches payback mid way in the useful life of the asset.
Based on these economic indicators, this appears to be a good investment.
Year
3
Year
4
Year
5
Year
6
Year
7
Year
8
Year
9
Year
10
-20
400
150
600
1,130
-20
420
100
600
1,100
-20
420
50
600
1,050
-15
420
50
600
1,055
-15
430
50
650
1,115
-15
430
50
650
1,115
-15
450
50
650
1,135
-15
450
50
650
1,135
0.7013
0.6230
0.5535
0.4918
0.4369
0.3882
0.3449
0.3064
792
685
581
519
487
433
391
348
Total
-3,600
-190
4,220
1,150
6,000
7,580
2,604
5% Rate of Return
rate of return
ife of the asset.
2,314
14.62%
Product
Units Sold
in Yr 2005
Lectin
Protela
Sucula
3,020
2,005
880
Units Sold
in Yr 2006
3,305
2,180
1,080
Units Sold
in Yr 2007
3,710
2,380
1,410
Step 2 - Determine the expected pricing for your products and services next year
Based on competitive analysis and interviews with marketing staff, the following
sales prices will be applied in Year 2008:
Product
Lectin
Protela
Sucula
Price
$
$
$
14.50
17.30
11.20
Product
Lectin
Protela
Sucula
% Growth
in 2006
9.44%
8.73%
22.73%
% Growth
in 2007
12.25%
9.17%
30.56%
Average
Growth
10.85%
8.95%
26.64%
Expected
Sales
Sales
Price
4,112 $
14.50
2,593 $
17.30
1,786 $
11.20
Total
Estimated
Sales Amt
$
$
$
$
59,629
44,860
19,999
124,488
6,500
3.2 Identify any other major sources of revenues anticipated for the year 2008:
Strategic plan and financial plan includes divesting in non performing investments
Step 4 - Based on financial analysis, budgets, and other sources, estimate the costs for 2008
4.1 Cost accounting records and interviews with Engineers indicated the following production costs:
Product
Total Unit
Prod Cost
Units
Sold
Cost of
Goods Sold
Lectin
Protela
Sucula
1.15
1.84
1.32
6.20
7.55
4.40
2.60
3.21
2.84
9.95
12.60
8.56
Total
4,112 $
2,593 $
1,786 $
$
40,918
32,672
15,285
88,876
4.2 Marketing and selling costs are estimated based on the advertising budget and sales support team
needed to meet targeted sales for 2008
Advertising Plan and Budget for 2008
Sales Salaries and Commissions for 2008
General Marketing Expenses
Reserve and Allowance for Contigencies
Total
2,390
3,585
550
325
6,850
4.3 General and administrative costs are estimated based on staff plans for 2008 in all service support functions
Executive Management
Engineering & Operations
Accounting & Finance
Human Resource Mgmt
General Administrative
Other Support Functions
Total
4,130
2,705
1,510
1,006
460
194
10,005
4.4 Interest on debt is calculated based on anticipated borrowing of funds in 2008. The total required fixed assets
to support the sales revenues was considered adequate and thus no additional borrowings were expected.
The total scheduled interest payments for 2008 are:
Interest payments on loans
Interest payments on mortgage debt
Total
810
2,260
3,070
124,488
4,357
120,131
6,500
126,631
88,876
Gross Profits
Operating Expenses:
37,756
4.2
4.3
6,850
10,005
16,855
20,901
3,070
17,831
7,132
10,698
e support functions