ACCOUNTING - FINAL EXAM NOTES

# ACCOUNTING - FINAL EXAM NOTES - DU PONT ANALYSIS OF...

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DU PONT ANALYSIS OF FINANCIAL STATEMENTS Balance Sheet (BS) Income Statement (IS) Drivers of Value (the D’s) Analysis of leverage: Financing analysis - Return on Invested Capital (ROIC)

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Formula Why know this? What kind of return is the company producing with operating assets? Both equity and debt holders care about this number. NOPAT = Net Operating Income After-Taxes By how much is debt increasing NI or ROE. How much higher (spread) than Interest rate (cost of debt financing) is the company’s ROIC? Measuring Volume & Efficiency in BS
Formula Why know this? On average through the year how often does the company get paid. If I am charging a high interest rate for people to borrow, then I want to this number to higher. On average, how often does the company sell the entire inventory? For super markets this number will be very low. For a car dealer, it might be a lot higher. How many days in advance have I prepaid my insurance? How many days in advance have my costumers paid me? Within how many days do I usually pay my suppliers? If I am being charge a very high interest rate, I want this number to be very low. Within how many days does the company pay its employees? After cash is invested in the business, how many days does it usually take to receive it back. How much in sales is produced per dollar of PP&E. For companies that have a lot of real estate assets, it good to know how efficiently these assets are being used. Credit Risk Analysis Formula Why know this? Liquidity Rations If I am lending more on a very short-term basis (i.e. one month) I would like this number to be as high as possible. Does the company have cash on hand to pay me in a month? If I am lending for a year, I will look at this ratio. Solvency Ratios Since depreciation is usually not a CASH expense, as a debt holder I want to know, if the company is producing enough cash to cover my interest payments.

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In case for companies where Depreciation is an REAL expense (i.e. car rental companies), we use EBIT. I will use these ratios in the same framework I would use if I am lending to a buy a house (Mortgage). As a lender, I want these ratios to be as low as possible. Which items in the CF statement affect Retained Earnings (RE)? NI (OCF) & Dividends (FCF).
PRACTICE 3: TIME VALUE OF MONEY - Problems Example of Present Value with a single Cash Flow (one year) : 1. What is the present value of \$100 to be received one year from now if the discount rate is 120% APR compounded monthly? Future Value ( FV ): Compounding Frequency: Compounding frequency per year ( y ): Years ( t ): Total # of compounding periods ( n ): \$100 Every 1 month (monthly) 12 1 Annual Percentage Rate ( APR ): Periodic Rate ( r ): 120% Annual Percentage Yield ( APY ): Present Value ( PV ): Year: 1 Compounding Period: 2 4 5 6 7 8 9 1 0 11 12 PV: \$31.86 FV: \$100 Example of Present Value with a single Cash Flow (Multiple years) : 2. PayLate agrees to pay \$1,210 at the end of YEAR 2 to GetLate. How much cash should GetLate give to PayLate if

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ACCOUNTING - FINAL EXAM NOTES - DU PONT ANALYSIS OF...

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