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MGMT310_lecture4

MGMT310_lecture4 - Lecture Lecture4 Lasttimewediscussed...

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Lecture 4 Last time we discussed…. How can we make informative comparisons? Common financial ratios (table 3.8, page 65) I. Short term solvency / liquidity ratios II. Long term solvency / financial leverage ratios III. Asset management / turnover ratios IV. Profitability ratios V. Market value ratios Du Pont Identity: ROE = NI/Sales × Sales / Assets × Assets / TotalEquity (Profit Margin) (Asset Turnover) (Equity Multiplier)
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Google snapshot on 1/22/2010 08/19/2004: Google stock opened at $100.00 12/31/2004 G l t k l d t $192 79 ith P/E ti 93 135 12/31/2004: Google stock closed at $192.79, with P/E ratio 93.135
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Sample financial statements Publicly traded firms must file with the SEC and make their financial statements publicly available http://www.sec.gov/edgar/searchedgar/companysearch.html 10 K – provides annual snapshots E.g., Starbucks’ Form 10 K: http://www.sec.gov/Archives/edgar/data/829224/000095012309064772/v53316e10vk. htm 10 Q – provides quarterly snapshots E.g., Starbucks’ Form 10 Q: http://www.sec.gov/Archives/edgar/data/829224/000095012309029843/v52638e10vq. htm
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Financial planning Firm A is a restaurant chain in Indiana. It would like to expand to Illinois within the next five years. Some things Firm A needs to consider: 1. How much capital is needed for investment in new assets? 2. How should this expansion be financed (i.e., cash/debt/equity)? 3. How will this expansion affect net working capital needs? 4. What kind of sales/profit growth is expected? 5. How much is Firm A currently paying out in dividends, and how should this change in accordance with Firm A’s growth? should this change in accordance with Firm A s growth? 6. Is this expansion feasible, taking into account Firm A’s other goals/constraints? (e.g., debt capacity, dividend policy, etc.)
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Let’s do a simple example together Recent (Actual) Financial Statements: Income statement Balance sheet Sales $1,000 Assets $500 Debt $200 Costs 900 Equity 300 EBIT 100 Total $500 Total $500 Interest 0 Taxable Income 100 Taxes (35%) 35 Net Income $ 65 Note: For simplicity, let’s assume interest free debt Sales are projected to rise by 20%. Let’s assume costs and assets grow at the same rate as sales, and that 50% of net income must always be paid out in di id d dividends.
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