Fin 221 web L 02

Fin 221 web L 02 - Managerial Finance Lecture 2 Free Cash...

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1 Managerial Finance Lecture 2 Free Cash Flows Class 1: Takeaways Finance is about decision making Good decisions: Include all relevant costs and benefits Consider the opportunity cost of taking the decision: best alternative use Net present value rule captures the essence of good decisions: Considers all costs and benefits throughout the life of the project Makes costs and benefits comparable by computing their present value Considers the opportunity cost of funds through the rate that we use to discount the cash flows of the projec 2 discount the cash-flows of the project NPV captures how much value is created Intuitive and easy to compute if we know 1. The cash-flows (main focus today) 2. The discount rate
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2 Callaway Golf FX-1 Key decision : Should Callaway Golf launch the FX-1? Callaway Golf is considering the introduction of a new set of irons to pair with its FT hybrid drivers. These irons, dubbed the FX-1 , will provide the optimal combination of control and forgiveness for the ultimate course experience. They are designed to appeal to statement golfers , who are seeking the hottest and newest technology paired with continual performance enhancement. The hope is that these new irons will reinvigorate sales at the high end of this market. What are the FX-1’s key costs and benefits for Callaway? 3 What is the value of this opportunity? Where can we find the numbers we need to address this question? Accounting Measures Callaway Golf Balance Sheet ($000s) – End of FY 2006 Cash & ST Investments 46,362 Accounts Payable 111,360 Accounts Receivable 118,133 Accrued Compensation 18,731 Inventory 265,110 Warranty Expenses 13,364 Other Current Assets 63,595 Line of Credit 80,000 Total Current Assets 493,200 Total Current Liabilities 223,455 Prop/Plant/Equip. (Net) 131,224 Deferred Compensation 7,210 Intangible Assets (Net) 144,326 Minority Interest 1,987 Goodwill (Net) 30,833 Other Liabilities 36,178 Other Long-Term Assets 46,364 Long-Term Debt 0 Assets Liabilities 4 Total Assets 845,947 Total Liabilities 268,830 Total Equity 577,117 Total Liability & Shareholders' Equity 845,947
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3 Accounting Measures Callaway Golf Earnings Income Statement 2002 2003 2004 2005 2006 (in $ thousands) Total Sales 793,219 814,032 934,564 998,093 1,017,907 yoy growth -2.8% 2.6% 14.8% 6.8% 2.0% Cost of Sales -393,068 -445,417 -575,742 -583,679 -619,832 Gross Profit 400,151 368,615 358,822 414,414 398,075 Gross Margin 50% 45% 38% 42% 39% Operating Expenses: R&D -32,182 -29,529 -30,557 -26,989 -26,785 Selling Expenses -200,329 -207,783 -263,089 -290,074 -254,526 General and Administrative -56,580 -65,448 -89,878 -80,145 -79,709 Operating Income 111,060 65,855 -24,702 17,206 37,055 Other Income/Loss 2,271 2,452 1,189 -1,290 2,035 5 EBIT 113,331 68,307 -23,513 15,916 39,090 EBIT Margin 14.3% 8.4% -2.5% 1.6% 3.8% Interest Income/Expense -1,660 -424 -200 -1,379 -4,092 Income Before Tax 111,671 67,883 -23,713 14,537 34,998 Taxes -42,225 -22,360 13,610 -1,253 -11,708 Net Income 69,446 45,523 -10,103 13,284 23,290 Net Profit Margin 8.8% 5.6% -1.1% 1.3%
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This note was uploaded on 01/08/2012 for the course MS&E 245G taught by Professor Perez-gonzalas during the Fall '11 term at Stanford.

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Fin 221 web L 02 - Managerial Finance Lecture 2 Free Cash...

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