Gross profit Cash Trade payables CAPITAL BUDGETING Other operating income Investments Other accruals ?what projects to accept? Other operating expenses Trade receivables Tax liabilities FINANCING Total cost and expenses Inventories Short-term loans, leases ?what is the debt capacity? Operating profit (EBIT) Non-current assets Non-current liabilities Interest, finance costs Property, plant & equipment Loans, debt, leases due after 1 year Profit before tax Investment property Retirement benefit obligation COST OF DEBT Income tax Goodwill Deferred tax liabilities Net profit after tax Total non-current liabilities Dividends K-WACC Reinvested in the business Stockholder's equity (Net worth) Preferred stock OPERATING LEVERAGE Common stock COST OF EQUITY Additional paid-in-capital FINANCIAL LEVERAGE Retained earnings VALUATION CASH FLOW Total assets Total liabilities & equity COST OF CAPITAL
ANALYSIS STEPS: FINANCING 1-HISTORICAL RATIOS 2-K-WACC HISTORICAL RATIOS I/S & B/S FORECAST EFN 3-CAPITAL BUDGETING LONG-FORM FORECAST I/S, B/S, & RATIOS 5-EQUITY VALUATION 6-FINANCING CAPITAL BUDGETING OP & CAP NATCF, NPV, IRR, PAYBACK VALUATION ENTERPRISE VALUE USING FREE CASH FLOW MARKET MULTIPLES: P/E, MV/BV, REV, EBIT 4-FORECAST & EFN
DEBT EQUITY DEBT EQUITY EBIT CHART income risk control mktblty flexblty timing K-WACC
FINANCING (DEBT-EQUITY) DECISION Leahy Bread Company ANSWER BOXES BEGIN AT ROW 74 Inputs: External Financing Needed 392,675 from forecast Existing Common Shares 7,500 from company info Existing Long-Term Debt 300,000 from most recent historical balance sheet Interest Rate on Existing Debt 7.0% from company info Interest Rate on New Debt 9.0% given Boom EBIT 300,000 arbitrarily above optimistic forecast Bust EBIT 50,000 arbitrarily below pessimistic forecast Income Tax Rate 35.0% from income statement Share Price $ 100.00 from market info Equity 528,741 from most recent historical balance sheet Results: IF DEBT IS USED IF EQUITY IS USED BOOM BUST BOOM BUST EBIT 300,000 50,000 300,000 50,000 Interest expense - old (21,000) (21,000) (21,000) (21,000) Interest expense - new (35,341) (35,341) 0 0 Profit before tax 243,659 (6,341) 279,000 29,000 Income tax (85,281) 2,219 (97,650) (10,150) Net profit 158,379 (4,121) 181,350 18,850 Shares 7,500 7,500 7,500 7,500 Shares - new 0 0 3,927 3,927 Earnings per share $ 21.12 $ (0.55) $ 15.87 $ 1.65 Coverage ratio 5.3 0.9 14.3 2.4 EBIT 50000 300000 debt EPS ($0.55) $21.12 equity EPS $1.65 $15.87 Indifference point calculation: Debt Equity Common shares 7,500 11,427 Income tax rate 35.0% 35.0% Interest expense 56,341 21,000 EBIT 123,841 123,841 Indifference EBIT Interest expense 56,341 21,000 EBT 67,500 102,841
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