Residual Income and NOPAT
Problem with RI
The low return on net financial assets tends to
make RI look a lot lower than it really is
In reality, there is an operating business that
generates lots of RI and there lots of cash.
The cash is worth cash (an
Definition of cost of goods sold
=Cost of Goods Available for Sale
=Cost of Goods Sold
Or: Cost of goods available for sale = Ending Inventory + Cost of Goods Sold
No accounting work is n
BK Risk and Covenants
What is risk?
Equity Risk The uncertainty about the range of
outcomes, where outcomes are something like
the PV of future earnings
Credit risk The probability that you, the lender,
doesn't get paid back in full, on time.
Operating Leverage Problem
1. For each year, estimate the cost function for COGS and SGA using data through that
year. For example, as of 1/30/1999, you have three prior years of data with which to
estimate the cost functions. Your estimation procedure ca
Cost of Good Sold
S G& A
Total Operating Expenses
Income From Operation
Income Before Incometax
Income Tax Expense
Statement of Retained Earning
To-do for cash flow versus earnings
There are selected financials for eight well-known companies.
For each company: Which stage of the lifecycle does the comparison of cash flow and earnings
numbers suggest the company is in?
For each company: Compare the
There are two important concepts that are important for calculating EPS: the weighted
average of shares outstanding, and the adjustment for potentially dilutive securities.
While the basic EPS computation does not make an adjustment for po