Financial Management - Webster in china

dingelfinGestion

10 nov. 2013 (il y a 7 années et 9 mois)

283 vue(s)

Finance


A practical and hands on course on the valuation and financial management of corporations


FINC 5000




Joint MBA Program Shanghai


week 1
-

2013

This week

s agenda


Textbook chapters 1
-
3


Financial Management Intro


Financial Statements


Analysis of Financial Statements


Practicing Assignments


Homework Assignments


In the News (HP, Yahoo! a.o.)



$

Financial Management (ch.1)


What are the most admired
companies in the world? (see
www.fortune.com
)


Innovative companies


High management quality companies


High employee talent companies


High product quality companies


High return on investment value
companies


Financial sound companies


Social responsible (ethical) companies


Efficient use of assets companies

Norms and values…



How admired is Google Inc.?


Follow the mentioned criteria
for being admired and figure
out on what criteria Google Inc.
is scoring strong and weak…


Try to find some evidence on
the global net for your
qualifications


Make a one page feed back
slide


indicate per criteria the
research you found that back
your statements

Love to go to work!

@

Forms of companies


(1)Sole proprietorship


Easy and inexpensive to raise


Subject to only a few government regulations


No corporate income taxes


Full liability of owner


Difficult to acquire capital


The life of the company stops when the owner dies


Your local store…

Forms of companies


(2) Partnership


Low cost and easy to form


Unlimited liability (for some or all partners)


Limited life of the company


Difficult to transfer ownership


Difficult to raise large capital

From
partnership…

Forms of companies


(3) Corporations


Unlimited life time


Limited liability


Easy to transfer ownership


Taxed at corporate tax level (about 35%)


Setting up is complex and costly


Many reporting regulations/obligations


…to corporation!

Setting up a Corporation…


The incorporators of the
corporation have to:


Create a charter of the company


Name of the company


Types of activities of the company


Amount of capital stock


Number and names/addresses of
directors


Define a set of so called bylaws for
the company


How directors are elected


Will shareholders have the first
right on newly issued shares (right
of first refusal)


The conditions for changing the
bylaws of the company




The right of first refusal…

The objective of Finance


To maximize value to stockholders
(van Horne
-
Stanford)


Increase stockholders value in the value of the firm
(Breadley and Myers)


Maximize wealth of stockholders
(Copeland &Weston)


Maximize the price of common stock
(Brigham &
Gapenski)


Maximize current value per share
(Ross,
Westerfield,Jordan; your textbook)


Maximize the value of the firm
(your instructor)

Creating Value…


For stakeholders of the
company like:


Customers (sustainable flow
of products and services)


Suppliers (sustainable flow of
raw material orders)


Employees (sustainable jobs
with career perspectives)


Shareholders (growing share
value and dividends)


Banks and Financial
Institutions (sustainable pay
back of loans and interest)


The Government … (more
profit is more tax income)

Textbook approach…

In reality companies create value
by…



Increasing Free
Cash flow (FCF)


Reducing The
Weighted Average
Cost of Capital
(WACC%)



The Company Value =
Long Term FCF/ WACC%


Increased FCF or lower WACC% ?

Free Cash Flow is…


NOPAT (Operating profit or
Earnings before Interest and
Tax so called EBIT after tax) +




Depreciation





The increase in Net Working
Capital (NWC)







Capital Expenditure (CAPEX)


NOPAT you will find in the income
statement of your company


Depreciation you will find in the
income statement and cash flow
statement of your company

NWC=Accounts Receivables plus
Inventories minus Accounts
Payables; the change from your to
year you can calculate (a decrease
in NWC from one year to another is
a Cash In Flow so this adds to FCF

CAPEX you will find in the cash
flow statement it

猠瑨攠慭潵湴n
spend on investments…

Simple Valuation…


So if Google Inc. in the Long Term
can generate a FCF of $ 3 bln. And
the WACC% of Google Inc. is 10%
then the value of Google Inc. is
(follow the formula)


Company Value (Google Inc.)= $ 3
bln./0.10= $ 30 bln.


Of course this is an example and I
just made up the estimated FCF and
WACC% we will learn during the
course how to estimate FCF and
WACC% to enable us to calculate
the value of any company…under
assumptions


This in fact is the core capability of
finance


Once we can calculate the value of a
company periodically we can
calculate if the company is in fact
creating value for its stakeholders or
destroying value


Google INC on NASDAQ 19
th

August

Assignment 1: Value your S&P company


You have picked a S&P500 company
to work on during the course


Try to figure out what the Long Term
Free Cash Flow is of your company by
reading its annual reports (1999
-
2010)
Limit yourself to the financial
paragraph


Assume your companies


WACC% is
anywhere in between 5% and 25%;
5% if your company is extremely
financially solid and rather low risk,
25% if your company has a very
volatile performance over the last 5
years and a bumpy road ahead and is
an extremely high risk business (you
may pick any WACC% in between)


Calculate the Company Value of
your company under these
assumptions

(ad 1) Value your S&P company (h@)


Now look up the Long Term debt from the
latest available Balance Sheet (sure you will
find it under liabilities)


Subtract this figure from the Company Value
you found in 1a)


Now you have the companies


equity value


Divide that number by the number of
common shares outstanding


Now you find the equity value per share
outstanding or the calculated share price of
your company


Compare this share price with the current
share price of your company (take the latest
closing price for comparison)



Does the market value the share of your
company higher (over priced) or lower
(under priced) then what you calculated?


Why do you think there is a difference?

Help…


You can find your company

猠晩杵牥f 慴a
www.sec.gov



Go to Filings and Forms (EDGAR)


Search for company filings


Look up the ticker symbol of your company at Yahoo
Finance (symbol lookup)


Plug in the found ticker symbol at EDGAR


Try GOOG and you will find all the filings of Google
Inc.


Now search for the latest 8 and 10
-
K (annual reports)
filings or 10
-
Q (quarterly reports)

More help…


Go to Yahoo Finance


Plug in the ticker of your company


See the left hand buttons

More
on…



For a quick scan of your company


Click Profile, Key Statistics


For Historical Share Prices click…


Professional research on your
company…


Company events, news on your
company…


Everything is here…Use it!


Do You


?

All lights are green…

Financial Management in the 21
st

century



Further Globalization Trends



The world is one big market


Products will be made in lowest cost countries


Raw materials will be sourced in lowest cost
countries


Business will concentrate in Emerging markets



Increasing role of IT and the Internet



The world is one big information network


Technology will allow for faster and better decisions


Information will be real time on line available


Video conferencing will replace time consuming
travel


Electronic Commerce will increase
fast


Social Networks will replace messaging



Increasing impact of Business Ethics



Companies conduct towards stakeholders is
getting more attention


The social responsibility of the company is in
high focus


Meet any time any where…

Agency Conflicts


Stockholders versus
Management:


Owners have other interests
then managers…


Managers can be encouraged
to do the things that
shareholders want them to do
through bonuses and option
plans related to performance…


Shareholders versus Creditors:


Creditors have other interest
then shareholders


Restrictive covenants in debt
agreements


In the long term fair play must
be obeyed


Beware of agency problems…

Financial Statements (ch.2)



Kicking the tires!


潲o
畮摥牳u慮摩湧a桯w 愠
company is doing…


You need to know how to
interpret the financials of a
company when you are in
business…


Only three financial
statements are of importance:


The Balance Sheet of a
company


The Income Statement
(or P&L Profit and Loss)


The Cash Flow
Statement


Keeping you above water

The Balance Sheet


Left hand side of the balance sheet
shows the assets of the company


Assets are fixed (buildings, machines,
land) or current (cash, receivables
from customers, inventories)



The right hand side tells you how the
company finances its assets


Financing can be done with equity
(shareholders pay in capital and buy
shares) or debt (long term debt and
loans from banks or short term debt
like short term facilities with banks or
through delaying the payment of bills
from suppliers i.e. so called accounts
payable)















Let us have a look at:

Comparative Balance Sheet

Microsoft
(in millions)

6/30/2003*
6/30/2004
Change
Cash & short term investments
$49,048
$60,592
$11,544
Accounts receivable
5,196
5,890
694
Other current assets
4,729
4,084
(645)
Current assets
58,973
70,566
11,593
Property & equipment
2,223
2,326
103
Equity & other investments
13,692
12,210
(1,482)
Other assets
6,844
7,287
443
Total assets
81,732
92,389
10,657
Short-term unearned revenue
7,225
6,514
(711)
Other current liabilities
6,749
8,455
1,706
Current liabilities
13,974
14,969
995
Long-term unearned revenue
1,790
1,663
(127)
Other long-term liabilities
1,056
932
(124)
Total liabilities
16,820
17,564
744
Shareholders' equity
64,912
74,825
9,913
Total liabilities & shareholders equity
$81,732
$92,389
$10,657
* June 30, 2003 balance sheet has been restated for the retroactive adoption of SFAS 123.
The Income statement


Covers a specific
period (mainly year, half
year or quarter)


Reflects sales
performance, cost
control and profitability


Operating Income is
EBITDA (Earnings
Before Interest and Tax)


NOPAT is EBITDA
minus (provisions for)
Tax (calculate
Microsoft

猠乏N䅔⁩渠
the next slide)

$1,000
$1,500
$2,000
$2,500
Q4-
FY03
Q1-
FY04
Q2-
FY04
Q3-
FY04
Q4-
FY04
+20%
Y/Y
Growth

Server & Tools Revenue

($ in millions, except EPS)
FY03-Q4*
FY04-Q4
% Change
Revenue
8,065
$

9,292
$

15%
Cost of revenue
1,304
1,481
14%
Research & development
1,681
1,659
-1%
Sales & marketing
2,288
2,409
5%
General & administrative
1,252
610
-51%
Total operating expenses
6,525
6,159
-6%
Operating income
1,540
3,133
103%
Gains/(losses) on equity investees; other
(15)
1
-107%
Investment income
689
570
-17%
Income before taxes
2,214
3,704
67%
Provision for income taxes
731
1,014
39%
Net income
1,483
$

2,690
$

81%
EPS - Diluted
0.14
$

0.25
$

79%
*FY03 results have been restated to reflect the retroactive adoption of SFAS 123, Accounting for Stock-based Compensation

Income Statement
Q4
-

2004

Cash Flow Statement


Shows the performance of the
company over a period of time
in generating cash



Shows how the company uses
that cash generated to invest in
assets (both fixed and current),
or to reduce the debt level by
paying back loans



Shows how the company
acquires cash from outside
(bank loans) when the cash
generated is not enough to
fund all ambitious plans of the
company…

The real money is here…

Cash Flow (1)

Where the cash comes from….

Operations



















Net income

$

7,346


$

7,829


$

9,993


Cumulative effect of accounting change, net of tax



375












Depreciation, amortization, and other noncash items



1,536




1,084




1,439


Net recognized losses on investments



2,221




2,424




380


Stock option income tax benefits



2,066




1,596




1,376


Deferred income taxes



(420)



(416)



336


Recognition of unearned revenue



(6,369)



(8,929)

-
11,292

Accounts receivable



(418)



(1,623)



187


Other current assets



(482)



(264)



412


Other long
-
term assets



(330)



(9)



(28)

Other current liabilities



774




1,449




35


Other long
-
term liabilities



153




216




440


Net cash from operations



13,422




14,509




15,797


Cash Flow (2)

Where the cash is used….

Financing



















Common stock issued



1,620




1,497




2,120


Common stock repurchased



(6,074)



(6,069)



(6,486)

Repurchases of put warrants



(1,367)











Common stock dividends













(857)

Other, net



235












Net cash used for financing



(5,586)



(4,572)



(5,223)

Investing



















Additions to property and equipment



(1,103)



(770)



(891)

Acquisitions of companies, net of cash acquired















(1,063)

Purchases of investments

-
66,346



(89,386)

-
89,621

Maturities of investments



5,867




8,654




9,205


Sales of investments



52,848




70,657




75,157


Interpreting your company

s
performance


To understand how
your company is
doing you need to
know much more
then just the
financials


The strategy, the
competition, the
market
environment, the
innovation, the
risks


For all the different
segments that your
company is
operating in…


Nokia is much more then just Mobile Phones…

Key Business Risks

Linux and non
-
commercial software

Difficult foreign exchange comparables for 2005

Difficult 2005 comparables on PC and Server unit
demand

Reduction in Upgrade Advantage revenue

Execution of business plan

Ongoing legal risk

For further information regarding risks and uncertainties associated with Microsoft’s business,
please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Issues and Uncertainties” sections of Microsoft’s SEC filings, including, but not
limited to, its annual report on Form 10
-
K and quarterly reports on Form 10
-
Q.

Segment Performance

Information Worker


$2.9B



23
%

Server & Tools

$2.3B



20%

Home & Entertainment

$499M




3%

MSN

$588M




5%

Microsoft
Business
Solutions

$196M




9%

Mobile and
Embedded
Devices

$70M



59%

Client

$2.8B




9%


Assignment 2 (a): Annual
report


Your company is a S&P500 company and you will be able to
find its latest annual reports on its website (investor
relations) or at
www.sec.gov



Download the annual reports 1999
-
2010 and keep them in
your files for quick reference also download the last
quarters 1
-
2 of FY 2011



Copy the Balance sheet, Income statement and Cash flow
statement of each year to an EXCEL spreadsheet such that
you can generate a 10 year overview (1999
-
now) for each
statement



Perform a segment analysis and Business Risk assessment;
what segments are the money makers which ones are the
value destructors



Now look at your figures and draw conclusions:


How have the assets developed in the balance
sheet


How has the company financed its assets over
the years (mainly debt or equity?)


How has the sales growth been over the years


And how has the profitability performed


Is the company generating enough cash to fund
its growth


For what purposes is the company using the
cash generated (pay back loans or invest in
future expansion?)

Assignment 2(b): Annual report


For companies that follow the
calendar year for reporting we
have in any case 2 quarters
(first half of 2011) of more
recent financial data available;
download these data (Q
-
10 form
in sec.gov)



For these companies we also
have Q3 almost or just now
available; check investor
relations and the release of Q3
financials for your company
and download them when
available



Now review your conclusions of
(2a) based on the latest
financials and management
reports

UNITED STATES

SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C. 20549


FORM 10
-
Q


QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF
1934








For the
Quarter Ended
June

30, 2004



Commission
File Number 1
-
11605

Other Performance measures


ROIC (Return on invested
Capital) relating NOPAT
(operating result after tax) with
Capital invested (Fixed assets
plus Net Working Capital)



EVA (Economic Value Added)
calculating NOPAT after
deduction of the Cost of Capital
over the Capital invested



MVA (Market Value Added)
calculating the Market Value
(common shares outstanding
times share price per share) of
the Stock of the company
minus all paid in capital (Equity
Capital Supplied by
Shareholders)

Some websites for your information

CFO.com calculated the ranking in EVA

'02 '99 Company MVA MV Capital EVA


1 2 General Electric 222,767 322,290 99,423 5,983


2 4 Microsoft 212,340 237,547 25,207 2,201


3 6 Wal
-
Mart Stores 207,346 280,970 73,624 2,928


4 22 Johnson & Johnson 124,237 171,829 47,592 2,839


5 12 Merck 107,076 144,624 37,548 3,872


6 32 Procter & Gamble 92,231 133,248 41,017 2,315


7 8 IBM 90,422 193,955 103,533 (8,032)


8 13 Exxon Mobil 85,108 273,634 188,526 (2,175)


9 21 Coca
-
Cola 82,413 107,007 24,594 2,496


10 3 Intel 77,395 114,574 37,179 (3,736)

Assignment (2c): Calculate


For your company determine:



ROIC based on the
latest available financials


MVA


EVA


Now compare the ROIC, MVA and EVA of the
main competitor of your company


Which company is performing better ?

Recommended Reading

Nominal Corporate tax rates (US)


Corporate Tax Rates
*



Tax Rate Taxable Income



15% $


1
-

50,000


25% 50,001
-

75,000


34% 75,001
-

100,000


39% 100,001
-

335,000


34% 335,001
-

10,000,000


35% 10,000,001
-

15,000,000


38% 15,000,001
-

18,333,333


35% over 18,333,333



* Personal service corporations pay a flat 35%.


Empty your pockets

Tax Havens


Companies have the task to create
value for their shareholders


Paying taxes is in conflict with that
objective


Many companies raise

off shore


subsidiary's to avoid taxes


Famous tax havens are:


The Bahama

s


Grand Cayman islands


Monaco


The Netherlands Antilles


Ireland (only 12% corporate tax)

Pay tax or take a holiday?


The Bahama

s

Assignment (2d): Tax


Your company has made
provisions in its Income Statement
over the past 5 years to pay taxes
over its taxable income



Calculate tax (t) as a % of
Operating Profit (EBIT) over the
years 2003
-
08 and estimate 2009



Has your company paid the full
amount of taxes or does it use

off
shores

?



What was the average tax rate (%)
over the period 2003
-
2008 and
what was the variance ?

Valuing taxes…

Analysis of Financial Statements (ch.3)


Business People perform a
2 step approach to
understand how a company
is doing:



Skim
: try to get a quick
overall and basic

understanding of what the
company is doing


Scan
: try to get a quick
understanding of how the
company is doing
financially

Through looking at the
company in its
environment
(competition/industry)

Through Financial
Ratio Analysis

Financial Ratios
:


Liquidity Ratios
: how many assets can be
quickly converted to cash to pay the
company

s bills?


Asset Management Ratios
: How effectively
does the company manages its assets?


Debt Management Ratios
: How does the
financial leverage effects the risk and
returns of the company?


Profitability Ratios
: what is the profit
performance of the company?


Market value Ratios
: How do earnings and
shareholders value are related for the
company?


Du Pont Charts
: How is the company doing
on its main ratios on asset and operational
performance ?

Run the math…

Liquidity ratios


Current ratio
: current assets/current liabilities


Quick ratio
: (current assets
-
inventories)/current
liabilities



Inventories are in general not so easy to change
to cash (it will take some time) so excluding
inventories from the ratio will give a better
understanding of the real liquidity of the
company… (note: liquidity is the ability for the
company to pay all its bills in the near future)



High current/quick ratios (at least at value 1)
indicate that the company can fulfil its short term
obligations (current liabilities) i.e. pay its bills for
the period to come

Asset Management ratios


Inventory turnover ratio
:
Sales/Inventories


DSO
(days of Sales
Outstanding in Accounts
Receivables) : Accounts
Receivables/Sales per day


Note Sales per day= Sales/365
days


Fixed assets turnover ratio
:
Sales/Fixed assets


Total assets turnover ratio
:
Sales/Total assets

Getting the picture

Debt Management ratios


Debt ratio
: Total debt/Total Assets


what part of total assets is financed
with debt


Times Interest Earned ratio (TIE)

:
EBIT/interest charges


Note: EBIT= Earnings Before Interest
and Tax or Operational Profit and
interest charges is the interest
expenses in the income statement


EBITDA coverage ration
:
(EBITDA+lease
payments)/(Interest+principal
payments+lease payments)


Note: EBITDA is EBIT plus
Depreciation and Amortization

Uncovering real performance

Profitability ratios


Profit Margin on Sales
:
Net income/Sales


Basic Earning Power
:
EBIT/Total Assets


Return on Total assets
:
Net income/Total assets


Return on Common
Equity
: Net
income/common equity

Playing with the shareholders

Market Value ratios


Price
-
Earnings ratio (PE)

:
Price per share/earnings per
share


Price
-
Cash Flow ratio
: Price
per share/cash flow per
share


Book value per share
:
Common equity/number of
shares outstanding


Market to Book ratio
: Market
price per share/Book value
per share

What shoe will fit ?

Assignment (3a):Trend Analysis



Calculate all the ratios for your company (in
Excel)


Calculate the ratios over 10 years


Graph the results and interpret the numbers



Do the same for the main competitors of the
company


Now: Draw conclusions !



How is your company doing compared to its
competitors?


What is your forecast for the ratios for FY 2011
based on the 10
-
Q (quarterly reports) of your
company that are available to date ( 3 quarters
are already available in this calendar year)


Note: if you want to use
www.sec.gov

to find
the 10
-
Q reports use the ticker symbol to enter
the EDGAR database

Du Pont scheme


Du Pont
introduced a
comprehensive
scheme of ratios
that enables
companies to
make a quick
scan and
compare their
performance with
other companies
in the industry

Assignment (3b): Du Pont scheme


Follow the textbook scheme
of Du Pont on page 93
(depend on your edition)


Develop a Du Pont chart for
your company


Indicate the good
performances with bright
green


The areas of concern with
orange and


The areas of Alarm with
bright red!


O


O

Assignment (3d): Looking beyond the numbers


Are there any risks you perceive for
your companies industry or/and
products and services or its
markets that can/will threaten its
survival?


Ask yourself: how dependant is my
company on a single product, a
single customer, a single supplier ?


In what countries does my
company operate; are these
countries high risk ? (Iraq


Thailand
-

Iran
-

Afganistan
-

Syrie,
Libya, Yemen, Egypt, Greece,
Portugal, Ireland…)


How vulnerable is the current
technology base of my company?
Can my company innovate at the
same or higher pace as the
industry?

Dark clouds over the future ?

That

s it for this week…


Please forward your
assignments to me before
the next on line class
(see
the syllabus)


Paul_pmbon@yahoo.com


paulusbon@msn.com

(for
large files)


Next week we will cover

The
time value of money


(chapter
8) Please start reading…


Feel free to give me any feed
backs…(thanks)


Enjoy!