Docstoc

Financial Accounting

Document Sample
Financial Accounting Powered By Docstoc
					Further Evaluation of
           Accounts




                        1
Dr. Clive Vlieland-Boddy
        FCA FCCA MBA
                    2009



                           2
Valuation of Businesses
   Enterprise Value (EV)
   Net Asset Value.
   Earnings Multiple Values
   Discounted Net Present Value.
   EV/EBITDA = payback




                                    3
Enterprise Value
   Market Cap +
   Interest bearing debt –
   Cash or Cash Equivalents

This is sometimes called the “takeover value”!




                                                 4
Net Asset Value
The net asset value is arrived at by:
 Total Current and Non Current Assets

 Less: Total Current and Non Current
  Liabilities.

   The same can be arrived at by taking total
    shareholders funds,


                                                 5
Earnings Multiple
   Often based on an adjusted P/E ratio or a
    standard market ratio.




                                                6
Discounted NPV
   Discounting the future expected cash flows to
    present value.




                                                7
Remember…
   Valuation is one thing.
   But the real issue is to find a price that buyer
    and seller agree.




                                                       8
Linking Ratios
   These are essentially expanding the items
    examined but essentially the basis equation
    still exists.




                                                  9
Dupont Analysis

 Analysis of Return on
  Stockholders’ Equity
                (ROE)

                         10
The Dupont Equation
[Return on Equity (ROE)]


             NI
      ROE 
            Equity

                           11
ROE just tells us the return!
This could be because of the:
 Profitability of the business.

 The gearing of the business so that the
  Equity Shareholders are benefiting or
  otherwise from changes in debt financing.
 Or could be from better or worse use of the
  NCA.
Du Pont expands the basic Formula…….
                                                12
The Dupont Equation
[Return on Equity (ROE)]


       NI    Sales   Assets
ROE       X       X
      Sales Assets Equity

ROE  ( profitability) X (efficiency X (leverage)
                                    )


                                                13
The Dupont Equation
[Return on Equity (ROE)]


       NI    Sales   Assets
ROE       X       X
      Sales Assets Equity

ROE  ( profitability) X (efficiency X (leverage)
                                    )


                                                14
The Dupont Equation
[Return on Equity (ROE)]



       NI    Sales   Assets   NI
ROE       X       X        
      Sales Assets Equity Equity

ROE  ( profitability ) X (efficiency ) X (leverage)


                                                   15
Betas = systematic risk
   These are placed on enterprises by the
    market place. They normally range from 0-2
   1 is standard.
   0 means that the company is not affected by
    the general movement of the market.
   2 means that the company is moves more
    sharply than the market.
   They can act as a general guide to the entity.
                                                 16
Failure Prediction Models
   These are useful tools to know about. They
    basically look at the liquidity of a company
    and create something called a “z” score.
    Altman’s which is the most well known is
    worth knowing.
   At www.creditguru.com is an insolvency
    predictor which does the calculation for you.


                                                    17
Altman’s Z Score
Z Score = 1.2 A + 1.4 B + 3.3 C + 0.6 D + 1.0 E
when:
A = working capital/total assets
B = retained earnings/total assets
C = EBIT/total assets
D = market value of equity/book value of debt
E = sales/ total assets
A score of 2.7 or more represents a strong
  company. A score of less than 1.8 indicates 18

  high risk of failure.
Sustainable Growth
   Internally by:
         Improving Working Capital Management. (See 19.1.2)
         Improving Assets Utilization.
         Retaining Profits
   Externally by:
         Increasing Leverage.
         Increasing Share Capital




                                                           19
Sustainable Growth
Financing Growth is essential. This can be
   done by several ways:
 Improving Cash Management.

 Improving Assets Utilisation.

 Increasing Leverage.

 Retained Earnings.

 Increasing Share Capital.



                                             20
Sustainable Growth – Cont…
   Most companies fund growth by not paying
    all the net profit out as dividends. Thus the
    “retained earnings” fund the growth. But
    often this is insufficient.
   Some can fund the growth by effective
    working capital management. Lidl and Aldi.
   Generally additional capital, debt or equity is
    often required.

                                                      21
Sustainable Growth – Cont..
   Pay Out Ratio ( dividend Ratio) is the % or
    net profit that is distributed as dividends.
   Plough Back Ratio is the % that is retained.
   Some say that the Plough Back Ratio is the
    sustainable growth rate. But this is not
    altogether fair.



                                                   22
Sustainable Growth
Whilst this formula shows the internally
  generate profits will assist with growth, there
  are clearly other areas to achieve sustainable
  growth:
 Improving working capital management. (Aldi
  & Lidl)
 Access to debt and capital markets to
  generate funds on a regular basis.

                                                23
Good Readings
   See 17.1.11




                  24
Environmental
     Scanning




                25
Environmental Scanning
                     TOOLS AND
                      METHODS




      SWOT
                                    Other
    Strenghts,         Economic
                                    Tools
   Weaknesses,        Development
 Opportunities and     Scenarios
 Threats Analysis



                                            26
Environmental Scanning

           TOOLS AND
            METHODS




                         Other
 SWOT       PESTEL
                         Tools


                                 27
SWOT
The Company
   Strengths
   Weaknesses
The Environment
   Opportunities
   Threats


                    28
SWOT analysis

   Popular method used for summarising of the
    innovation analysis results;
   Provides an overview of regional strengths
    and weaknesses as well as opportunities and
    threats the region is currently facing or may
    face in the future.


                                                29
Internal factors
   A STRENGTH is a is a resource or capacity
    of the region that it can take advantage of to
    improve its innovation system and
    competitiveness, e.g.
       Access to well-educated labour force;
       Good communication and infrastructure;
       Diversified regional economic structure;
       Well-functioning public services;
       Etc.
                                                     30
Internal factors

   WEAKNESS is a limitation, fault or defect in
    the region that will keep it from improving the
    innovation system, e.g.
       Limited number of start ups in the region;
       Peripheral location and low population density;
       High degree of long-term unemployment;
       Lack of cooperation between companies;
       Etc.
                                                          31
External factors

   OPPORTUNITY is a favourable situation in
    the region's environment, e.g.
       Availability of EU funds and programmes;
       New          markets       through     increased
        internationalisation;
       New educational opportunities;
       Cross-border cooperation;
       Global increase for demand in tourism services;
       Etc.
                                                       32
External factors

   THREAT is an unfavourable situation in the
    region's environment that may potentially
    damage the strategy, e.g.
       Increasing of energy prices;
       Termination of regional development funding;
       Decrease of population;
       Emigration of high-qualified labour force;
       Etc.
                                                       33
SWOT Design
   One SWOT strategy for the whole region; or
   A set of SWOT strategies
       Relevant if different views of the parties involved
        in the SWOT process;
       E.g. a regional economic strength may be
        regarded as a weakness from environmental
        point of view;
       May be structured along different sectors
        (economic, environmental, social, etc) or target
        groups (companies, public agencies, R&D
        sector, etc).
                                                         34
SWOT Analysis – Main Steps

                                                            Strenghts     Weaknesses
                                                                1             1
                                                                2             2
                                                                3             3
              Analysis of    Analysis of
 Scaning of
              Strenghts     Opportunities
  Regional                                  Opportunities   OS Actions    OW Actions
                 and            and
Environment                                      1            OxSx          OxWx
              Weaknesss       Threats            2            OxSx          OxWx
                                                 3            OxSx          OxWx


                                               Threats       TS Actions   TW Actions
                                                  1            TxSx         TxWx
                                                  2            TxSx         TxWx
                                                  3            TxSx         TxWx


                                                            SWOT Matrix

                                                                                  35
Using SWOT as a Basis for
Development Strategy
The strategy shall define priorities and actions
   that

1.   Build on STRENGTHS;
2.   Eliminate WEAKNESSES;
3.   Exploit OPPORTUNITIES;
4.   Mitigate the effect of THREATS.
                                               36
SWOT Golden Rules

   Be realistic about the strengths and
    weakness of your region when conducting
    the SWOT;
   Avoid general SWOT! It should always be
    specific;
   Distinguish between where your region is
    today and where it could be in the future;
   Keep your SWOT short and simple.         37
PEST or PEST(EL)
Environmental Scanning
   Political Issues
   Economic Issues
   Social Issues
   Technical Issues
   Environmental Issues
   Legal Issues

                           38
Development Scenarios
   An alternative to SWOT analysis
   Development scenarios are not predictions or
    forecasts of the future!
   They intend to explore a number of wide-
    ranging „possible futures“ and access their
    implications for the region and its main actors


                                                  39
Development Scenarios – Main
Steps


                                             Development   Development
                                              Scenario 1    Scenario 2
Identification   Assessment    Elaboration
 of Regional     of Regional       of
 Drivers and     Drivers and   Dependency
  Regional       Dependency       Matrix
    Issues        Analysis                   Development   Development
                                              Scenario 3    Scenario 4




                                                                   40
Market Value Added




                     41
MVA
 Market Value Added (MVA) is the
  difference between the firm’s
  market value and the amount of
  capital supplied.
 MVA measures how well
  managers are doing at
  maximizing shareholders’ wealth.

                                     42
Market Value Added



                        Market
    Total     Premium   value added
    market
    value
              Debt &
              equity
                        Investment
              capital


                                      43
Earnings Value Added




                       44
EVA
 Economic Value Added (EVA) is like
  MVA, but applied on an annual basis.
 EVA = Operating profit - (Total
  capital x Cost of capital).
 EVA represents economic profit, as
  opposed to accounting profit.


                                     45
EVA Drives MVA
 Companies that consistently earn profits in
     excess of their required return ...

                                     EVA
    NOPAT
                      Charge

       Gain a premiums to book value.

    Market                           MVA
    Value
                     Capital
                                               46
Relationship of EVA to MVA
MVA is the NPV of the EVA’s

                        EVA      EVA       EVA         EVA
                        Year 1   Year 2    Year 3 .... Year n


             MVA
Market
Value
Market                  EVA + EVA +        EVA + ... + EVA
value    =              1+r   (1 + r)2     (1 + r)3    (1 + r)n
             Capital   Market value is based on establishing the
                       economic investment made in the company
                       (capital), making a best guess about what
                       economic profits (EVA) will happen in the
                       future, and discounting those EVAs to the
                       present to get market value added.
                                                                  47
Capital Structure Theory
   Modligliani and Miller theory
       Zero taxes
       Corporate taxes
       Corporate and personal taxes
   Trade-off theory
   Signaling theory
   Debt financing as a managerial constraint

                                                48
MM Theory: Zero Taxes
   Modligliani and Miller (MM) prove, under a very
    restrictive set of assumptions, that a firm’s value is
    unaffected by its financing mix:
       VL = VU.
   Therefore, capital structure is irrelevant.
   Any increase in ROE resulting from financial
    leverage is exactly offset by the increase in risk (i.e.,
    rs), so WACC is constant.


                                                             49
MM Theory: Corporate Taxes
   Corporate tax laws favour debt financing over
    equity financing.
   With corporate taxes, the benefits of financial
    leverage exceed the risks: More EBIT goes to
    investors and less to taxes when leverage is used.
   MM show that: VL = VU + TD.
   If T=40%, then every dollar of debt adds 40 cents of
    extra value to firm


Under MM with corporate taxes, the firm’s value
increases continuously as more and more debt is used.
                                                   50
Dividend Policy
   There is an agreement that companies
    should not pay dividends as they should be
    able to generate a return far in excess of that
    an ordinary shareholder could do with the
    money.
   This argument that capital gains will
    accelerate faster with no dividend policy is an
    argument supported by many.
   In reality, shareholders need cash flow.
                                                  51
Coffee Break
   17.2.1




               52
Coffee Break
   17.5.1




               53
Competitive Analysis
and Marketing Strategy:
A Review


                          54
  Structural Analysis of Industries
  Michael Porter

                     THREAT OF
                   NEW ENTRANTS




BARGAINING                            BARGAINING
 POWER OF          RIVALRY AMONG       POWER OF
 SUPPLIERS          COMPETITORS         BUYERS




                     THREAT OF
                    SUBSTITUTES
                                              55
Barriers to Entry
   Economies of Scale
   Product Differentiation
   Capital Requirements
   Switching Costs
   Access to Distribution Channels
   Cost Disadvantages Independent of Scale
   Government Policy
   Experience Curves
   Expected Retaliation

                                              56
Factors Affecting Rivalry Among
Existing Competitors
     Numerous or Equally Balanced Competitors
     Slow Industry Growth
     High Fixed or Storage Costs
     Need to operate at capacity …. Price cutting
     Lack of Differentiation
     Capacity Augmented in Large Increments
     Diverse Competitors
     High Strategic Stakes
     High Exit Barriers

                                                     57
Bargaining Power of Buyers is
High When....
   Purchasing is concentrated or is in large volumes
    relative to seller’s sales
   The product represents a large proportion of buyer’s
    costs
   There is little differentiation or there are low
    switching costs
   Backward integration is a credible threat
   Product performance / quality is unimportant to
    buyer’s performance


                                                       58
Bargaining Power of Suppliers is
High When....
   Supplying industry is dominated by a few firms and
    is more concentrated than the customer industry
   The product has few substitutes
   The customer industry is not important to the
    supplier
   The supplier product is an important input, is
    differentiated, or has high switching costs
   The supplier group poses a credible threat of
    forward integration


                                                         59
 Barriers and Profitability



       Low
             Low, stable returns Low, risky returns

 ENTRY
BARRIERS

       High High, stable returns High, risky returns



                    Low                   High
                                                       60
                          EXIT BARRIERS
Preparation for next session
   Exercises 17,23 and 27




                               61
The End…
   to be continued…..




                         62

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:8
posted:7/17/2012
language:
pages:62