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Review Ch. 4_ Ch. 12_ Ch. 13

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Review Ch. 4_ Ch. 12_ Ch. 13 Powered By Docstoc
					Review Ch. 4, Ch. 12, Ch. 13
             Chapter 4 Outline
1.   What is financial planning
2.   Financial planning models
3.   The percentage of sales approach
4.   External financing and growth
5.   Caveats in financial planning




                                        2
  Percentage of sales approach:

              COMPUTERFIELD CORPORATION

                    Financial Statements

Income statement                    Balance sheet

Sales      $8,000        CA       $5000      Debt      $8250

Costs       5,800        FA      $7000       Equity    $3750

Net Income $2,200        Total   $12000      Total    $12000




                                                           3
       EFN and Capacity Usage
• Suppose COMPUTERFIELD is operating at 80%
  capacity:
 1. What would be sales at full capacity? (1p)
 2. What is the capital intensity ratio at full
  capacity? (1p)
3. What is EFN at full capacity and Dividend
  payout ratio is 15%? (1p)
What is EFN to increase sales to 12000 and
  Dividend payout ratio is 35%?
                                                  4
      Q 1:8,000/.8=10,000; Full capacity as increase
              10,000/8,000 = 1.25 (25%)

•   Income statement
•   Sales $8,000
•   Costs $5,800
•   N I $2,200
• Ret earnings 2,200*.85=1,870
• New Ret earnings 1,870*1.25=2,337.5
• There is no indication that any changes took
  place in % cost for the proforma income
  statement, we can get the same result by
  increasing RE or by creating proforma IS
                                                       13-5
           New assets needed
•   CA
•   5000*1.25=6,250
•   TA =6,250+7000
•   13,250
• capital intensity ratio at full capacity
• =13,250/10,000 =1.325
• EFN =0 change in TA = 1250 which is less than
  the retained earnings, we can fully finance
  internally full capacity operation.
                                                  13-6
    What is EFN to increase sales to 12,000 (50%) and
              Dividend payout ratio is 35%?

•   Income statement
•   Sales $8,000
•   Costs $5,800
•   N I $2,200
• Ret earnings 2,200*.65=1,430
• New Ret earnings 1,430*1.5=2,145
• There is no indication that any changes took
  place in % cost for the proforma income
  statement, we can get the same result by
  increasing RE or by creating proforma IS
                                                        13-7
Recent Sales 8,000; Proj. Sales 12,000
                   Increase 50%


• CA 5,000*1. 5=7,500
• FA=7,000+1,400
• TA =15,900


• FA=7000/10000 per unit of sales=.7
• Inv . Need for 2000 more units of sales
  =.7*2000=1,400
• EFN=1,755 change in TA = 3,900 from RE=2,145

                                                 13-8
                 EFN=1,755

•   D/E ratio =3/2
•   EFN=1,755
•   How much debt should be issued?
•   How much equity?
• If they issue only debt (all 1,755 in bonds)
  what will be the D/E ratio on the proforma BS?
• D=8,250+1,755=10,005
• E=3,750+2,145=5,895 D/E=1.69
                                               13-9
          Please, Review also
• Internal Growth Rate




• Sustainable Growth Rate
           Chapter 12 Overview
• Return of an investment: arithmetic and geometric

• The variability of returns

• Efficiency of capital markets




                                                      11
           Arithmetic vs. Geometric
                 Averages (1)
• Geometric return = the average compound
  return earned per year over multiyear period

                Geometric average return =


• Arithmetic average return = the return earned
  in an average (typical) year over a multiyear
  period
                                                 12
      The Variability of Returns
• Variance = the average squared deviation
  between the actual return and the average
  return



• Standard deviation = the positive square root
  of the variance


                                                  13
The Normal Distribution (2)




                              14
                  Z-score
• For any normal random variable:




• Z – z-score
• X – normal random variable
•    - mean

                                    15
           Chapter 13 Outline
• Expected Returns and Variances of a portfolio
• Announcements, Surprises, and Expected
  Returns
• Risk: Systematic and Unsystematic
• Diversification and Portfolio Risk
• Systematic Risk and Beta
• The Security Market Line (SML)
                    Portfolios
             Portfolio = a group of assets held by an
                             investor


• The risk-return trade-off for a portfolio is measured
  by the portfolio expected return and standard
  deviation, just as with individual assets

               Portfolio weights = Percentage of a
            portfolio’s total value in a particular asset

                                                            17
    Portfolio Expected Returns (1)
• The expected return of a portfolio is the weighted
  average of the expected returns for each asset in the
  portfolio




• You can also find the expected return by finding the
  portfolio return in each possible state and computing
  the expected value

                                                      18
    Calculate Portfolio Variance
• Portfolio variance can be calculated using
  the following formula:



• Correlation is a statistical measure of how 2 assets
  move in relation to each other

• If the correlation between stocks A and B = -1,
  what is the standard deviation of the portfolio?

                                                         1
Portfolio Diversification




                            20
      Measuring Systematic Risk
• Beta (β) is a measure of systematic risk

• Interpreting beta:
  – β = 1 implies the asset has the same systematic
    risk as the overall market
  – β < 1 implies the asset has less systematic risk
    than the overall market
  – β > 1 implies the asset has more systematic risk
    than the overall market

                                                   21
Portfolio Expected Returns and Betas




  Rf
               Reward-to-Risk Ratio:

• The reward-to-risk ratio is the slope of the line
  illustrated in the previous slide
  – Slope = (E(RA) – Rf) / (bA – 0)
  – Reward-to-risk ratio =

• If an asset has a reward-to-risk ratio = 8?

• If an asset has a reward-to-risk ratio = 7?


                                                  23
        The Fundamental Result
• The reward-to-risk ratio must be the same for
  all assets in the market




• If one asset has twice as much systematic risk
  as another asset, its risk premium is twice as
  large
                                                   24
Security Market Line (2)




                           25

				
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posted:7/26/2013
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