Preferred Dividend Coverage Ratio - DOC

Document Sample
Preferred Dividend Coverage Ratio - DOC Powered By Docstoc
					Foundations of Management
Webb, MW
                                   Financial Controls

Financial Performance Data essential to determine:
        Attractiveness (firm and industry) for investment + competition
        Profitability Potential
        Current and Future Positioning

Sources of Income for the Firm
       -       sales and revenues
       -       equity in the form of stock (sale of a share of ownership)
       -       financial portfolio investments
       -       borrowed or leveraged funds
       -       bonds (long term contractual IOU by which the firm agrees to pay the
lender a specified amount of interest each year at a specified dates within the year and
redeem the principal at a future maturity date) = long term debt.

Bonds carry provision that protect the claim over a stockholder’s.
       Registered Bonds (recorded in corporate books/ interest is
       automatically paid)
       Coupon or Bearer Bond (coupon with bond is redeemed for interest
       with an agent)

In the case of Bankruptcy – provision allow for priority take by lenders, suppliers,
bondholders, over shareholders.

Collateral = loan secured by property
Unsecured = loan is NOT secured by property

ASSETS
       1)      Fixed Assets or Tangible Assets = assets not intended for sale; used in
manufacture, display, warehouse, or transport of product.
               = plant, equipment calculated as the cost of acquisition minus
depreciation (the decline in useful value of a fixed asset due to wear and tear from use
and time, or even not in use by reason of action of elements)

                Intangible Assets = assets having no physical presence, but substantial
value ( franchise rights to do business; patents; exclusive contracts; goodwill)

       2)     Liquid or Current Assets -
                      cash on hand and in the bank
                      accounts receivable
                      marketable securities (govt securities or commercial
                      paper = unsecured promissory note)
                      inventory (raw materials/partially finished/finished good)
Financial Controls
Page Two

LIABILITIES
       1)        Current Liabilities = all debt that falls due the current year of
                 the balance sheet
                 -       accounts payable
                 -       notes payable ($ to bank or lenders)
                 -       federal taxes payable
                 -       accrued expenses payable (salaries, wages, interest, fees,
                                 premiums, pensions)

        2)       Long Term Liabilities = debt due after one year from the
                 balance sheet date
                 -      mortgage bonds
                 -      long term bonds

COGS =     COST OF GOODS SOLD
     = raw materials, purchases, direct labor, manufacturing overhead

SG&A =           Sales, General, and Administrative Costs

LIQUIDITY        =      measure of the ratio of “liquid assets” to debt
                        obligations (interest or principal)
                        =       ability to convert assets into cash for Accounts
                                Payable and Long Term Debt

        WHAT IS CAPABILITY TO MEET/SERVICE DEBT?

        Current Ratio =         Current Assets / Current Liabilities
                                =     42,663 / 14,408
                                =     2.96 for every $$ of ST Debt, there is
                                             $2.96 liquid asset to cover

        Acid Test               =       Current Ratio minus inventory
                                =       Inventory may be obsolete, unsalable,
                                        not easily convertiable – most illiquid
                                =       Examine inventory to determine degree of
                                               liquidity
                                =       Acid Test may lower CR significantly

                                =       Current Assets – Inventory / CL
                                =       42,663 – 10,430 / 14,408
                                =       2.24 for every $$ ST Debt, $2.24 liquid
Financial Controls
Page Three

        HOW EFFICIENTLY DO WE CONVERT SALES INTO CASH?

Average Collection Period Ratio
                            =      How many days out of 360 it takes the
                            average account to be collected.
                            =      Collection Periods – 30, 60, 90 days
                            =      Long collection period = low liquidity
                            =      As the average collection period increase,
                            AR become less liquid (red flag)

                              =       Accounts Receivables $$ X 360
                                      Annual Credit Sales $$
                              =       $7,745 X360 / $120,785
                              =       23 days average collection period

        Account Receivable Turnover Ratio
                            =      Also a measure of AR liquidity
                            =      # of times AR turnovers
                            =      As ACTR increases, liquidity increases

                              =       Annual Credit Sales $$
                                      Accounts Receivables $$
                              =       $120,785/ $7,745
                              =       15.5 times AR are collected in full 15.5
                                      times a year

        HOW MANY DAYS CAN WE GO WITHOUT CASH INFUSION?

        Basic Defense Interval Ratio
                              =      Funds available to meet immediate
                      obligations without sales or other sources

                              =       Cash + Marketable Securities + AR
                                      COGS + GAADS
                              =       Number of days to survive operating

ASSET UTILIZATION or ACTIVITY RATIOS

=       efficiency with which assets are used to generate sales + profits
=       as sales + profits > per each $ of asset – mgt performance >
Financial Controls
Page Four

        HOW ATTRACTIVE IS THE FIRM FOR INVESTMENT?
        HOW EFFICIENTLY IS THE FIRM USING ITS ASSETS?

        Asset Turnover Ratio
               =     Amount of revenue generated per $$ tangible asset
               = Net Sales / total tangible assets (total assets – intangible assets)
                     =       1.94 implies that for every $1 of tangible asset,
                             the firm generated almost $2 in sales

        Earning Power Ratio (ROA)
               =     How much net profit was derived from every dollar of total assets
               =     How attractive is the firm for return on investment?

                 =     Net Profit after Taxes / Total Assets
                 =     $123,300,000 / 1,974,320,000
                 =     .06 implies that every dollar invested will provide only a 6% yield
                       in profit.

        Physical Ratios of Asset Utilization
               =       Output in relation to industry specific asset measure
               =       Retail = measures sales per square foot (efficient use of floor
                       space)
               =       Airlines = measures load factor (# of passenger miles actually
                       flows : # available)
               =       Hospitals = bed capacity utilization

PROFITABILITY
      = How well each $1 of sales generates profit (operational efficiency)
      = How well each $1 invested generates profit (financial efficiency)

        HOW MUCH PROFIT IS GENERATED FROM SALES?
        HOW MUCH PROFIT IS GENERATED FROM INVESTED CAPITAL?

        Gross Profit Margin
               =      The percentage of revenue generated after cost of production
               =      Sales – COGS / Sales
               =      .22 GPM indicates firm generated a 22% return from
                      manufacturing efficiency
Financial Controls
Page Five

        Operating Profit Margin
              =       The percentage of revenue generated after SGA subtracted from
                      operating profits
              =       Operating Profit - SGA/ Sales
              =       .10 OPM indicates firm generated a 10% return after considering
                      cost of sales, distribution, and administration
              =       By comparing GPM and OPM, analysts can determine if changes in
                      profitability were the result of manufacturing efficiency or in
                      selling and distribution

        Net Profit Margin or Return on Sales (ROS)
              =       The overall measure of management’s capability to turn each
                      dollar of sales into profit
              =       Net Profit after Taxes & Interest / Sales
              =       .04 indicates a 4% return on every dollar of sales in net profit
                      after taxes and interest

        Return on Invested Capital (ROI)
               =      Percent return per 1$ of borrowed and invested capital
               =      Indicates managerial and financial efficiency (portfolio strategy)
               =      NPAT / LT Debt + Stockholder Equity

LEVERAGING OR LONG TERM SOLVENCY
     =    Can the firm support the amount of borrowing it has committed itself to
          repay over the long run? And continue to leverage growth?

                 IS THERE ENOUGH EQUITY TO SUSTAIN CONTINUED
                 BORROWING?
                 CAN FIRM GENERATE ENOUGH INCOME TO SERVICE DEBT?

        Debt to Equity Ratio
               =      Degree of reliance on debt vs. equity financing
               =      Percentage of equity going to service debt
               =      Total Debt includes current and long term liaibilities

                 =     Total Debt / Stockholder Equity
                 =     .94 indicates that 94% of equity is going to service debt

                 =     > ratio shows increased reliance on debt relative to equity
                 =     < ratio shows > reliance on equity OR aversion to leverage

        Interest Coverage Ratio
                =     Interest payments have first claim on earnings (all annual interest
                      including that due on bonds)
                =     Measure of amount of funds available to pay interest
                =     EBIT / Interest
Financial Controls
Page Six

        Preferred Dividend Coverage Ratio
               =      Same as ICR, only indicates how secure preferred dividends are in
                      relation to earning power of the firm.
               =      EBIT / Annual preferred dividends

        Capital Structure Breakdown
                =      Percentage capitalization of LTD, Preferred Stock, and
                       Common Equity (Common Stock)

COMMON STOCK RATIOS
    = these describe the characteristics of the common stock; not the performance
    of the firm

        Book Value per Share or Net Worth or Stockholder’s Equity
               (considered assets – liabilities as net worth reflected in “book value” =
               Stockholder’s equity – preferred share at par / # shares outstanding)
        Payout Ratio (proportion of earnings paid to shareholders)
        Prcie/Earnings Share (market price of share relative to earnings)

ECONOMIC VALUE ADDED (EVA)
    =     Redefines processes, and resources as invested capital
          (i.e. human capital, intellectual capital, total assets)
    =     After tax cash flow generated minus the cost of capital used to generate
          that cash flow.
    =     Considered to represent “real” profit vs. profit on paper, as it
          indicates the gain on investment capital AND the cost of capital
    =     If the cost of capital (loans, bonds, equity) is 15%, then a 14% earning is
          not a gain in economic value.
    =     By the same token, > earnings mean > taxes, which also drain true
          economic value

        EVA requires calculating the cost of capital
        =     after tax interest rate on loans and bonds
        +     cost of equity (based on expected returns on equity per share)

        AND calculating EXPENSES as use of invested capital
        =    very useful as a comparative of business units, divisions, and
             related corporations within a diversified portfolio

        =        NPAT minus TOTAL COST OF CAPITAL

				
DOCUMENT INFO
Description: Preferred Dividend Coverage Ratio document sample