· Read the article and summarize.· Discuss your reaction to th.docx
- 1. · Read the article and summarize. · Discuss your reaction to the article · Generate 2-3 recommendations for an organization needing to create a more "thriving" environment. · Your recommendations should be written as if you were an OB Consultant and were trying to convince top leadership the value of a "thriving" environment. Be sure to utilize your breadth of knowledge about OB. You will be graded on your ability to use the concepts from our course to strengthen your argument. For example: performance management, motivation, leadership, and/or job design would likely relate to the article but I am sure other concepts would also fit. **Please write 2 pages. Please provide high quality. Aswath Damodaran! 1! Financial Statement Analysis! “The raw data for investing” Aswath Damodaran! 2! Questions we would like answered…!
- 2. Assets Liabilities Assets in Place Debt Equity What is the value of the debt? How risky is the debt? What is the value of the equity? How risky is the equity? Growth Assets What are the assets in place? How valuable are these assets? How risky are these assets? What are the growth assets? How valuable are these assets? Aswath Damodaran! 3! Basic Financial Statements! firm owns and owes at a point in time. earned in the period of analysis
- 3. and outflows to the firm during the period of analysis Aswath Damodaran! 4! The Accounting Balance Sheet! Assets Liabilities Fixed Assets Debt Equity Short-term liabilities of the firm Intangible Assets Long Lived Real Assets Assets which are not physical, like patents & trademarks Current Assets Financial InvestmentsInvestments in securities & assets of other firms
- 4. Short-lived Assets Equity investment in firm Debt obligations of firm Current Liabilties Other Liabilities Other long-term obligations Figure 4.1: The Balance Sheet Aswath Damodaran! 5! Principles underlying accounting balance sheets! Value: Unless a substantial reason is given to do otherwise, accountants view the historical cost as the best estimate of the value of an asset. of an asset is often viewed as both much too volatile and too easily manipulated to be used as an estimate of value for an asset. This suspicion runs
- 5. even deeper when values are is estimated for an asset based upon expected future cash flows. estimating it: When there is more than one approach to valuing an asset, accounting convention takes the view that the more conservative (lower) estimate of value should be used rather than the less conservative (higher) estimate of value. Aswath Damodaran! 6! Measuring asset value! begin with the historical cost at which assets were acquired and financing raised, they are no designed to measure the current value of assets. at most companies today, are current assets. There are a handful of sectors
- 6. (such as banks) where assets are marked up to market. from an accounting statement are not measures of the current values of either. ng, a trend in both US and international accounting, aims to bring asset values in accounting balance sheets closer to their current market values. Aswath Damodaran! 7! A Financial Balance Sheet! Assets Liabilities Assets in Place Debt Equity Fixed Claim on cash flows Little or No role in management Fixed Maturity Tax Deductible
- 7. Residual Claim on cash flows Significant Role in management Perpetual Lives Growth Assets Existing Investments Generate cashflows today Includes long lived (fixed) and short-lived(working capital) assets Expected Value that will be created by future investments Aswath Damodaran! 8! The Income Statement! Figure 4.2: Income Statement Revenues Gross revenues from sale of products or services - Operating Expenses Expenses associates with generating revenues = Operating IncomeOperating income for the period - Financial ExpensesExpenses associated with
- 8. borrowing and other financing - TaxesTaxes due on taxable income = Net Income before extraordinary items Earnings to Common & Preferred Equity for Current Period - (+) Extraordinary Losses (Profits)Profits and Losses not associated with operations - Income Changes Associated with Accounting ChangesProfits or losses associated with changes in accounting rules - Preferred DividendsDividends paid to preferred stockholders = Net Income to Common Stockholders Aswath Damodaran! 9! Principles underlying accounting income statements! selling a good or service is recognized in the period in which the good is sold or the service is performed (in whole or substantially). A corresponding effort is made on the expense side to match expenses to
- 9. revenues. financing and capital expenses. • Operating expenses are expenses that, at least in theory, provide benefits only for the current period; the cost of labor and materials expended to create products that are sold in the current period is a good example. • Financing expenses are expenses arising from the non-equity financing used to raise capital for the business; the most common example is interest expenses. • Capital expenses are expenses that are expected to generate benefits over multiple periods; for instance, the cost of buying land and buildings is treated as a capital expense.
- 10. Aswath Damodaran! 10! Measuring accounting profitability! invested in an asset or business, you get accounting returns. It can take these forms: • Return on equity = Net Income/ Book Value of Equity • Pre-tax Return on (invested) capital = Operating Income/ (Book Value of Equity + Book Value of Debt – Cash) t, relative to revenues: By scaling profits to revenues, you can arrive at profit margins. Again, it can take two forms: • Net Margin = Net Profit/ Revenues • Operating Margin = Operating Income/ Revenues ng margin can also be computed in
- 11. after-tax terms, by multiplying each by (1- tax rate) Aswath Damodaran! 11! Measuring financial leverage! business can be scaled to either the equity in the business or the total capital (debt plus equity). • Debt/ Equity Ratio = Debt/ Equity • Debt/Capital Ratio = Debt/ (Debt + Equity Both ratios can be computed in book value or market value terms. ws and earnings: The financial leverage burden can also be stated in terms of total debt or debt payments each period: • Debt/EBITDA = Debt/ EBITDA
- 12. • Interest coverage ratio = Operating Income/ Interest Expenses Aswath Damodaran! 12! Accounting inconsistencies…! miscategorized in financial statements.In particular, • Operating leases are considered as operating expenses by accountants but they are really financial expenses • R &D expenses are considered as operating expenses by accountants but they are really capital expenses. recognition and extraordinary items is used to manage earnings and provide misleading pictures of profitability.
- 13. Aswath Damodaran! 13! Dealing with Operating Lease Expenses! Expenses at the pre-tax cost of debt - the value of which is equal to the debt value of operating leases. This asset now has to be depreciated over time. these changes: • Adjusted Operating Earnings = Operating Earnings + Operating Lease Expense - Depreciation on the leased asset • If we assume that depreciation = principal payment on the debt value of
- 14. operating leases, we can use a short cut: Adjusted Operating Earnings = Operating Earnings + Debt value of Operating leases * Cost of debt Aswath Damodaran! 14! The Effects of Capitalizing Operating Leases! used in the cost of capital and levered beta calculation s will now be before the imputed interest on the operating lease expense operating and financial expenses anyway
- 15. in operating income will be proportionately lower than the increase in book capital invested Aswath Damodaran! 15! R&D Expenses: Operating or Capital Expenses! operating expense even though it is designed to generate future growth. It is more logical to treat it as capital expenditures. • Specify an amortizable life for R&D (2 - 10 years) • Collect past R&D expenses for as long as the amortizable life • Sum up the unamortized R&D over the period. (Thus, if the amortizable life is 5 years, the research asset can be obtained by adding up 1/5th of the
- 16. R&D expense from five years ago, 2/5th of the R&D expense from four years ago...: Aswath Damodaran! 16! The Effect of Capitalizing R&D! upon whether R&D is growing or not. If it is flat, there will be no effect since the amortization will offset the R&D added back. The faster R&D is growing the more operating income will be affected. upon how fast R&D is growing capitalized Research asset ll increase by the amount of R&D; Depreciation will increase by the amortization of the research
- 17. asset; For all firms, the net cap ex will increase by the same amount as the after-tax operating income. Aswath Damodaran! 17! The Statement of Cash Flows! Cash Flows From Operations + Cash Flows From Investing + Cash Flows from Financing Net cash flow from operations, after taxes and interest expenses Includes divestiture and acquisition of real assets (capital expenditures) and disposal and purchase of financial assets. Also includes acquisitions of other firms. Net cash flow from the issue and repurchase of equity, from the issue and repayment of debt and after dividend payments = Net Change in Cash Balance Figure 4.3: Statement of Cash Flows
- 18. Aswath Damodaran! 18! Valuation cash flows! free cash flows to equity or free cash flows to all capital investors. • The free cash flow to equity is the cash left over, after you have made interest expenses, paid taxes and met reinvestment needs. It is also after the net cash flow from issuing debt (positive) and repaying debt (negative) • The free cash flow to the firm is a pre-debt cash flow, but it is after taxes (a hypothetical tax that you would have paid if you had no debt) and reinvestment needs. makes it closer to a cash flow to equity) but it also incorporates cash flows from new equity issues and to equity investors (dividends and stock
- 19. buybacks). Apex Printing Balance Sheets As of December 31, 2013 and 2012 000$ 000$ Assets 2013 2012 Cash 6,000 5,700 Accounts Receivable 2,350 2,300 Inventory 12,100 6,500 Total Current Assets 20,450 14,500 Land 25,000 20,000 Building & Equipment 300,000 300,000 Less: Accumulated Depreciation - Building & Equipment (187,850) (160,000) Total Long Term Assets 137,150 160,000 Total Assets 157,600 174,500 Liabilities and Stockholders' Equity
- 20. Accounts Payable 4,600 3,500 Salaries Payable 0 2,100 Interest Payable 1,500 0 Short Term Notes Payable 12,000 0 Taxes Payable 0 5,600 Total Current Liabilities 18,100 11,200 Mortgate Payable 54,950 100,000 Total Long Term Liabilities 54,950 100,000 Common Stock 60,000 60,000 Retained Earnings 24,550 3,300 Total Stockholders' Equity 84,550 63,300 Total Liabilities and Stockholders' Equity 157,600 174,500 Apex Printing Income Statements For the Periods Ended December 31, 2013 and 2012 000$ 000$ 2013 2012 Revenue: 450,000 475,000
- 21. Less: Cost of Goods Sold (324,300) (374,500) Less: Depreciation Expense (27,850) (26,000) Gross Margin 97,850 74,500 Selling, General & Administrative Expenses (29,100) (32,000) Income Before Interest & Taxes 68,750 42,500 Interest Expense (7,500) (6,000) Income Before Taxes 61,250 36,500 Income Taxes (35,000) (30,000) Net Income 26,250 6,500 Apex Printing Statement of Cash Flows For the Period Ended December 31, 2013 000$ Cash Flows from Operating Activities: Net Income 26,250
- 22. Adjustments to reconcile net income to net cash provided by operating activities Depreciation Expense 27,850 Increase in accounts receivable (50) Increase in inventory (5,600) Decrease in salaries payable (2,100) Increase in interest payable 1,500 Decrease in taxes payable (5,600) Increase in Short Term notes Payable 12,000 Increase in accounts payable 1,100 Net Cash Flow from Operating Activities 55,350 Cash Flows from Investing Activities: Cash paid to purchase land (5,000) Net Cash Flow from Investing Activities (5,000) Cash Flows From Financing Activities: Cash paid for mortgage (45,050) Cash paid for dividends (5,000) Net Cash Flow from Financing Activities (50,050) Net Increase in Cash
- 23. 300 Plus: Cash Balance at December 31, 2012 5,700 Cash Balance at December 31, 2013 6,000