Financial Planning & Capital Investment Evaluation

1. PICPA 2nd General Membership Meeting
&
Capital Investment Evaluation
23rd February 2012, Thursday, 5:00PM – 10:00PM
1

2. Agenda
o Hierarchy of Planning
o Strategic Planning
o Financial Goal
o Financial Planning
o Capital Budgeting
o Investment Decisions
o Financing Decisions
o Evaluation Techniques

3. Plan a
Destination
3

4. Mission
Strategic
Planning
Goals
Long-Range
Planning
(Capital Investment)
Objectives
Operational Planning
(Income Statement)
Output: Mission Statement
Basic Question. What
business are we in?
Output: The Five-Year Plan
Basic Question. What are
the major components of our
business?
Output: Budget & Forecast
Basic Question. What
specific tasks must be done
to achieve the results stated
in the long-range plan?
4

5. Mission
Strategic
Planning
Goals
Long-Range
Planning
(Capital Investment)
Objectives
Operational Planning
(Income Statement)
Output: Mission Statement
Basic Question. What
business are we in?
Output: The Five-Year Plan
Basic Question. What are
the major components of our
business?
Output: Budget & Forecast
Basic Question. What
specific tasks must be done
to achieve the results stated
in the long-range plan?
5

7. Determine the
current financial
position
Periodic review and
revise the financial
plan
Identify and set
financial goal
Financial
Planning
Process
Create &
Implement a
financial action plan
Identify suitable
investment
avenues
Evaluate alternative
& strategize
7

8. Determine the
current financial
position
Periodic review and
revise the financial
plan
Identify and set
financial goal
Financial
Planning
Process
Create &
Implement a
financial action plan
Identify suitable
investment
avenues
Evaluate alternative
& strategize
8

9. Financial Goal of the Corporation
The primary financial goal is
shareholder wealth maximization,
which translates to maximizing stock
price.
Current stock price relies upon current
earnings, as well as future earnings
and cash flow.

10. Factors that affect stock price
• Projected cash flows
to shareholders
• Timing of the cash
flow stream
• Riskiness of the
cash flows

11. Basic Valuation Model
CF1
CF2
CFn
Value 

 
1
2
(1  k)
(1  k)
(1  k) n
n
CFt

.
t
t 1 (1  k)
 To estimate an total enterprise value (asset’s
value), one estimates the cash flow for each period
t (CFt), the life of the asset (n), and the appropriate
discount rate (k)

12. Net Present Value
Future Value
PV = ----------------(1 + i)n
Where i = interest rate
n = number of years
 The PV of Php1 @ 10% in 1 years time is 0.9090
 If you invested 0.9090 centavos today and the interest
rate was 10% you would have Php1 in a year’s time
 Process referred to as:
‘Discounting Cash Flow’

13. Factors that Affect the Level and
Riskiness of Cash Flows
• Decisions made by financial managers:
1. Investment decisions
2. Financing decisions (the relative use of debt
financing)
3. Dividend policy decisions

14. Capital Budgeting Within The Firm
The Position of Capital Budgeting
Financial Goal of the Firm:
Wealth Maximisation
Investment Decison
Long Term Assets
Short Term Assets
Financing Decision
Dividend Decision
Debt/Equity Mix
Dividend Payout Ratio
Capital Budgeting
14

15. Principles of Corporate Finance
1. Invest in projects that yield a return greater than the
minimum acceptable hurdle rate with adjustments for
project riskiness.
2. Choose a financing mix that minimizes the hurdle rate.
3. If there are not enough investments that earn the hurdle
rate, return the cash to stockholders.
4. These decision criteria will be consistent with the
objective of the firm: Maximize the Value of the
Firm

16. Strategic Financial
Decisions
16

17. Strategic Planning
17

18. GAP Analysis
Planning
Diversification
New market development
gap
New product development
Improve current operations
18

19. Product Market Matrix
Markets
Present
New
Products
Present
New
Momentum
Market
Development
Product
Development
Diversification
19

20. SWOT Analysis
Strong leadership
Financial soundness
Innovative product
design
Breakthrough
technology
Product development
Strong market position
Strengths
20

21. SWOT Analysis
Internal Factors
Strengths (S)
Weaknesses (W)
Opportunities (O)
SO Strategies
WO Strategies
External opportunities
goes here
Strategies use strength
that take advantage of
the opportunities
Strategies use
opportunities by
overcoming
weaknesses
Threats (T)
ST Strategies
WT Strategies
External threats goes
here
Strategies use strength
to avoid threats
Strategies minimize
weaknesses and avoid
threats
External Factors
21

22. Marketing Strategy
Boston Consulting Group (BCG)
• BCG Growth/Share Matrix
– Analyzes business opportunities according to
growth rate and market share
(Build)
(Hold)
?
(Divest)
(Harvest)

23. Marketing Strategy
Market
Positioning
Market
Targeting
Market
Segmentation
23

24. Marketing Mix
Target
Market
24

25. Mission
Strategic
Planning
Goals
Long-Range
Planning
(Capital Investment)
Objectives
Operational Planning
(Income Statement)
Output: Mission Statement
Basic Question. What
business are we in?
Output: The Five-Year Plan
Basic Question. What are
the major components of our
business?
Output: Budget & Forecast
Basic Question. What
specific tasks must be done
to achieve the results stated
in the long-range plan?
25

26. P&L Plan (SR’000)
11A
12P
13P
14P
15P
16P
17P
Sales
69.0
79.3
103.2
118.7
136.4
156.9
180.4
COGS
27.6
31.7
41.3
47.5
54.6
62.8
72.2
Gross Profit
41.4
47.6
61.9
71.2
81.8
94.1
108.2
SG&A Expense
13.8
15.9
20.6
23.7
27.3
31.4
36.1
Depreciation
0.5
0.5
20.5
20.5
20.5
20.5
20.5
Other Income
0.1
0.1
0.1
0.1
0.1
0.1
0.1
27.1
31.3
20.9
27.0
34.2
42.4
51.8
Interest Expense
0.0
14.0
11.2
8.4
5.6
2.8
0.0
Taxes
8.1
5.2
2.9
5.6
8.6
11.9
15.5
19.0
12.1
6.8
13.0
20.0
27.7
36.2
EBIT
Net Profit
26

27. Balance Sheet Plan (SR’000)
11A
12P
13P
14P
15P
16P
17P
Cash
54.6
79.0
72.5
70.8
76.8
90.4
112.7
Receivables
37.5
43.1
56.1
64.5
74.1
85.3
98.1
Inventories
2.8
3.2
4.1
4.7
5.5
6.3
7.2
Fixed Assets
5.0
205
205
205
205
205
205
Accum. Deprn.
0.5
1.0
21.5
42.0
62.5
83.0
103.5
Total Assets
99.3
329.3
316.2
303.0
298.8 304.0
319.5
Payables & Accruals
30.4
48.2
63.3
72.1
82.9
95.4
109.7
Bank Loans
35.0
175.0
140.0
105.0
70.0
35.0
0.0
Equity
34.0
106.1
112.9
125.9
145.9 173.6
209.9
Total Liab. & Equity
99.3
329.3
316.2
303.0
298.8 304.0
319.5
27

28. Cash Flow Statement Plan (SR’000)
11A
Net Income
12P
13P
14P
15P
16P
17P
19.0
12.1
6.8
13.0
20.0
27.7
36.2
0.5
0.5
20.5
20.5
20.5
20.5
20.5
(9.9)
11.8
1.2
(0.2)
0.4
0.5
0.6
9.6
24.4
28.5
33.3
40.9
48.7
57.3
Investment
(5.0)
(200.0)
0.0
0.0
0.0
0.0
0.0
Financing
50.0
Net Cash Flow
54.6
24.4
(6.5)
(1.7)
5.9
13.7
22.3
0.0
54.6
79.0
72.5
70.8
76.7
90.4
54.6
79.0
72.5
70.8
76.7
90.4
112.7
Non Cash Item
Changes in WC
Operating Cash Flow
Cash at Beginning
Cash at Ending
200.0 (35.0)
(35.0) (35.0) (35.0) (35.0)
28

29. Intimidated by report that full of numbers?
29

30. Do you know how to deal with numbers?
30

31. Financial numbers?
31

32. Financial information?
32

33. Financial knowledge?
33

34. Financial intelligence?
34

35. Financial Information
Income Statement (SR Thousand)
Year Ended
Dec. 31, 2012
EBIT = 39.5%
Net Profit
= 15.3%
Sales
79,350
Cost of Goods Sold
31,740
Gross Profit
47,610
SG&A expense
Gross Margin
= 60.0%
15,870
Depreciation
500
Other income
100
EBIT
31,340
Interest expense
14,000
Taxes
Net profit
Financial
Knowledge
5,202
12,138
Financial
35
Numbers

36. “I was very creative with my accounting, but not
creative enough.”
Finance is an Art
36

37. Financial Planning
Art and science of managing
money.
What are your financial goals?
Means different things to
different people.
37

38. Financial Planning
Art of managing the financial
resources of a business.
38

39. Determine the
current financial
position
Periodic review and
revise the financial
plan
Identify and set
financial goal
Financial
Planning
Process
Create &
Implement a
financial action plan
Identify suitable
investment
opportunities
Evaluate alternative
& strategize
39

40. XYZ Restaurant
40

41. Key Assumptions
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Population and Growth Rate
Inflation Rate
Exchange Rate
Market Share
Industry Growth Rate
Company Growth Rate
Segmented Projected Sales
Segmented Sales Mix%
Pricing and Costing
Days Level
Headcount
Capital Expenditure
Project and Time Dimensions
Capital Structure (Financing Mix)
WACC (Cost of Debt + Cost of Equity)
41

42. Financial Assumptions
11A
A. Growth Rate
0%
12P
13P
14P
15P
16P
17P
15% 30% 15% 15% 15% 15%
B. Sales (Meals)
Segment A
80
92
120
138
158
182
209
Segment B
120
138
179
206
237
273
314
C. Sales Mix%
Segment A
40% 40% 40% 40% 40% 40% 40%
Segment B
60% 60% 60% 60% 60% 60% 60%
42

43. Financial Assumptions
11A
12P
13P
14P
15P
16P
17P
Segment A
9
9
9
9
9
9
9
Segment B
14
14
14
14
14
14
14
D. Pricing (SR)
E. Costing (% of Sales)
F.
40% 40% 40% 40% 40% 40% 40%
Days Level
DSO
30
30
30
30
30
30
30
DIL
3
3
3
3
3
3
3
DPO
45
45
45
45
45
45
45
43

44. Financial Assumptions
11A
G. CAPEX (SR‘000)
I.
12P
13P 14P
15P
16P
17P
200
Capital Structure
Debt Financing
70%
Equity Financing
30%
J. WACC
6.7%
44

45. P&L Plan (SR’000)
11A
12P
13P
14P
15P
16P
17P
Sales
69.0
79.3
103.2
118.7
136.4
156.9
180.4
COGS
27.6
31.7
41.3
47.5
54.6
62.8
72.2
Gross Profit
41.4
47.6
61.9
71.2
81.8
94.1
108.2
SG&A Expense
13.8
15.9
20.6
23.7
27.3
31.4
36.1
Depreciation
0.5
0.5
20.5
20.5
20.5
20.5
20.5
Other Income
0.1
0.1
0.1
0.1
0.1
0.1
0.1
27.1
31.3
20.9
27.0
34.2
42.4
51.8
Interest Expense
0.0
14.0
11.2
8.4
5.6
2.8
0.0
Taxes
8.1
5.2
2.9
5.6
8.6
11.9
15.5
19.0
12.2
6.8
13.0
20.0
27.7
36.2
EBIT
Net Profit
45

46. Balance Sheet Plan (SR’000)
11A
12P
13P
14P
15P
16P
17P
Cash
54.6
79.0
72.5
70.8
76.8
90.4
112.7
Receivables
37.5
43.1
56.1
64.5
74.1
85.3
98.1
Inventories
2.8
3.2
4.1
4.7
5.5
6.3
7.2
Fixed Assets
5.0
205
205
205
205
205
205
Accum. Deprn.
0.5
1.0
21.5
42.0
62.5
83.0
103.5
Total Assets
99.3
329.3
316.2
303.0
298.8 304.0
319.5
Payables & Accruals
30.4
48.2
63.3
72.1
82.9
95.4
109.7
Bank Loans
35.0
175.0
140.0
105.0
70.0
35.0
0.0
Equity
34.0
106.1
112.9
125.9
145.9 173.6
209.9
Total Liab. & Equity
99.3
329.3
316.2
303.0
298.8 304.0
319.5
46

47. Cash Flow Statement Plan (SR’000)
11A
Net Income
12P
13P
14P
15P
16P
17P
19.0
12.2
6.8
13.0
20.0
27.7
36.2
0.5
0.5
20.5
20.5
20.5
20.5
20.5
(9.9)
11.8
1.2
(0.2)
0.4
0.5
0.6
9.6
24.5
28.5
33.3
40.9
48.7
57.3
Investment
(5.0)
(200.0)
0.0
0.0
0.0
0.0
0.0
Financing
50.0
Net Cash Flow
54.6
24.5
(6.5)
(1.7)
5.9
13.7
22.3
0.0
54.6
79.0
72.5
70.8
76.7
90.4
54.6
79.0
72.5
70.8
76.7
90.4
112.7
Non Cash Item
Changes in WC
Operating Cash Flow
Cash at Beginning
Cash at Ending
200.0 (35.0)
(35.0) (35.0) (35.0) (35.0)
47

48. Corporate Finance Functions
1. Allocation of financial resources
What long-term investments should the firm
engage in?
2. Procurement of funds
How can the firm raise money for the required
investments?
3. Efficient and effective utilization of financial
resources.
How much short-term cash flow does a company
need to pay its bills?
48

49. Investment Decisions
49

50. The Balance-Sheet Model of the Firm
Total Value of Assets:
Total Firm Value to Investors:
Current Liabilities
Current Assets
Long-Term Debt
Fixed Assets
1 Tangible
2 Intangible
Shareholders’
Equity
50

51. The Balance-Sheet Model of the Firm
The Capital Budgeting Decision
(Investment Decision)
Current Liabilities
Current Assets
Long-Term Debt
Non Current Assets
1 Tangible
2 Intangible
What longterm
investments
should the
firm engage
in?
Shareholders’
Equity
51

52. Capital and Capital Budgeting
Capital:
is the stock of assets that will generate a
flow of income in the future.
Capital budgeting:
 is the planning process used to determine
the cash inflow and cash outflow of the long
term investment (more than single
accounting period) and based on that it
measure viability of the project.
52

53. Restaurant Example
How much to invest in Equipment?
SR 200,000-
When to invest?
4Qtr 2012
How long to invest?
5 years
53

54. Cash Flows during a Capital Budgeting Project
Cash
Inflow
Cash Flows
Initiation
Operation
Project
Disposals
Cash
Outflow
54

55. Initiation Cash Flows (SR’000)
12P
+
+
Net Profit
Or +
Increase or Decrease of Working Capital
Depreciation
NOPAT Cash Flow
+
Post Tax Interest Expense
Unlevered Operating Cash Flow
Cost of New Assets
Tax on Gain on Sale of Old Assets
+
=
Proceeds from Sale of Old Assets
Unlevered Operating FCFF (Initiation Cash Flow)
12.2
0.5
11.8
24.5
9.8
34.3
(200)
0.0
0.0
165.7
The cost of new equipment is SR200M and released of working capital by
SR11.8M. Pretax interest expense is SR14M. Net profit is SR12.2M and
depreciation of existing fixed asset is SR0.5M. (Tax rate is 30%)
55

56. Operational Cash Flows (SR’000)
13P
+
Net Profit
+
Depreciation
or +
Increase or Decrease of WC
NOPAT Cash Flow
+
Post Tax Interest Expense
=
Unlevered Operating FCFF
6.8
20.5
1.2
28.5
7.8
36.3
XYZ company will generate net profit of SR6.8M in year 2013 and
planned to release working capital of SR1.2M of the same year. It has a
pretax interest expense of SR11.2M. The fixed assets of SR205M will be
depreciated over 10 years. (Tax rate is 30%)
56

57. Operational Cash Flows (SR’000)
13P
Gross Profit
61.9
Operating Expenses (excluding
depreciation)
20.6
=
Incremental Cash Flow
41.3
=
Incremental Cash Flow after Tax
28.9
+
Depreciation Tax Shield
6.2
or + Increase or Decrease of WC
1.2
+
=
Unlevered Operating FCFF
36.3
XYZ company planned to have an incremental margin of SR61.9M in year
2013 and will incur operating expenses (excluding depreciation) of
SR20.6M. The pretax interest expense is SR11.2M as the cost of debt.
Fixed assets of SR205M will be depreciated over 10 years. Decrease in
working capital is SR1.2M. (Tax rate is 30%)
57

58. Disposal Cash Flows (SR’000)
13P
Proceeds from Selling of disposed assets
+0.0
or +
Net tax effect due to gain on asset disposal
-0.0
or +
Increase or Decrease of Working Capital
+0.0
+
=
Incremental Cash Flow at Disposal
0.0
58

59. OFCFF
11A
Net Profit
12P
13P
14P
15P
16P
17P
19.0
12.2
6.8
13.0
20.0
27.7
36.2
0.5
0.5
20.5
20.5
20.5
20.5
20.5
(9.9)
11.8
1.2
(0.2)
0.4
0.5
0.6
NOPAT Cash Flow
9.6
24.5
28.5
33.3
40.9
48.7
57.3
Add Post Tax
Interest Expense
0.0
9.8
7.8
5.9
3.9
2.0
0.0
Unlevered
Operating Cash
Flow
9.6
34.3
36.3
39.2
44.8
50.7
57.3
Capital Spending
(5.0)
(200.0)
0.0
0.0
0.0
0.0
0.0
Unlevered OFCF
4.6
(165.7)
36.3
39.2
44.9
50.6
57.3
Add Depreciation
Changes in WC
59

60. Cash Flows
•Initiation
(165.7)
•Operation
228.3
•Disposals
0.0
Net Value = (165.7) + 228.3 = SR62.6
60

61. Company value
 Value is what investors & lenders consider
worth paying NOW for the company’s
expected future income
 Value NOW — called ‘present value’
 This must exceed the cost of raising
capital from investors & lenders
61

62. Time Value of Money
(Timing of Cash Flow)
Value of SR1
=
Today
SR1
Today
Value of SR1
After One Year
=
SR0.91
Today
62

63. NPV of OFCFF
12P
Unlevered OFCFF
13P
14P
15P
16P
17P
(165.7)
36.3
39.2
44.9
50.6
57.3
1.00
0.937
0.878
0.823
0.772
0.723
(165.7)
34.0
34.4
36.9
39.1
41.4
WACC (6.7%)
PV of 1
NPV
PV of Cash Flows
•Initiation
(165.7)
•Operation
185.9
•Disposals
0.0
63

64. Cash Flow Analysis
(Evaluating Capital Investment)
• Net Present Value (SR Amount)
• Internal Rate of Return (%)
• Payback Method (# of years)
• Profitability Index (Profit/SR1 of investment)
64

65. Net Present Value
(Evaluating Capital Investment)
• NPV = PV of Future OFCFF – Initial Investment
Cash Flows
•Initiation
(SR165.7M)
•Operation
SR185.9M
•Disposals
SR0.0
NPV= 185.9 – 165.7 = SR20.2M
65

66. Net Present Value
(Evaluating Capital Investment)
Decision Criteria:
NPV > SR0
Project Return>Required Return
NPV = SR0
Project Return>Required Return
NPV< SR0
Project Return<Required Return
66

67. Internal Rate of Return
(Evaluating Capital Investment)
Cash Flows
•Initiation
(SR165.7M)
•Operation
SR185.9M
•Average Cash Returns
SR45.7M
Required rate of return: 6.7%
PV Annuity Factor =Initial Investment/Annual Cash Returns
= SR165.7M / SR45.7M
= 3.6296 3.6296 = 11.9%
Periods
11%
12%
14%
5
3.6959
3.60478
3.43308
67

68. Internal Rate of Return
Decision Criteria:
If the IRR > Cost of Capital, accept the project
If the IRR = Cost of Capital, accept or reject
If the IRR < Cost of Capital, reject the project
68

69. Payback Method
(Evaluating Capital Investment)
Payback Period is the number of years needed to
recover the net initial investment.
Simple Payback Method
Payback Period = Yrs until full recovery+Unrecovered Cost at the Beg. of LY
Cash Flow During the Year
0
OFCF
4.6
(165.7)
1
2
3
4
5
36.3
39.2
44.9
50.6
57.3
3 Years Returns = 36.3+39.2+44.9
= SR120.3M
Unrecovered Cost = 45.4M / 44.9
= 0.90 Year
Payback Period = 3.9 Years
69

70. Profitability Index (PI)
(Evaluating Capital Investment)
PI measures how much profit each SR1 of investment
will generate.
PI = PV of Future Cash Flows / Initial Investment
•Initiation
•Operation
•Disposals
(SR165.7M)
SR185.9M
SR0.0
PI = SR 185.9M / 165.7M
= 1.12
70

71. Cash Flow Analysis
(Evaluating Capital Investment)
• Net Present Value (SR 20.2M)
• Internal Rate of Return (11.9%)
• Payback Method (3.9 years)
• Profitability Index (1.12)
71

72. Financing Decisions
72

73. The Balance-Sheet Model of the Firm
The Capital Budgeting Decision
(Financing Decision)
Current Liabilities
Current Assets
Long-Term Debt
Non Current Assets
1 Tangible
2 Intangible
How can the
firm raise the
money for the
required
investments?
Shareholders’
Equity
73

74. Capital Structure
The value of the firm
can be thought of as a
pie.
50% Debt
The goal of the
25% Debt 30%
Equity
manager is to increase
70% Debt
the size of the pie.
75%
50%
Equity
The Capital Structure
decision can be viewed
as how best to slice up
a the pie.
If how you slice the pie affects the size of
the pie, then the capital structure
decision matters.
74

75. Capital Structure :Debt and Equity
• The basic feature of a debt is that it is a
promise by the borrowing firm to repay a fixed
amount of by a certain date.
• The shareholder’s claim on firm value is the
residual amount that remains after the
debtholders are paid.
• If the value of the firm is less than the amount
promised to the debtholders, the shareholders
get nothing.
75

76. Weighted Average Cost of Capital (WACC)
Cost of debt (rd): interest rate paid to creditors net of
taxes
Cost of equity (re): rate of return to shareholders in
order to induce them to invest in the firm
WACC : rd (1-tax)
D
(D + E)
+ re 
E
(D + E)
76

77. Weighted Average Cost of Capital (WACC)
WACC : rd (1-tax)
Component
Amount
D
(D + E)
Weight
+ re 
Pretax
Cost
E
(D + E)
Pretax
WACC
LT Debt
35,000
0.70
10%
7.0%
Equity
15,000
0.30
6%
1.8%
Total
50,000
1.00
Tax Rate
30%
WACC
4.9%
1.8%
6.7%
77

78. Sources and Uses of Funds
Financing Mix
Amount
(SR’000)
Uses of Funds
Equipment
200
Sources of Funds
Debt
70%
140
Equity
30%
60
Total
100%
200
78

79. Debt Service Coverage Ratio (DSCR)
11A
Unlevered OFCF
4.6
12P
(165.7)
13P
14P
15P
16P
17P
36.3
39.2
44.9
50.6
57.3
Financing
Debt
140.0
Equity
60.0
Cash Flow before
Debt Service
34.3
36.3
39.2
44.9
50.6
57.3
Loan Repayment
0.0
35.0
35.0
35.0
35.0
35.0
Interest
14.0
11.2
8.4
5.6
2.8
0.0
Total
14.0
46.2
43.4
40.6
37.8
35.0
2.45
0.79
0.90
1.10
1.34
1.64
DSCR
0.0
79

80. KPIs
11A
12P
13P
14P
15P
16P
17P
Debt-to-Equity (TLiab/Equity)
1.92
2.10
1.80
1.41
1.05
0.75
0.52
Debt Ratio (TLiab/T.A)
0.66
0.68
0.64
0.58
0.51
0.43
0.34
Long-term Debt to Equity Ratio
1.03
1.65
1.24
0.83
0.48
0.20
0
Equity Ratio (Equity/T.A)
0.34
0.32
0.36
0.42
0.49
0.57
0.66
Financial Leverage Index (TA/Equity)
2.92
3.10
2.80
2.41
2.05
1.75
1.52
Degree of Operating Leverage (DOL)
2.55
2.53
4.94
4.39
3.99
3.70
3.49
Time Interest Earned Ratio
3.33
6.02
7.20
4.83
3.99
3.57
3.33
Debt Service Coverage Ratio (DSCR)
0.00
2.45
0.79
0.90
1.10
1.34
1.64
Leading Financial Indicators
• Debt ratio is high which indicates creditors are not well protected.
• LT Debt-to-equity ratio (Yr 2012) indicates relying heavily in the use of debt
financing.
• Declining Financial Leverage Index commencing year 2013 shows an
increasing Equity Ratio.
80
• Year 2013-2014 DSCR is below 1.

81. Financial Leverage
Cost of
Capital
(percent)
e
Debt-to-Equity Ratio
81

82. KPIs
11A
12P
13P
14P
15P
16P
NPV (SR‘000)
17P
20.2
IRR (%)
11.9%
Profitability Index (PI)
1.12
Payback Period (years)
3.9
Current Ratio
3.12
2.60
2.10
1.94
1.89
1.91
1.99
12
10
13
14
14
14
14
EVA
121.0
352
354.0
350.0
356.0
373.0
400.0
Profit Ratio
27.5% 15.3%
6.6%
11%
14.7% 17.6% 20.1%
Liquidity Index (Days)
ROE
0.0
11.4%
6.0%
10.4% 13.7% 15.9% 17.3%
Leading Financial Indicators
•
•
•
•
•
Sound financial position with a conservative current ratio greater than 1.0
The capital investment has a positive Net Present Value.
The IRR is higher than WACC.
The Profitability Index is greater than 1, hence it is acceptable investment.
The Economic Value Added is positive, hence the company is earning more than the
82
cost of capital.

83. The Balance-Sheet Model of the Firm
The Net Working Capital Investment Decision
(Financial Decision)
Current Liabilities
Current Assets
Net
Working
Capital
Non Current Assets
1 Tangible
2 Intangible
How much
short-term cash
flow does a
company need
to pay its bills?
Long-Term Debt
Shareholders’
Equity
83

84. Aggressive Financing Policy
84

85. Conservative Financing Policy
85

86. Dividend Policy Decisions
86

87. Dividends and stock buybacks
• The two major means of returning cash to shareholders
is dividends and stock buybacks
• Effects of buybacks:
– Reduces the number of shares outstanding

88. Cash available to be returned
• The Free Cash Flow to Equity (FCFE) is a measure of
how much cash is left in the business after non-equity
claimholders (debt and preferred stock) have been paid,
and after any reinvestment needed to sustain the firm’s
assets and future growth. This is the cash available for
dividend payouts.
Free cash flow to equity = Net Income + Depr&Amort
– Chg in WC – Cap Exp
+ (New Debt Issue – Debt Repay)
– Pref. Dividends

89. Intimidated by reports full of numbers?
Do you know how to deal with numbers?
Financial numbers?
Financial information?
Financial knowledge?
Financial intelligence?
89

90. The Continuum of Understanding
Know
Why
Know
How
Know
What
Know
nothing
90

91. Q&A
[30 min]
91

92. Q&A instructions
1 min
1 min
• Break into small groups
• Work with your group to answer
question.
• Discussion of answer as entire
class
92

93. 1. Art and science of managing financial
resources of a business.
Ans: Financial Planning
2. Process of mapping the organization’s
future direction to attain desired goals.
Ans: Planning
3. Fill the gap between ‘where are now?’ and
‘where do we want to go?
Ans: Gap Analysis
93

94. 4. Also called the current state
analysis that provides a means to
organize the data gathered in the
detailed internal and external analysis
Ans: SWOT Analysis
5. Cash inflow in Depreciation
Ans: Depreciation Tax Shield
6. Rate of return wherein Net Present
Value is equal to zero.
Ans: Internal Rate of Return
94

95. 7. Present Value of future cash flows less
initial investment.
Ans: Net Present Value
8. Number of years needed to recover the
initial investment.
Ans:
Payback Period
9. Measure of how much profit each SR1 of
investment will generate.
Ans: Profitability Index
95

96. 10. Planning process used to determine the
cash inflow and cash outflow of the long
term investment.
Ans: Capital Budgeting
11. Analyzes business opportunities
according to growth rate and market share
Ans: BCG Growth / Share Matrix
12. Mix of long-term debt and equity
financing.
Ans: Capital Structure
96

97. 13. Weighted rate of debt and equity
Ans: WACC
14. A concept that a 1 peso today is worth
that 1 peso received tomorrow.
Ans: Time Value Concept
15. It measure in taking advantage the
borrowed capital and to enhance earnings
per share (EPS) and return on equity
(ROE).
Ans: Financial Leverage
97

98. 16. Measure of how much cash is left in the
business after non-equity claimholders
(debt and preferred stock) have been paid
Ans: Free Cash Flow to the Equity
17. Cash flow use in the calculation of total
enterprise value.
Ans: Unlevered Free Cash for the Firm
98

99. “If you fail to plan, then
you’re planning to fail”
by: Wharton Professor Emeritus
Russell Ackoff

100. PICPA 2nd General Membership Meeting
100