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FINANCECash flows + financial planning
Solvay Business School
Université Libre de Bruxelles
Fall 2006
MBA 2006 Cash flows + financial planning |2
Sources of Cash Inflow and Cash Outflow
Operating ActivitiesSales of goods and services
Investing ActivitiesSale of fixed assetsSales of LT financial assets
Financing ActivitiesIssuance of stocks and bondsLT and ST borrowing
Operating ActivitiesPurchase of suppliesSelling, general and administrative expensesTax expenses
Investing ActivitiesCapital expenditures and acquisitionsLT financial investments
Financing ActivitiesRepurchage of stocks and bondsRepayment of debtDividend payment
ΔCASH
CF from operating activities
CF from investing activities
CF from financing activities
MBA 2006 Cash flows + financial planning |3
Exemple numérique
T+1100.050.010.040.013.626.4
10.56
BILAN T T+1Immobilisés nets 100.0 115.0 15.0Clients 12.0 32.0 20.0Stocks 15.0 30.0 15.0Disponible 20.0 7.8 -12.2
147.0 184.8 37.8
Fonds propres 132.0 147.8 15.8Dette financière 0.0 15.0 15.0Fournisseurs 15.0 22.0 7.0
147.0 184.8 37.8
ImpôtsBénéficeDividendes
COMPTE DE RESULTATS
Amortissements
Chiffre d'affairesExcédent brut d'exploitation
Résultat d'exploitation
Δ
MBA 2006 Cash flows + financial planning |4
Cash flow opérationnel
Comptabilité Cash flow ClientsAccount
receivable
StocksInventory
FournisseursAccount payable
Chiffre d'affairesRevenue
100.0 80.0 20.0
Achats 65.0 -58.0 7.0Variation de stocks 15.0 0.0 15.0AmortissementsDepreciation
10.0 0.0
Résultat d'exploitationEarnings before interest and taxes
40.0
ImpôtsTaxes
13.6 -13.6
Bénéfice 26.4 20.0 15.0 7.0Cash flow opérationnel 8.4
Bénéfice 26.4Amortissements 10.0- BFR 28.0=CFop 8.4
Besoin de fonds de roulementWorking Capital Requirement
Δ
MBA 2006 Cash flows + financial planning |5
Tableau de financement
T+1
26.410.028.08.4
15.010.0-25
-16.6-10.56
015
4.44-12.2VARIATION DU DISPONIBLE
TABLEAU DE FINANCEMENT STATEMENT OF CASH FLOWS
DividendesVariation du capitalVariation de la detteCASH FLOW DU FINANCEMENT
Variation des immobilisés netsAmortissementsCASH FLOW D'INVESTISSEMENTFREE CASH FLOW
BénéficeAmortissements- Variation BFRCASH FLOW OPERATIONNEL
MBA 2006 Cash flows + financial planning |6
Notations
• Income statement
• REV Revenue
• CGS Cost of goods sold
• SGA Selling, general and administrative expenses
• Dep Depreciation
• EBIT Earnings before interest and taxes
• Int Interest expenses
• TAX Taxes
• Tc Tax rate
• NI Net income
•
• Balance sheet
• FA Fixed assets, net
• AR Accounts receivable
• INV Inventories
• CASH Cash & cash equivalents
• SE Equity capital
• LTD Long term debt
• AP Accounts payable
• STD Short-term borrowing
• Statement of retained income
• DIV Dividendes
MBA 2006 Cash flows + financial planning |7
Income statement and balance sheet
• Income statement
• EBIT = REV - CGS - SGA - Dep
• TAX = Tc (EBIT - Int)
• NI = EBIT - Int - TAX
• Balance sheet equation
• FA + AR + INV + CASH = SE + LTD + AP + STD
Working capital requirement: WCR AR + INV - AP
=(Current assets - CASH) - (Current liabilities - STD)
Summarised balance sheet:
FA + WCR + CASH = SE + D (D = LTD + STD)
MBA 2006 Cash flows + financial planning |8
Cash flow statement : indirect method
FA + WCR + CASH = SE + D
FA = CAPEX - Dep CAPEX = Acquisitions - Disposals (investing & divesting)
SE = NI - DIV + KK = New issuance of capital
(NI + Dep - WCR) - (CAPEX) + (K + D -DIV) = CASH
Cash flow from
operating activities
Cash flow from
investing activities
Cash flow from
financing activities
+ + =
MBA 2006 Cash flows + financial planning |9
Statement of cash flows: direct method
+ Cash collection from customers
- Cash payment to suppliers and employees
- Cash paid for interest
- Cash paid for taxes
= Cash flow from operating activities
+ Cash flow from investing activities
+ Cash flow from financing activity
= CASH
REV - AR
CGS + INV + SGA - AP
Int
TAX
(REV-CGS-SGA-Int-TAX)- WCR
-CAPEX
K + D - DIV
=NI+Dep-WCR
(NI + Dep - WCR) + (-CAPEX) + (K + D - DIV) = CASH
MBA 2006 Cash flows + financial planning |10
Free Cash Flow
• Free Cash Flow = Cash flow from operating activities
+ Cash flow from investing activities
Free Cash Flow = DIV - K - D + Cash
• Calculating free cash flows of all equity firm:
Free Cash Flow = EBIT(1-TC) + Dep - WCR - CAPEX
• Statement of cash flows for all-equity firm:
Free Cash Flow = DIV - K + Cash
MBA 2006 Cash flows + financial planning |11
Financial Forecasting
EBITDA-Depreciation=EBIT-Taxes+Net Income
Income Statement
Statement of
Cash Flows
CF from operating activities
UpdateBalance
Sheet
CF from investing activitiesCF from financing activities
MBA 2006 Cash flows + financial planning |12
Financial Planning
• Based on ∆Revenues
• Assumptions on key ratios relating Revenues to:
• Gross margin: m = EBITDA /Revenues
• Working capital requirement: w = WCR / Revenues
• Net fixed assets: a = NFA / Revenues
• Financial policy:
• Payout ratio p = DIV/Net Income
• Depreciation d = Depreciation / Fixed Assets-1
• Environment:
• Tax rate TC
• Cost of debt i
MBA 2006 Cash flows + financial planning |13
Data
• Revenues year 0: 2,000
• Growth rate year 1: 25%
• Balance sheet end year 0
Net Fixed Assets 600
Working Capital Requirement 400
Cash 0
Total Assets 1,000
Book Equity 600
Debt (financial) 400
Total Liabilities + Stockholders’ equity
1,000
Gross margin: m = 30%WCR: w = 20%Net fixed assets: a = 30%Payout ratio p = 50%Depreciation d = 10%Tax rate TC = 40%Cost of debt i = 10%
MBA 2006 Cash flows + financial planning |14
Step 1: Income statement
Year 0 Year 1
Sales 2,000 2,500 Rev-1 (1+g)
EBITDA 750 m × Rev
Depreciation 60 d × NFA-1
EBIT 690
Interests 40 i × D-1
Taxes 260
Net Income 390
MBA 2006 Cash flows + financial planning |15
Step 2: Statement of Cash Flows
Year 0 Year 1
Net Income 390 From Income Stat.
Depreciation 60 From Income Stat.
∆WCR 100 w × Revenues
CF from operations 350
∆NFA 150 a × Revenues
Depreciation 60
CF from investing -210
Div 195 p × Net Income
Stock Issues/buy back 0 Assumption
∆Debt 55 Plug
CF from financing -140
∆Cash 0
MBA 2006 Cash flows + financial planning |16
Step 3: Update balance sheet
Year 0 Year 1
Net Fixed Assets 600 750 NFA-1 + Inv – Dep
Working Capital 400 500 WCR-1 + WCR
Cash 0 0 Cash-1 + Cash
1,000 1,250
Book Equity 600 795 BEq-1+SI + NI – DIV
Debt 400 455 D-1 + D
1,000 1,250
MBA 2006 Cash flows + financial planning |17
The Full Model
Year 0 Year 1 Year 2 Year 3 Year 4Income StatementSales 2,000 2,500 3,125 3,906 4,883EBITDA 750 938 1,172 1,465Depreciation 60 75 94 117EBIT 690 863 1,078 1,348Interest Expenses 40 46 52 61Taxes 260 327 410 515Net Income 390 490 616 772Statement of Cash FlowsEarnings 390 490 616 772Depreciation 60 75 94 117Var WCR 100 125 156 195Operating Cash Flow 350 440 553 694Var Net Fixed Assets 150 188 234 293Depreciation 60 75 94 117Cash Flow from Invest -210 -263 -328 -410Dividends 195 245 308 386Var Book Equity 0 0 0 0Var Debt 55 67 83 102CF from Financing -140 -178 -225 -284Var Cash 0 0 0 0Balance SheetFixed assets 600 750 938 1,172 1,465Working Capital 400 500 625 781 977Cash 0 0 0 0 0
1,000 1,250 1,563 1,953 2,441Book Equity 600 795 1,040 1,348 1,734Debt (Financial) 400 455 522 605 707
1,000 1,250 1,563 1,953 2,441
Financial planningSales growth rate 25%Gross margin 30%Depreciation rate 10%Cost of debt 10%Tax rate 40%Payout 50%WC/Sales 20%NFA/Sales 30%