7/29/2019 FM902_5

1/22

2 - 1

Balance Sheet is Stock (as of)

Other Statements are Flow(through time)

When analyzing, keep unusualevents in mind

NOTES

7/29/2019 FM902_5

2/22

2 - 2

What effect did the expansion haveon net operating working capital

(NOWC)?

NOWC98 = ($7,282 + $632,160 +$1,287,360)

- ($524,160 + $489,600)

= $913,042.

NOWC97 = $793,800.

= -Non-

interestbearing CA

Non-

interestbearing CL

NOW

C

7/29/2019 FM902_5

3/22

2 - 3

What effect did the expansion have

on capital used in operations?

= NOWC + Net fixed assets.

= $913,042 + $939,790

= $1,852,832.

= $1,138,600.

Operatingcapital98

Operatingcapital97

Operatingcapital

7/29/2019 FM902_5

4/22

2 - 4

Did the expansion create additionalnet operating profit after taxes

(NOPAT)?

NOPAT = EBIT(1 - Tax rate)

NOPAT98 = -$690,560(1 - 0.4)

= -$690,560(0.6)

= -$414,336.

NOPAT97= $125,460.

7/29/2019 FM902_5

5/22

2 - 5

What is your initial assessment ofthe expansions effect on

operations?

1998 1997

Sales $5,834,400 $3,432,000NOPAT ($414,336) $125,460

NOWC $913,042 $793,800

Operating capital$1,852,832 $1,138,600

7/29/2019 FM902_5

6/22

2 - 6

What effect did the companys

expansion have on its net cash flowand operating cash flow?

NCF98 = NI + DEP = -

$519,936 + $116,960= -$402,976.NCF97= $87,960 + $18,900 =

$106,860.OCF98 = NOPAT + DEP

= -$414,336 + $116,960= -$297,376.OCF97= $125,460 + $18,900

= $144,360.

7/29/2019 FM902_5

7/22

2 - 7

What was the free cash flow (FCF)

for 1998?

FCF = NOPAT - Net capital investment

= -$414,336 - ($1,852,832 -$1,138,600)

= -$414,336 - $714,232

= -$1,128,568.

How do you suppose investorsreacted?

7/29/2019 FM902_5

8/22

2 - 8

What is the companys EVA?

Assume the firms after-tax cost ofcapital (COC) was 11% in 1997and 13% in 1998.

EVA98 = NOPAT- (COC)(Capital)= -$414,336 -

(0.13)($1,852,832)= -$414,336 - $240,868

= -$655,204.EVA97 = $125,460 - (0.11)($1,138,600)

= $125,460 - $125,246= $214.

7/29/2019 FM902_5

9/22

2 - 9

Would you conclude

that the expansion increased ordecreased MVA?

MVA = - .

During the last year stock pricehas decreased 73%, so marketvalue of equity has declined.Consequently, MVA has declined.

Equity capitalsuppliedMarket valueof equity

7/29/2019 FM902_5

10/22

2 - 10

Probably not.

A/P increased 260% over thepast year, while sales increasedby only 70%.

If this continues, suppliers maycut off trade credit.

Does the company pay its suppliers

on time?

7/29/2019 FM902_5

11/22

2 - 11

No, the negative NOPAT showsthat the company is spendingmore on its operations than it

is taking in.

Does it appear that the sales price

exceeds the cost per unit sold?

7/29/2019 FM902_5

12/22

2 - 12

1. The company offers 60-day creditterms. The improved terms arematched by its competitors, sosales remain constant.

What effect would each of these

actions have on the cash account?

A/R wouldCash would

7/29/2019 FM902_5

13/22

2 - 13

2. Sales double as a result of thechange in credit terms.

Short-run: Inventory and

fixed assets to meetincreased sales. A/R , Cash. Company may have to seekadditional financing.

Long-run: Collectionsincrease and the companyscash position would improve.

7/29/2019 FM902_5

14/22

2 - 14

The expansion was financedprimarily with external capital.

The company issued long-termdebt which reduced its financial

strength and flexibility.

How was the expansion financed?

7/29/2019 FM902_5

15/22

2 - 15

Would external capital have been

required if they had broken even in1998 (Net income = 0)?

Yes, the company would stillhave to finance its increase in

assets.

7/29/2019 FM902_5

16/22

2 - 16

What happens if fixed assets are

depreciated over 7 years (as opposedto the current 10 years)?

No effect on physical assets.Fixed assets on balance sheet

would decline.

Net income would decline.Tax payments would decline.

Cash position would improve.

7/29/2019 FM902_5

17/22

7/29/2019 FM902_5

18/22

2 - 18

Does the companys positive stockprice ($2.25), in the face of largelosses, suggest that investors are

irrational?

Common stock has limited liability.Therefore, it can never have a negative

value. If it is expected to producefuturecash flows, it will have a positive value.

7/29/2019 FM902_5

19/22

2 - 19

Why did the stock price fall

after the dividend was cut?

Management was signaling thatthe firms operations were in

trouble.

The dividend cut loweredinvestors expectations for future

cash flows, which caused the stockprice to decline.

7/29/2019 FM902_5

20/22

2 - 20

What were some other sources of

financing used in 1998?

Selling financial assets: Shortterm investments decreased by$48,600.

Bank loans: Notes payableincreased by $520,000.

Credit from suppliers: A/Pincreased by $378,560.

Employees: Accruals increased by

$353,600.

7/29/2019 FM902_5

21/22

2 - 21

What is the effect of the $346,624

tax credit received in 1998.

This suggests the company paid at least

$346,624 in taxes during the past 2years.

If the payments over the past 2 yearswere less than $346,624 the firm would

have had to carry forward the amountof its loss that was not carried back.

If the firm did not receive a full refund

its cash position would be even worse.

7/29/2019 FM902_5

22/22

2 - 22

Got questions?

Get answers!!

Email: Voicemail:

chodges@gsu.edu (404) 651-2691

Electronic Bulletin Board:

http://www-cba.gsu.edu/~wwwfin/finconf/finba862/finba862.html