Corporate Finance - Financial Statement Analysis

6:00 pm

Reading 41 of CFAI Materials
Review of Dupont Analysis

• ROA = Net profit margin * revenues/avg total assets
• Net profit margin breaks down further
• Net profit margin = operating profit margin * income before taxes / operating income * (1 - taxes / income before taxes)
• Income before taxes / operating income is the effect of nonoperating expenses - critical value is 1
• ROE = Net income / average shareholders' equity
• ROE = net profit margin * revenue / average total assets * average total assets / average shareholders' equity
• Can again expand out net profit margin
• This is the 5 part dupont
• Can compare Duponts of different companies to compare what they do differently and how ROA and ROE are composed

Pro Forma Analysis

• Forecasting income statements and balance sheets
• Some factors are tied to revenues, others are not
• Sales driven factors
• COGS as a percent of sales
• Opex as a percent of sales
• Current assets and current liabilities as a percent of sales
• Fixed burdens
• Primarily interest and taxes
• Taxes as a percent of taxable likely to remain same
• Interest is a function of capital structure - if it will not change, just use past interest expense
• Revenues
• Strictly using growth from past periods does not take into account other factors that impact revenues
• Product mix might change
• Try to build up by forecasting segment by segment

Interest/iterations

• Will depend on capital structure - need some assumption about what happens with excess funds and how deficits are financed
• Using a surplus to pay down debt will also decrease interest expense, and there will still be a small surplus - so you have to use this surplus to again pay down the debt
• If the assumption instead was that you would maintain total debt/total equity relationship, you would use the surplus to buy back stock and it would balance

End

7:00 pm

1 hour