Financial Analysis and Valuation

Part 1: Financial Ratios and Metrics

Working Capital

Working Capital = Accounts Receivable + Stock - Accounts Payable

Net Short-Term Debt

Net Short-Term Debt = Short-Term Debt - Cash

Net Total Debt

Net Total Debt = Net Short-Term Debt + Long-Term Debt

Net Total Investment

Net Total Investment = Working Capital + Net Fixed Assets

Security Stock

Security Stock = Working Capital - Net Short-Term Debt

Average Collection Period (ACP)

ACP = [(Average Accounts Receivable) / (Revenues)] * 365

Average Sales Period (ASP)

ASP = [(Average Stock) / (Cost of Sales)] * 365

Purchases

Purchases = Cost of Sales + Stock2 - Stock1

Average Payment Period (APP)

APP = [(Average Accounts Payable) / (Purchases)] * 365

Financial Average Maturity

Financial Average Maturity = Sum of Averages

Cash Flow from Operations

Cash Flow from Operations = Net Profit - (Working Capital2 - Working Capital1) + Amortization

Cash Flow from Investing

Cash Flow from Investing = (Fixed Assets2 - Fixed Assets1) - Amortization

Other Changes in Capital

Other Changes in Capital = Equity2 - Equity1 - Reserves

Cash Flow from Financing

Cash Flow from Financing = (Short-Term Debt2 - Short-Term Debt1) + (Long-Term Debt2 - Long-Term Debt1) - Dividends + Other Changes in Capital

Total Cash Flow

Total Cash Flow = Sum of all Cash Flows

Tax Rate

T = Tax / EBT

Free Cash Flow

Free Cash Flow = (EBIT * (1 - T)) - (Working Capital2 - Working Capital1) + Amortization - (Gross Fixed Assets2 - Gross Fixed Assets1)

Debt Cash Flow

Debt Cash Flow = [Financial Expenses * (1 - T)] - [(Short-Term Debt2 - Short-Term Debt1) + (Long-Term Debt2 - Long-Term Debt1)]

Equity Cash Flow

Equity Cash Flow = Dividends - Other Changes in Capital + Cash

Part 2: Dupont Analysis (Percentage)

Return on Invested Capital (ROIC)

ROIC = Operating Margin * Turnover * (1 - T)

Operating Margin

Operating Margin = EBIT / Revenues

Turnover

Turnover = Revenues / Net Investment DAA

Financial Leverage

Financial Leverage = Size * Cost

Size

Size = Net Investment DAA / Equity DAA

Cost

Cost = EBT / EBIT

Return on Equity (ROE)

ROE = ROIC * Financial Leverage * 100%

Part 3: Modigliani-Miller Theorem

ROIC

ROIC = [EBIT * (1 - T)] / (Net Total Investment DAA)

Cost of Debt (KD)

KD = Financial Expenses / Net Total Debt DAA

Debt-to-Equity Ratio

Debt-to-Equity Ratio = Net Total Debt DAA / Equity DAA

Financial Leverage

Financial Leverage = [ROIC - (KD * (1 - T))] / Debt-to-Equity Ratio

ROE

ROE = ROIC + Financial Leverage

Part 4: Project Valuation

(1) Relevant Project Cash Flow

1. EBITDA * (1 - T)

• Old: Units * (Price - Cost) = Gross Margin
• New: Units * (Price - Cost) = Gross Margin
• Average Margin = New Margin - Old Margin
• (-) General Expenses = EBITDA
• EBITDA * (1 - T)

2. Amortization

• New Amortization = (Amortization / Years)
• Old Amortization = (Amortization / Years)
• Amortization = New Amortization - Old Amortization
• Amortization * T

3. Working Capital Investment

• New Working Capital = Revenues * % Working Capital
• Old Working Capital = Revenues * % Working Capital
• Average Working Capital = New Working Capital - Old Working Capital
• Working Capital Investment = (Year 2 Working Capital - Year 1 Working Capital), ... (Negative)

4. Capital Expenditures (CAPEX)

• New: Investment (Year 0) (-) // Divestment (Year Y) (Selling Price)
• T = t * (Selling Price - Book Value), where Book Value = Investment - Accumulated Depreciation
• Old: Divestment // T (Always below) (Once placed, +)

Cash Flow Summary

Combine all cash flow components and sum them.

(2) Debt Cash Flow

1. Payment

• Payment (Years 0-4): Payment in Year 0 (-) Debt Amortization for the relevant years
• Calculate the remaining debt balance for each year.
• Interest Expenses * (1 - T)

2. Financial Expenses

• Year 0 * Cost of Debt (Year 1), Year 1 * Cost of Debt (Year 2), ...

Debt Cash Flow

Debt Cash Flow = Payment + Financial Expenses

Equity Cash Flow

Equity Cash Flow = Project Cash Flow - Debt Cash Flow

(3) Evaluation Convenience

Project Cash Flow / (1 + WACC)^0 + Project Cash Flow / (1 + WACC)^1 + ...

(4) Evaluation Convenience + WACC

• Create a table with the Equity Cash Flows.
• Below the Equity Cash Flows, input the discount factors provided.
• Multiply the Equity Cash Flows by the discount factors and sum the results from Year 1 onwards.
• This gives you the Net Present Value of Equity (NVE).
• Net Present Value of Debt (NVD) = Debt Loan
• Cost of Equity (KE) = Given percentage
• Cost of Debt (KO) = Interest Expenses calculated above
• WACC = [(NVE * KE) + (NVD * (KO * (1 - T)))] / (NVE + NVD)