AR turnover = sales / avg AR

NOPAT – NNE = NIC

EPS = NIC / avg CSO
Net operating profit margin (NOPM = NOPAT / Sales)
Net operating asset turnover (NOAT = Sales / NOA)
Net Profit Margin = (NI)/Sales
ROCE = NIC / avg CSE = (NI – pref div) / avg CSE = ROA*leverage
= RNOA + non-op return
RNOA = pm * Net op asset turnover
To report higher earnings:
Leverage = avg TA / avg CSE •Use straight-line depreciation
PM = (NI) +(1-tax)(int exp) / (sales) = NOPAT/Sales • Estimate long useful lives
• Estimate large salvage value of assets
Asset turnover = sales/avg TA higher useful life; higher salvage value = less deprecation expense; higher PPE
ROA = (NI + int exp – int exp(tax))/Total assets = PM/asset turnover

PPE Turnover: analysis of the productivity of long-term assets

PPE Turnover, Net = Sales / Average PP&E, Net
Estimated useful life = Depreciable asset cost / Depreciation expense
CAPITALIZATION Percent used up = Accumulated depreciation / Depreciable asset cost

CAPITAL VS OPERATING LEASE

Capital lease method - both the lease asset and the lease liability are reported on
the balance sheet.
Operating lease method - neither the lease asset nor the lease liability is on the
balance sheet.
Conditions for a capital lease:
• Extends for at least 75 percent of the asset’s total expected economic life. •
Transfers ownership to the lessee. • The “bargain purchase” option will be used.
• The present value of the contractual minimum lease payments equals or
exceeds 90 percent of the fair market value of the asset at the time of signing

Long-term assets mainly consist of property, plant,

and equipment (PPE)

Record as op lease
At inception: ---
Each yr: rent exp(D) cash (Cr) total rent exp / life of lease
Record as cap lease
At inception: lease asset (D) lease liab (Cr) PV(payments)
Each yr: dep exp(D) acc dep(Cr) PV(payments)/# years
Lease liab(D) cash(Cr) outstanding amount on loan * int rate

Capital leases result

in higher assets,
liabilities, operating
income, operating
cash flow. Also
result in lower net
income and lower
non-operating
income
 Step 1 – financial calculator
Sense-check: Verify the
reasonableness of the rate you
calculated in part (a) by calculating:
2013 Interest Expense / ST + LT
Debt in 2013
FORECASTING
BOTTOM-UP FORECASTS
Sales affected by VOLUME and PRICE:
[1 + volume growth rate] x [1 + price
growth rate] = [1 + sales growth rate]
WACC = (rD)(D/(E+D)) + (rE)(E/(E+D))
rE = rF + B ( rM – rF)
rD = Cost of Debt Capital = Average
Borrowing Rate for Debt (1-Marginal tax
rate)
ROPI: 5 STEPS
1. Forecast and discount ROPI for the horizon period.
2. Forecast and discount ROPI for the terminal period.
3. Sum the present values of the horizon and terminal periods and then add to the
current book value of net operating assets (net working capital plus long-term assets)
to get firm value.
4. Subtract net non-operating obligations (NNO) from firm value to yield firm equity
value.
5. Divide firm equity value by the number of shares outstanding to yield stock value
per share.
FIRM VALUE INCREASES IF:
• Efficiency improves (less NOA to generate NOPAT)
• Profitability improves (given the same level of NOA investment
DCF
Free Cash Flows to the Firm = Operating CF (aka
NOPAT) - Investments in NOA
FCFF
Cash available to pay interest & dividends
Starting points you may have seen:
• NOPAT+ D&A + Deferred Tax Expense – Capex – WC
• NI + D&A – Capex – WC
• EBIT(1-t) + D&A – Capex - WC
MULTIPLES
P/E, P/B (M/B)
Equity Intrinsic Value / Book value of Equity = P/B (1 = assets on bal
sheet)(>1 = amazon)
Equity Intrinsic Value / Net Income available to common = Price:
Earnings
- based on expected growth in earnings
VALUATION USING BV
Equity Intrinsic Value = Book Value of Equity * BV Market Multiple
Equity Value per Share = Equity Intrinsic Value / Common Shares Outstanding
VALUATION USING NOA
Company Intrinsic Value = NOA * NOA Market Multiple
Equity Intrinsic Value = Company Intrinsic Value - NNO
Equity Value per Share = Equity Intrinsic Value / Common Shares Outstanding
VALUATION USING NI
Equity Intrinsic Value = Net Income * NI Market Multiple
Equity Value per Share = Equity Intrinsic Value / Common Shares
Outstanding
VALUATION USING NOPAT
Company Intrinsic Value =NOPAT* NOPAT Market Multiple
Equity Intrinsic Value = Company Intrinsic Value - NNO
Equity Value per Share = Equity Intrinsic Value / Common Shares Outstanding
Write off
Loss (SE)
Acc Dep(A)