What If” Questions (i.e. what if we didn’t borrow this, or didn’t buy this asset, etc.) WACC Question(s)
Questions involving discussions about liquidity, leverage, profitability, and efficiency
What to Know
How to forecast
How to calculate AFN
How to make a statement of cash flows work
How to calculate WACC
How to calculate DCF
How to describe a company using liquidity, leverage, profitability, and efficiency
ALWAYS RECONCILE RETAINED EARNINGS
Tactic “Dart and Tweak” – coined by Wade
Begin by ensuring whatever numbers you plug in still balance
Balance Sheet MUST balance
Statement of Cash Flows MUST work
Then, tweak numbers according to desired amounts (given in the problem, or projections) Ways to Forecast Numbers Don't forget about the age old question of What is the difference between the behaviors of male and female crickets?
For Accounts Receivable, Inventory, and Accounts Payable, you will be given a number of days to use to solve for the forecasted value. By using the following equations and completing the steps below, you can solve for the forecasted number.
# Days = Average Inventory/ (COGS/365)
# Days = Average Accounts Receivable/ (Net Sales/365)
# Days = Average Accounts Payable/ (COGS/365)
If you want to learn more check out Who own factors of production?
(1) plug in numbers given in the question/financial statement
60 days = Average Inventory / (400,000/365)
*60, 400,000, and inventory for the previous year will be given
(2) use algebra to solve for average inventory
(400,000/365) x 60 = 65,753.4 66,000
(3) double the solved value to get the average
(66,000 X 2) = 112,000
(4) subtract the previous year’s inventory We also discuss several other topics like Where is antitragus located?
Don't forget about the age old question of What does the circular flow model demonstrate in Economics?
112,00040,000 = 72,000
~always round to nearest thousand, 499 and below down, 500 and higher up ~this is the same process for receivables and payables
For Accrued Wages, use the percent of sales method to solve for the forecasted value.
2016: Accrued Wages = 40,000 Net Sales = 600,000; 2017: Net Sales = 800,000 (1) find the percentage of sales accrued wages was the year before
40,000/600,000 = .06667
(2) apply the percentage to the next year’s sales
6.7% x 800,000
(3) Projected Accrued Wages for 2017 = 53,333 54,000
AFN – additional funds needed – the required growth in assets minus the growth in spontaneous liabilities debt minus growth in retained earnings; appears in the balance sheet under total liabilities – must be generated by either debt or equity; typically, new ventures have to be funded by equity because banks will not approve them loans without existing financial statements, but once they begin to have more years of financial statements you can start getting loans, credit cards, etc.
Statement of Cash Flows – know how to do a statement of cash flows that still works with forecasted values you projected
Net Income (+/)
Change Accounts Receivable ()
Change in Inventory ()
Change in Accounts Payable (+)
Change in Accruals (+)
Investing – any growth in assets If you want to learn more check out Hybridity is the idea that a person can have what?
Financing – any changes in funding in liabilities section (includes AFN)
Operating + Investing + Financing should equal the change in cash
(beginning cash – ending cash)
Weighted Average Cost of Capital – weighted average of the cost of the individual components of interestbearing debt and common equity capital If you want to learn more check out What is the function of the demand management process?
WACC = [(1Tax Rate) x (Debt Rate) x (Debt to Value)] + [Equity Rate x (1 – Debt to Value)] *memorize the formula so you can plug in numbers given
*this was not covered in class in detail, so to get a better understanding of the dynamics of the equation, I recommend reading Chapter 7, Section 7.6 on page 254255
Discounted Cash Flow (DCF) – valuation approach involving discounting future cash flows for risk and delay
*again, this was not covered heavily in class, I recommend reading Chapter 10, Divide and Conquer with Discounted Cash Flow on pages 359362
*the equation is very complicated, so refer to page 360
1. CF years 15 and project year 6 T
2. % growth CF year 6 g
3. % return for years 15 rv
4. % return for future years r∞
*plug those numbers (given in question) into the equation given on page 360361 of the textbook; review inclass example covered on Tuesday
*Wade said as long as you know the equation and can plug in the numbers, that is enough MEMORIZE
WAAC = [(1Tax Rate) x (Debt Rate) x (Debt to Value)] + [Equity Rate x (1 – Debt to Value)] DCF Equation (page 360)
InventorytoSale – # Days = Average Inventory/ (COGS/365)
SaletoCash – # Days = Average Accounts Receivable/ (Net Sales/365)
PurchasetoPayment – # Days = Average Accounts Payable/ (COGS/365) Operating Cycle = inventorytosale + saletocash
Cash Conversion Cycle (C3) – inventorytosale + saletocash – purchasetopayment
Current = current assets / current liabilities
Quick = current assets – inventory / current liabilities
NWC = current assets – current liabilities / total assets
TD/TA = total debt / total assets
CL/TD = current liabilities / total debt
Interest Coverage = EBITDA / interest
GPM = gross profit / net sales
NPM = net profit / net sales
SalestoTotal Assets = net sales / total assets
ROA = net income / average total assets
ROE = net income / average owner’s equity
1. There are no tricks on the exam.
2. Actually read the chapters in the book.
3. Do not dump all the information you know, quality over quantity. Just answer the question. 4. Take your time and check your numbers.
5. Always reconcile retained earnings.