Comprehensive exam Feb.11 1
Objectives of the examination Apply the financial management concept to evaluate the company s performance. Relate the results of the analysis to make financial decisions or make recommendations. 2
Guidance to comprehensive exam THREE questions, passing score 55% Calculation part: (50 points) Value-based performance analysis (Free Cash Flow to Firm, Return on Invested Capital, Weighted Average Cost of Capital) Other information such as financial ratios are provided. Analysis part: (50 points) Analysis of the company based on your calculation & available information. Recommendation based on the result of your calculation 3
Calculation parts Free Cash Flow Return on Invested Capital Weighted Average Cost of Capital Review the definitions of financial ratios 4
Free cash flow Total cash available for distribution to owners and creditors after funding all worthwhile investment activities 5
Free cash flow Free cash flow to firm (FCFF) is cash flow from operations after investments in working capital and capital expenditure It represents the amount of cash available to debt and equity holders of the company. It is used to assess the ability of the firm to meet its interest and principal repayment Free cash flow to equity (FCFE) is free cash flow to firm after interest and principal payment. It represents the amount of cash available for equity holders. It is used to assess the firms financial ability to sustain its dividend policy and to identify potential agency problems from excess free cash flow. 6
Calculating free cash flow to firm Using income statement EBIT x (1- Tax rate) + Depreciation/ Amortisation (Other non cash charges) - Change in working capital - Change in fixed capital = Free Cash Flow to Firm Using cash flow statement Cash flow from operations +/- Cash flow from investing activities + After tax interest (interest expense x (1-Tax rate) = Free Cash Flow to Firm 7
Practice exercise 2004 2005 2006 2007 Cash 259,061 141,287 132,794 67,861 Trade account receivables 334,696 284,164 571,070 749,415 Inventory 669,171 850,080 1,272,746 1,258,817 Other current assets 58,793 36,492 107,240 46,509 Trade account payables 109,114 113,723 160,210 223,571 Other current liabilities 76,081 92,834 150,394 156,547 Property, plant and equipment 827,805 1,237,691 2,256,911 2,406,649 EBIT 255,510 163,672 207,059-273,280 Depreciation and amortisation 61,219 73,689 121,121 372,256 Note: tax rate is 30% 8
Calculating free cash flow for 2005 Step 1: Calculate change in working capital requires you to calculate working capital for 2004 and 2005 Working capital = (CASH + A/R + Inventory + Other operating current assets) (A/P + Other operating current liabilities) 9
Other operating CA & CL are shown as a single line under other current assets and other current liabilities in SETSMART financial statements 10
Working capital 2004 and 2005 2004 2005 Cash 259,061 141,287 - + + + = Trade account receivables 334,696 284,164 Inventory 669,171 850,080 Other current assets 58,793 36,492 Trade account payables 109,114 113,723 + Other current liabilities 76,081 92,834 Working capital 1,136,526 1,105,466 Change in working capital -31,060 11
Free cash flow Step 2: Calculate change in fixed capital 2005 = Property, Plant and Equipment 05 Property, Plant and Equipment 04 = 1,237,691-827,805 = 409,886 Step 3: Calculate Free cash flow to firm 2005 = EBIT * (1-.30) = 163,672 *.70 = 114,570 + Depreciation & Amortization = + 73,689 - Change in working capital = - (-31,060) - Change in fixed capital = - 409,886 = -190,567 Now, calculate free cash flow for 2006 and 2007 12
Solution to 2006 & 2007 2006 2007 EBIT * (1-.30) Depreciation & Amortization Change in working capital Change in fixed capital Free cash flow to firm 144,941 121,121 667,780 1,019,220-1,420,938-133,397 372,256-30,762 149,738 119,883 13
Exercise Calculate WACC for Bumrungrad international 1 month T-Bill 3.7% 3 year govt. bond 4% 23 year govt. bond 5.2% SET return 14% Cov (Bh, m) 22.87 Var (market) 35.24 Share price 35.5 No. of share outstanding (unit in 000) 728,269 Average cost of debt 7% Corporate Tax rate 30% 14
Value-based performance analysis Calculate ROIC, and Economic Profit for BH for the year 2007 15
Value-based performance analysis Does the company create value or destroy value? What are the key drivers of the company s performance? 16
Solution to BH: 17
Solution: ROIC - Definition: NOPAT / Invested Capital bop - NOPAT = EBIT x (1 Tax rate) - NOPAT = 2,159,147 x (1-0.3) - NOPAT = 1,511,403 - Invested capital = Interest bearing debt 2006 + Shareholders equity 2006 - Interest bearing debt 2006 = Current portion of long-term borrowings from financial institutions (328,522) + Long-term liabilities-net of current portion (1,422,449) = 1,750,971 - Shareholders equity 2006 = 3,628,547 - Invested capital 2006 = 1,750,971 + 3,628,547 = 5,379,518.- - ROIC = 1,511,403/ 5,379,518 = 28% 18
Solution: ROIC - Breakdown - Definition: NOPAT / Invested Capital bop = NOPAT x Sales Sales Invested capital 06 NOPAT margin Capital Turnover - NOPAT margin = 1,511,403 = 16.06% 9,413,123 - Capital turnover = 9,413,123 = 1.74 times 5,379,518 - Check : 16.06% x 1.74 = 28% 19
Solution: WACC Cost of debt = 7% After tax cost of debt = rd x (1 Tax) = 7% x (1-.3) = 4.9% Cost of equity = 5.2 + [(22.87/35.24) x (14-5.20)] = 10.91% 20
Solution: WACC Total capital = Book value of Debt + Market value of equity Book value of debt = 1,335,301 Long-term liabilities-net of current portion Market value of equity = 35.5 x 728,269 = 25,853,549.50 - Total capital = 1,335,301+25,853,549.50 - = 27,188,850 - Weight of debt = 1,335,301/27,188,850 = 0.05 - Weight of equity = 1-0.05 = 0.95 - WACC = [0.05 x 4.9%] + [0.95 x 10.91%] = 10.61% - ROIC = 28% > WACC 10.61% 21