# ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM 02/08/2020 ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM

E-mail: [email protected] www: HTTP://MICHALSKIG.UE.WROC.PL/ Mobile: +48503452860 5 lectures + 1 exam (individual homework sent via email + test)

Next lecture: 11th March. Michalski G., Prediction cooperator future condition using financial statements (In Polish: Ocena kontrahenta na podstawie sprawozda finansowych), ODDK, Gdask, 2008. D.R.Harrington, B.D. Wilson, Corporate Financial Analysis, Irwin. ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009]

2 ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] Wilcox-Gambler Model Wilcox's Gambler's-Ruin Formula: This model can be used to estimate the liquidation value of a company. It's likely to be significantly less than the book value because of the "fire sale" nature. Most current assets are valued at 70% of their balance sheet values; fixed and other assets at 50% of book value. Real estate should generally be valued separately. Cash plus marketable securities at market value + Inventory, accounts receivable, prepaid expenses, at 70% of book value

+ Fixed and other assets at 50% of book value - Current liabilities - Long-term liabilities = Liquidation Value ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] 02/03 8/20 20 Example: Firm has assets with the following book values: Cash on hand = \$26,000 Accounts receivable = \$80,000 Inventory

= \$20,000 Prepaid insurance = \$5,000 Equipment, office furniture, and trucks = \$150,000 Accounts payable and accrued expenses = \$40,000 Long-term liabilites = \$60,000 Here's the computation: Cash \$26,000 Accounts receivable \$80,000 x .7 Inventory \$20,000 x .7 Prepaid insurance \$5,000 x .7 Equipment, etc. \$150,000 X .5 Accounts payable and accruals -40,000 Long-term liabilities -60,000 Liquidation Value = ? ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009]

4 ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] Example: calculate Wilcox-Gambler liquidation value for Chemical and for Tobbaco company ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] 5 ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009]

If kd = 5% for Chemical and kd = 7% for Tobbaco Calculate ROA for them and compare with kd and sector/branch ROA = (NI+INT)/(Total_Assets) NI = net income, INT = interests (financial costs of debt) ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] 6 ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] Basic financial aim of the firm Firm

value maximization: Where: FCFn = free cash flows, n FCFt V p t t 1 1 CC CC = cost of capital financing the firm (WACC) n = period in which FCFn will be generated

ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] 7 ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] FCF how to calculate? CC cost of capital (cost of money), how to value? k E k RF k M k RF D L U 1 1 TC

E ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] 8 ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009]

ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009] ANALYSIS, USING AND UNDERSTANDING FINANCIAL STATEMENTS OF THE FIRM [AUFSF2009]