FMT2 NOTES:

Performance measures
ROA/ RONA
ROCE
NPM/ ROS
Tobins Q
Economic value added
Market value added

ROA is actually RONA= NOPAT/ Net Operating assets

Calculating NOPAT
Sales
-

COGS

Operating Expenses

Operating Cash

Depreciations

Operating Profit (used to calculate NOPAT)

Non Operating Expense

EBIT

Interest

Tax

PAT

NOPAT= PAT+ Interest or EBIT-tax

Net operating Asset= Total Assets Discontinued operations- investments - cash
Operating Assets = Total Assets- Value of Discontinued AssetsInvestments-Excess Cash

ROCE = EBIT/ Capital Employed

Capital Employed = Equity + Debt

If I invested in machinery = Capital investment
If I invest in raw materials etc = Working capital
In a situation. Wen no1 is giving me credits, my assets are equal to my long term

Capital Employed= Fixed Assets + Current Assets Current Liabilities

= Total Assets Current Liabilities

ROE:
= (PAT Preferred Dividend)/ (Paid up capital+ R&S - Revaluation Reserve)

ROS:
= PAT/ Net Sales
ROS = PAT/ Gross sales Sales Returns Servicing costs

Tobins Q = Market Value of a Firm/ Replacement Value of the Firm

Where, Market Value of a Firm = Market Value of Equity + Market Value of Debt

Economic Value Added

Year
PAT
Sales

1
400000
50 lac

2
500000
55 lac

Ke= 10%
Eq = 1cr
EVA = PAT- Ke x Equity Invested
eg. = pat of 3rd ye =6 lac
EVA = 6 lac -0.1*1cr= - 4lac

EVA= (PAT/ Equity Ke) x Equity investment

Or, EVA = (ROE- Ke) x Equity investment

3
600000
57 lac

Firms Perspective:
EVAfirm = NOPAT Ko x Capital Employed
EVAfirm = (NOPAT/CE - Ko) x Capital Employed
EVAfirm = (ROCE - Ko) x Capital Employed

Market Value Added

MVA= Actual Returnstock Expected Return of the Stock

Expected Return of the Stock (CAPM)

Degree of Leverage

Degree of Operating Leverage=

Change EBIT
Changethe Sales

Degreeof Financial Leverage=

ChangePAT
Changethe EBIT

Degreeof Total Leverage =

ChangePAT
Changethe Sales

Note: Reserves & surplus is not cash. It is a part of the investors fund
that has been reinvested in attaining different assets like PPE, raw
material etc.

For forecasting
1. If the funding is more than the assets, we
will make decision on the excess fund
Options
increase investments
stock repurchase
reduce the borrowings
2. If the funding is less than the assets, we
will make decision on the excess fund
Options
Increase borrowings
Equity
Current liability
Inventory reduce
Accounts payable increased
account receivable turnover ratio = sales/ average accounts receivables
Debtor period = 360/ Debtor turnover ratio

Expected Debtor=

sales x Debtor
Period/360

i.e. sales * accounts

receivable turnover
ratio

Working Capital
Eg: For a days Sale
Assets
Cart
10,000

Liability
10,000

Inventory (Fruits)

Owners Equity
1000

A/c Payable

1000

End of the day

Cart

10,000
10,500

Inventory (Fruits)

Owners Equity
0

A/c Payable

0
Cash

500

Case 2:

Eg: For a days Sale

Assets

Liability

Cart
10,500

10,000

Deposit

500

Inventory (Fruits)

Owners Equity

1000

A/c Payable

1000

End of the day

Cart

10,000
11,000

Inventory (Fruits)
0
Cash

Owners Equity
0

A/c Payable

1000

But this is a redundant thing to deposit and take in back everyday.. so we

can keep the deposit for a long time

Eg: For a days Sale

Assets
Cart
10,500

Liability
10,000

Owners Equity

Deposit

500

Inventory (Fruits)

1000

A/c Payable

1000

End of the day

Cart

10,000
11,000

Inventory (Fruits)
0
Cash

500

Deposit

500

Owners Equity
0

A/c Payable

When you take a long term financing for a short term activity it is called
working capital

If your current assets are lesser than your current liabilities, you are
financing your fixed assets through current liabilities that too better if
that is done by non-interest bearing funds like accounts payable and not
short term loans

If we assume, General expenses cannot be forecasted, we need to check

the DOL otherwise take the trend

Comparing the price of the stock with and without Repurchase of Shares
Without repurchase

y=0
y=1, Div=D

Po=

D
Keg

y=2, Div=D

y=3, Div=D

y=0
y=1, Div=0
Div=D

y=2, Div=D

y=3,

(because in the 1st yr all the money is used up for

repurchase)
D>D

P 1=

'
P
D
P 0= 1
Keg
1+ K e

Return
on sales

Net
Income
Sales

Sales
Total
expense

Return
on
assets

Asset
turnover
Return
on
equity

Financial
leverage

Total
assets

Sales

Current
Assets

Total
assets

Contribu
ted
Capital

Owners'
equity
Earned
capital

Long
term
assets
Stocks
at par
Additional
paid in
capital
Noncontrol
lin interest
Retained
earnings
Other
comprehens
ive income

Cost of
sales
Selling
expense
s
Admin
expense
s
Inventori
es
Accounts
receivabl
e
Cash &
other CA
Property,
Plant &
Equipment
Investment
s
Intangibl
e