the Illinois State Collegiate Compendium, Academic Lectures in Business and Economics.
This is Business Finance, FIL 341 for Autumn Semester 2024.
Today, additional funds needed. I had built and was going to deploy this on Tuesday with you on
Tuesday, but I just was not comfortable with my model at that point. And this is an Excel spreadsheet
that you will be able to download yourselves and use as you wish for homework or just to get a
better feel for this part of finance. Now this is actually what we're going to do today and it
won't take a whole class period, but I do want to go through it in enough detail so that you
understand how this works. First things first, this is not a complete model of how you find
additional funds that you're going to need, but it is pretty darn close. There are a few
nuances that I'll bring up along the way with this, but it actually is in the borderline between
corporate and investments. It is corporate because you're determining doing a forecast of how much
money or capital or combination of those you are going to need for the next period. Now this one
focuses primarily on capital funds. I'm sorry, I kind of glitched out there, but all you have to do
is you can say not all of what we'll need will be capital. We can also add a cash buffer or another
one I'll bring up later is we can actually drain off some of our cash to provide additional funds.
Those are possibilities as well, but aside from that this is just sort of the block model that
I'll be doing, but just to show you where it is and just if you want to bring it up right now so
you can have it is go into spreadsheets, it's AFN, Additional Funds Needed, and just download it.
Now you can tweak this, I would kind of encourage you to if you're going to save save a copy instead
of saving over the first the thing itself, but it's AFN and we'll be using it after we look at
the numbers and you'll see that it is a daunting, it looks daunting at first, but it is actually
not hard and I patterned it after the one that you see in the textbook. It's different, but it's
just enough the same that you can look at the textbook to see some of the details if it's not
clear from the spreadsheets that I've built here, but this is just sort of like the numbers all come
out to be pretty clean at least at first and then they get a little hairy later, but anyway that's
where we are heading right now, but as I said first a look at the numbers as we always do
just so we can see what's going on. Now this might not look like a spectacular day, but it is a
turnaround from the bear market. If you've got a real bear market, when we say a bear market
that's more than a day, that's more than a week, it's an enduring thing. We're seeing a bull day
and yeah you can have bulls in a bear market and you can have bears in a bull market, but there is
at least some reason to believe that we have enough of a bull day here that it kind of broke the bear
mentality on the street. Now interestingly enough as you can see the Dow is still taking the brunt
of the punishment of the bears right now and there's actually good reason for that. Some of those
blue-chip stocks, the companies are not doing all that great and that's not really so much the economy
is analysts say this is these companies really not performing up to what we would expect. The
behemoths like Intel, Microsoft, even Apple are not really showing that they have what it takes to
have robust growth over the foreseeable future. However the S&P 500, notice here that the bears
did make a run. See that dip down there? The bears made a run around midday and they were beaten back.
The bulls came back and just started scooping up bargains again. So that is something that we can
take cheer in if nothing else. And the price of crude is dropping again, that's good news because
that's hopefully cheaper fuel prices down the road. So that's always a yay. The gold bugs are in a
good mood today. They think something bad is about to happen. So whatever that's the bulls. That's
the bulls in gold that are having the time of their lives and all that kind of stuff. But anyway
now let me take you over here just for a quicky look at yields and probably seeing something grim.
Oh look at that. The yields, oh that's a pretty decent drop so far five basis points today. So we
have some good news there with the yields on the bonds going down. They're not ready to break below
four obviously right now but still they're going down and so we can be happy. Excuse me the yields
are at least peeling backward a little bit in the bond market and that's going to be good for the
economy. What concerns us is when there are yield, the yields just keep going up. That's what gives
the banks the impetus to start jacking up mortgage rates, car loan rates, loans to corporations and
all that. So the fact that we now have this turnaround is going to take that excitement off
the banks to jack up their interest rates. And as long as it just keeps going down then what's
most likely that will be a sign that the banks will probably not be making many loans until
consumers, businesses and the banks know where this is all going to end up. Are we going to finally
start seeing a slide in interest rates again? Probably but we've got to wait for everyone
to think that's what's going on. Now interestingly the Nikkei even when it's having a bold day it's
not anything to write home about. Tokyo, what I hear is Tokyo is in something of a recession
and there's Tokyo Central Bank Japan Central Bank has talked about lowering their their interest
rates trying to get interest rates down to stimulate the economy. So far it hasn't really
juiced their economy much so Japan is in kind of a funk and that's what you're seeing here in the
Nikkei 225 just that overall malaise in the Japanese economy. And of course London it went up and then
it just slid right back down they're about to close out the day and they'll be lucky if they
stay above water before the end of before they bell over there in London. So there's that. But
like I said the good news is that we do have some strength and if you just look at some of the ones
that we usually look at yeah banks that's interesting BAC should be down but I can't swear to that
really. BAC should be down oh look at that well barely up. I mean it's really kind of a dead day
on the street something like let's look at uh Kohi-Pol-Moff what's the other one? Oh I wanted
to look at retail grocers. There is a shake-up happening rather noticeably in the retail
grocery market. Several old grocery chains you might not have heard of because they are regionals
in the south and in the west but they're buckling and it's a little bit troubling now that these
old fairly well diversified regionally diversified stores are beginning to slip away and Kroger is
one of them. But Kroger is not going to go away but it is taking some pretty big grief right now
it's underpriced according to this according to PE ratio it's underpriced but looking on another one
and we're talking about retail grocers here wait no that's not what I wanted why did I do that
Walmart? Even Walmart's in kind of a malaise right now but a lot of it's just this is not a good
time what we're hoping for is that these numbers are going to start looking better in the Christmas
season than they do now target has been showing not very much oh look at that today target actually
came up a little bit so there's some good news there but you have other sectors that just don't
seem to want to do much right now so anyway the bottom line is that this is a kind of a difficult
market now before I go to the topic today do you all know what I mean by a short sale by
short selling have you ever heard some of you are nodding your head so let me get a poll of this
do you know how to do a short sale okay I'm going to show you but I want to make sure I'm not telling
everyone something you already know have you ever done a short sale madam? Can I say that you have?
okay okay now most people and I this is getting you out of the textbook for just a few minutes
and getting you some extra knowledge that makes my file 341 a little richer than the typical one
but here's the thing
there is a common sentiment even among investors especially non-professional investors
that you make money when stocks go up you lose money when stocks go down
actually you can make money either way and I'm not talking about options call and put options
I'm talking about just stocks themselves obviously if you buy a stock and the stock goes up in price
you get a capital gain and you get a dividend oh everything good look everything's looking good
the that's a that that's what most people think and stocks go down boo hiss there goes my pension
fund or there goes my little investment I was making so I could put a down payment on a car and all that
but in fact there is the other side of the market you can go long or you can go short
long means buy short means kind of like a sell I caution you that this is going to be a very
simplified example of it and I also caution you that in order to participate in short sales
you must have a margin account in other words your brokerage account has to have a certain
amount of money in it in case something nasty happens because the worst that can happen
in when you buy is that you lose your investment the worst that can happen if you short sell
is that your ass can be reclaimed by the great ether and again this is going to be a very simplified
example of it and I will it dispense with a couple I'll mention them and then I'll step away from them
but here's how it works let's take drl common stock currently at $35 a share
now you think that that stock is going to fall you can't say yeah it's going to go up there
sky's the limit but you think it's going to drop and let's say that you have a what we might call
a cover trigger a cover point of $30 a share in other words if it gets that low well by God I've
made my money and I'm getting out before it turns around the other way in other words you need to
have a point in mind where enough is enough I'm getting out of this and there's a good reason for
it too the first thing you think that it's going to fall to $35 a share so what you do is you borrow
100 shares drl first thing you do is borrow now you're saying who do I borrow from you don't
it's just out there there is not someone that you borrow it from there's not some institution you
borrow it from you just borrow 100 shares because there's a vast ocean of shares out there and you're
just borrowing 100 of drl you go and your broker will take care of that for you and then you immediately
sell those 100 shares drl at the price of $35 now that will net you $3,500 you say wait a minute
is that how does this work well first of all when you borrow those shares every day that you hold
those you have that open borrowed position you are going to pay interest on it on that position
so remember that the longer that you keep that borrowed those borrowed shares out there in the
short position the more that accumulates that cost of the position and I'm going to ignore it for
this but keep in mind that that is a real motivation to cover soon so let's say now that drl actually
does fall to $30 a share so what you do is you buy 100 shares of drl at $30 a share so that means
that you are out now 30 times 100 or out $3,000 you buy those and you pay back those to where
that you borrowed that's the in other words you're covering your position you finish up game over
that's the end of the story and so without talking about fees or that interest that you were
accumulating how many days it took you to get it down there you waited you're up $500 that's how you
make money on stock price falls that's that's a short and they okay first things first keep in
mind again I can't emphasize this enough is that there is that interest payment per day that you're
going to be accumulating on that position so you're going to want to cover as soon as you can
now also notice that a drl goes up you're screwed because you will eventually panic and you will
cover at 37 38 just to get the hell out because you're not if the stock price goes up you're going
to have to buy back at a higher price and so you're going to wipe out that $3,500 if it goes to 38
well then you say okay that's it that's it I got to get out because it's going up and it's not
going to go back down so at that point you cover at 38 and so you lose $300 plus you probably waited
a few days three four five days and so you were accumulating that interest cost hoping to God
that it turned around and went down okay now a couple of pieces of terminology and of course
they don't keep the bookmarks they think I really want in this so I'll have to go and get it again
now there are a couple of different places you can look at short positions
NASDAQ has one and I hate it because theirs has a little more information but it's really old
information it's like last time I checked it was like in at the end of September what was going on
then but I've never looked at this fintel I don't know see there's some information that I'm hoping
for oh stop it of course I'm a human you toad that's not going to help me that's a little too
confusing there let me go back here whoops okay I'll just go to the NASDAQ tracker I hate this
one because it's just so lame but there are a couple of things the first thing is the short
interest outstanding or short interest how many shares of the company are out there in a short
position so let's look at say Tesla and I hate how late how how oh that's right gotta click that
this will show you up the NASDAQ for all that they used to be they are so behind now but
uh this is how many shares as on September on September the 30th how many shares of Tesla
were in a short position the bigger the more bearish the sentiment is behind the scenes keep
in mind that a stock as it's going up usually you'll see the short interest going up too
because there will be this belief that it will top out and turn back over so you'll have
shorters coming in to take their positions betting on the turnaround going down so Tesla
as you can see that that's a hell of a lot of shares and that's one company think of all the
hundreds of thousands of companies out there public companies that's just one so the aggregate
short interest is something that's kind of interesting to us because as that short interest
grows overall for all companies that says that there's market sentiment that is thinking there's
a lot of market sentiment that's thinking that it's going to have there's going to be a pretty big
drop in price uh of us of overall the stock markets so that's an important thing here now one thing
that I hate on these is they don't show you another one is that's important is the and I'll put this
in parentheses because almost no one said that the short float the short float that's a percentage
of the company's stock that is in short position and they don't report it for Tesla so if Tesla had
a billion shares then its float would be 7.4 percent the short float is important to the extent that
it can get ridiculous I've seen the float get to 70 percent 80 percent was in short now in other
words that many uh shorters on that stock were out there that that percentage of the shareholders
of the corporation were betting against the stock possibly that that's a scary number now
here's the bad part now this is how it can turn really nasty suppose that there is the stock price
keeps going up and up and the you see more and more shorters coming in thinking yeah it's going to
peak going to peak and the float gets bigger and bigger and it doesn't well you've got all these
people who are holding call cover see on Tesla here one day to cover in other words most right now
it's taking only one day for the shorts to say I'm covering that's a sign that the stock price
is going down they're covering and they're out they're just they've got made some money and they
leave after a day in this position that's that's decent if it gets to be five seven ten days
to cover that is a sign that something is they're going to get killed because you see after a certain
amount of time you get a mass freakout effect because let's say that you've got 70 percent of
the uh of the uh is the float and the stock keeps going up and up and all these people are sitting
there paying interest every day waiting for it to go down well some son of a bitch is going to say
all right I'm out and all it takes is a few of them all at once to say I'm out and they cover
cover and then okay look at the look at the place where you cover you have to buy the stock
to cover so if you suddenly start having a few shorters covering themselves that pushes the price
up the other short is a oh shit it's going up and they start getting out and then you have a heard
it essentially something that qualifies as the hordes of Genghis Khan all sell all buying it
wants to cover and all of them buying it once is going to drive the price through the roof and you've
got a whole lot of shorters who are very very sad because they are covering at way above the price
that they sold it at they got to buy it and when they buy it every buy pushes the price up and
have a whole bunch of those son of a dogs buy it they're going to drive the price through the roof
and then everyone is destroyed in the process as that happens that's how a short position that's
the dark side of a short now I'm sure you've never heard of this stock it's this lousy little company
called GameStop yeah you have heard of it haven't you GameStop was a favorite whipping boy of a
couple of disrupting of all so bees on the street they were short GameStop every couple of weeks
they just take these big positions in GameStop because they just knew the stock price was going
to go down and so it was like guaranteed money and they would oftentimes the rumor was that they
would help it go down by passing out another nasty rumor about GameStop oh man I hear it's
almost about to go to bankruptcy oh god yeah it's unbelievable how bad it is of course that would
drive the price down and they would cover their shorts and make themselves a couple of hundreds
a hundred five hundred thousand dollars a million dollars then the this terrible thing happened
this place this cesspool on the internet called Reddit and I am on Reddit there was a sub Reddit
called Wall Street Bets where they were saying you should buy this stock and there was an analyst
who was making note of something ancient that from my time a ratio that wasn't being paid attention
to and she 26 years old she was really bright bright I've begun to follow her recommendations
a little bit at least follow her blog she said ah GameStop is not going to go bankrupt GameStop
if it gets a good management team in there it is the the sky is the limit and so put those two
forces together and suddenly all of these redditors and their mothers and their cousins started buying
GameStop drove it sky high and these Wall Street boys were just sitting there they weren't even
paying attention and before they knew it they were covering at a loss of several million dollars
it was spectacular especially because after the blood had flowed these Wall Street boys were
demanding that Congress pass legislation that they can't talk about stocks on Reddit in places
but gee weren't you the free marketers and now you want government to regulate these these
scoundrels but anyway yeah it can turn sometimes when it turns nasty it turns nasty on the people
who were all making their coin just driving stock prices down so that they could profit on the cover
on short positions they were taking so there's that that is a short sale okay that's enough
about short but first things first and that's why I I hate this because they don't show the float
and the second thing about it is uh well well that's the big thing that I don't like is what
what percent of the stock is in that position but one percent oh I'd rather like that a one uh is
a decent one let me try this Ford what okay fine we'll do GM
search oh for having sex masak come on let's get real looks I've been let me see if I'm
finding another service that's better short tracker that's UK I don't want to do that
uh Finra I wonder if Finra has anything better
or
they're not reporting it either this is kind of depressing and look at that they're not
reporting any better than NASDAQ was oh well you got the idea so if you want to walk on the wild
side you can make money on short positions but remember don't this is a one night stand don't
get married to a position hoping that it will improve it's sort of like you get into a relationship
and your significant partner turns into a werewolf okay well I'm just going to wait this out tomorrow
that my partner will be nice and loving and normal again but every night I'm going to eat your loins
and soul get out don't hold shorts too long and make sure that you have to a certain extent see
that one right there that is not a tight trigger that's a nasty trigger a trigger I mean you're
going to do fine if you have triggers of a couple of dollars to share just make don't have
unless you're absolutely sure that the stock is going to go to hell make it a trigger like 33 32
you won't make as much money but at least it's a got a better chance of going to 33 or 32
than it does of going clear down to 30 just the last piece of advice now AFM uh additional funds
needed and I've made this spreadsheet for you folks to have and to use and this is a pretty trivial
example but you can put real numbers in there and this is more or less how it's done and you can
you can put some complications in the first thing that you're going to want to do is get a nice income
statement and some additional information the dividends and the additional retained earnings
additions to retained earnings how many shares are outstanding all that good stuff and a few ratios
and a tax rate for for your troubles once you have gotten all of that into place
and also you'll have a balance sheet too
that will give some of the the same information now you notice something that I do here I have
common size in other words these percentages are the percentages of sales
and then on the balance sheet these are the percentages of total assets these are just
common size now the purpose of the common size is a starting point you can use these
percentages for the next year's forecast you forecast revenues and then all the numbers
fall from the come out of the revenues as percentages so in other words if this goes up
to 80 000 then everything would be a this same percentage of 80 000 you don't have to do it this
way though you can actually alter these percentages you can say well that sgna
sucks as you can see it does here that's 90 percent yeah that's a terrible sgna so you might
declare 80 percent next year is the target for that 80 percent of sales not 90 percent 80 percent
of sales and that will trickle down here to a higher net income you hope net operating income
pre-tax and then at the end your net income you can target these you can put in another
one you can also say let's see let's make all of these industry standards in other words let's
see what the industry is for all these percentages easy to do you go to standard port of global net
advantage and you they'll tell you percentages of the uh compared to the industry nothing hard
about this part now i'm going to take keep pushing you here a little bit and you can put in a tax
rate now technically it should be 21 percent right now i just used 25 percent there but
now again the balance sheet the same thing you can forecast next year's by taking the
percentages off the total asset for next year you or you can set new targets in this case you
notice there are a couple of things that i would i'm looking at here deficiencies that concern me
somewhat about this my um assets here well i shouldn't say cash is a little bit on the thin side
it looks like they have some illiquidity here but we're not going to criticize them now for now
but now over here one thing i want to point out and again you can use next year's uh
uh at total assets with this year's the current percentages and get all of these numbers so whatever
that new current total assets you want to set it at you just take 25.35 percent of it and you get
your accounts payable and all that all the way down the line this has a name that is more common
you may not have heard this name before but if you take my 340 class you will hear it it's called
spontaneous liabilities or spontaneous short-term liabilities another term for it is spontaneous
financing because this is money that other companies are or your workers or whatever are
giving you you're not paying them so they're financing your operations so the term that we
use in cash management is this is spontaneous financing i think your book uses the term
spontaneous liabilities or spontaneous current liabilities something like that but it is actually
part of your financing package and as i told you this is actually you want this to be good
you want to put off paying your bills and you want to accelerate collecting your accounts for
receivable those increase those decrease your cash conversion cycle now obviously you're going to
piss off your your suppliers if you don't pay them but as a matter of fact if you look at
a company like walmart its accounts payable and accruable its spontaneous financing is so huge
huge that literally its suppliers finance all of its short-term operations literally it's they
finance all the walmart suppliers finance all of walmart and some extra into long-term assets
it's that severe and that puts walmart in the category of geniuses who are assholes
it's a special category but anyway okay so now i'm going to take you through just some ratios
that are that we care about operating costs over sales these are ratios that you have seen some of
these but these are more specialized for calculate they have more meaning and some of them you wouldn't
see typically in a usual find the ratio of no these are more things that we need to do if we're
going to forecast financial need and operating sales over operating costs over sales now look
at this one this one is bloody for this company it is awful a healthy number it depends on the
industry but i get a little bit overly excited if i see that about 60 percent this company is
essentially almost all of its sales revenue is being absorbed by operating costs and that's
just a terrible situation now depreciation over fixed assets the and this is accumulated depreciation
or or well no this is current depreciation over your fixed assets how much are you shaving off
this year but in general how much are you shaving off your fixed asset value book value
through depreciation you don't certainly want that to get too high because what that means
is that you don't have a whole lot of fixed assets of book value left and what you have left
you're depreciating the hell out of it going you're driving toward book value of zero on
your assets so you don't want this to be a very high number now in this case i did not and i
apologize for that these black numbers those are the industry averages those are industry averages
in here so you can see that actually this is a high operating cost industry but even at that
this company has even higher operating costs than the typical company does as a percent of sales
as a percent of sales and cash over sales this is apparently an industry that is illiquid they
maintain very tight cash balances or liquid balances i should say now the receivables as a percent of
sales it's that that is a little higher than the industry remember that your receivables
is revenue that you have recognized and that you have paid taxes on but you have not gotten that
money right now i'm driving into the end of the year and my receivables i'll just tell you the
number i'm projecting now but i'm seeing total sales of about 18 000 my receivables are disgraceful
12 percent of that i'm sorry 12 uh $12 000 i've got out there i'm paying taxes on the 18 grand
but i have got only uh about six grand in my pocket to pay those taxes the rest god knows
when those scoundrels are going to pay me okay inventory over sales this is fairly close to
the industry average in just remember that inventory allows you to be able to deliver to the customer
as fast very quickly we've got it in the warehouse we'll get it to you the downside is that the more
inventory you have the more you pay for it warehouse space security lighting heating
insurance is a big thing these days for inventory and uh it gets pretty bad because a lot of
insurance companies are they'll say well yeah we have standard policies and premiums for this this
and this but this is unusual we'll have to put you into an excess line and that'll be a very expensive
premium so that insurance can begin to bite you in the butt on this fixed assets to sales well
they certainly are the over sales they certainly have a lot of fixed assets compared to sales
uh relative to the industry they have they are overburdened to a certain extent with fixed assets
compared to their sales in other words their their fixed assets are not generating sales as much as
is typical in the industry so then we would go down to the accounts payable another spontaneous
financing as a percent of sales uh there there's a high and these are actually kind of made up
numbers but that's a little bit difficult okay the equity multiplier it basically all this is doing
is telling you how many times over your company it has magnified your your uh base of what uh
you've uh you got from those uh investors those equity investors then over total assets
you notice here this is a highly leveraged company compared to its industry they borrow a lot
compared to their industry and if their sales are not good that would explain it they're using a lot
of their um they're using a lot of money uh borrowed money to cover the all the assets they've built
total liabilities over total assets this is a company that is if you look at the TL over TA above
50 percent this is a highly leveraged company that means it's a very risky company and this
time's interest earned that is a consequence that's a low number they can cover their interest with
the money available from the for to cover it only three and a three quarters times over that is a
consequence of all of their debt they're borrowing a lot of money so these common sizes are doing a
lot for to help us ROA sucks this is because they have their return on assets they their fixed assets
are huge see this over here that's what's driving that ROA down remember ROA is in net income over
fixed assets going to sales over assets you can clearly see as I had said before that those fixed
assets are not generating a whole lot in sales they're not generating as much as the industry
average now the price earnings ratio this is indicating to us that the price the market just
does not like this stock they've got an earning they've got earnings no question about it but
the market is not impressed by those earnings operating profit ratio obviously lower because
of all that those sgna expenses the capital ratio is high because they've got so many fixed assets
and they've returned on invested capital well they're not making enough money for all that money
that was put into the company and the book has these formulas and you can certainly see them
when you go over here to the spreadsheet you can see how I construct them in the spreadsheet
but now here we go the proformas the proforma income statement I brought the numbers the
percentages over from 19 from 2023 and I just plopped them right there and then I just took
their projected sales and then took these percentages on to the new projected sales in
other words these are the same ratios that they had last year percentages now you can change those
well we don't want 90 we want 80 by god things like that you can change those ratios but I'm
just starting you out with the ones from last year to create just a basic set of proforma
income statements and balance sheets and a few other numbers around here that we're going to just
toss in you can put about anything you want in here as long as you're being realistic
so it's just one of those things you can do what you want now here this is a number that drives
this one we're going to say that the company is going to increase its sales by 10 percent in
2 that in 2024 you can make that number whatever you want you can make it smaller you can make it
larger remember that the smaller you make it the more you're continuing the suck that was their
income statements from last and balance sheet from last year the higher you make it ultimately
that's going to increase the afn the additional funds needed by the company and then of course
with the company it's already in so much debt and their price is so low that's not a very happy
situation they're already leveraged 53 54 percent their price is already in the toilet from the
p-e ratio so they don't have a whole lot of room to grow they're boxing themselves in in a bad way
now the balance sheet my ass what did i do there i don't know why that balance sheet turned nasty
i may have to fix it before you want to download okay now these are the numbers afn is just a
formula additional funds needed and there is the formula right there and all you need are the growth
in sales well we've said 10 percent i read my reference the sales last year well we got those
we just do that one by reference the assets last year we've got those the total assets now the
fund here's where i bring in that term spontaneous liabilities the spontaneous liabilities that was
the accounts payable plus accruals and that's that number right there now here is where i forecast
that number uh is the sales forecast sales and then increase in the sales is 7200 and number
doesn't look right i should have did i do that right pro forma actually i could just do that as
let me do this equals sales last year times
one plus point one zero close those parentheses
there we go increase in sales 7200 uh dollars okay so the profit margin it will just fall out on
its own the whole that is net income divided by sales and the then you take do a couple of ratios
assets over sales and you give your payout ratio now in this case the payout ratio is one minus the
dividend ratio the dividend ratio is how much they paid in dividends over here how much they paid
in dividends divided by the uh earnings net net income so that's the dividend ratio and the payout
ratio is one minus that and so we come out with the payout ratio and we get spontaneous liabilities
divided by sales we're going to need that now let me explain the formula to you fairly briefly
now you're going to take the the a the assets to sales and then you're going to multiply that
times the change in the sales and then you're going to take out your spontaneous liabilities
divided by your sales times the change in sales and then you're going to take the profit margin
times one minus the payout ratio so in other words this is the money that the company gets to keep
the profit the the profit margin the amount of money that the company gets to keep times one
minus what they pay out in dividends and this is their additional financing needed one uh
thousand nine hundred nine dollars and four cents now the one thing that you would want to ask yourself
is where are they going to do that where are they going to get that money if they get it from debt
we look at the four well i don't know why that's cracked up like that it wasn't a few minutes ago s
b eight over b eight
oh b eight
equals i can fix that easily enough the balance sheet times
i'm going to say one my times one plus i apologize for that i don't know 10 percent
i could do that more elegantly
oh balance sheet let me do that again equals the balance sheet pro the this was a pro forma
balance sheet where's my pro forma balance sheet
where the hell did my pro forma balance sheet go ha you aren't going to do this because somehow my
pro forma balance sheet has disappeared that's why that isn't isn't feeding in properly i'll fix
that before this is over though total let me do something here that is the pro no that is the pro
forma balance sheet equals the balance sheet from 2003 total assets times open print open parentheses
one plus point one zero close parentheses there we go that was rude yeah okay so there we go
go i don't know why that did that i'll have to re upload that but anyway there you go so the bottom
line though is they have got a lot of uh debt already sitting in their portfolio and they're
if they finance that one nine let me do that real quick here i'm just going to do a quick
scratch calculation here of the afn i'm going to take um this would be um debt
afn over debt afn over debt and let me see what that is that would equal additional financing
required divided by what they've got in debt right now uh right here
and that's a percentage for having stakes okay percent
they would have to increase their debt leverage 12 percent to finance their additional financing
needs with debt that would be that's a lot of increased they're going to pay a very high interest
rate to leverage themselves out that far but again the price of the stock is sucking right now
so we could even look at afn over equity equity ups i mean slash equity
equity and take that over here and say this number divided by their projected equity next year total
common equity it looks to me like if i were a betting kind of person they probably it's better
if they use equity at this point because that additional financing needed would increase their
equity contribution capital only 7.3 percent and if you use debt to do it that increases your
debt percentage by 12 more than 12 percent so the bottom line here is that it looks as if
even though the stock price sucks based upon that price earnings ratio selling stock is
probably going to be the best way that they can do what they need to get what they need to accomplish
so that and let me save that that is how you do an additional financing required calculation
now there are a few homework problems that you can use this into and i would recommend you go
through get comfortable with the model and then use that and then i will add some more meat to this
in the next couple of lectures saying okay what if we do it this way or that way there are a couple
of other ways we can get out of this trap that this company is in but none of them are going to be
quite very desirable but anyway that's all i have for you right now i thank you