Alan Cring Productions in association with Emergent Light Studio presents

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the Illinois State Collegiate Compendium, Academic Lectures in Business and Economics.

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This is Business Finance, FIL 341 for Autumn Semester 2024.

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Today, additional funds needed. I had built and was going to deploy this on Tuesday with you on

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Tuesday, but I just was not comfortable with my model at that point. And this is an Excel spreadsheet

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that you will be able to download yourselves and use as you wish for homework or just to get a

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better feel for this part of finance. Now this is actually what we're going to do today and it

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won't take a whole class period, but I do want to go through it in enough detail so that you

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understand how this works. First things first, this is not a complete model of how you find

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additional funds that you're going to need, but it is pretty darn close. There are a few

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nuances that I'll bring up along the way with this, but it actually is in the borderline between

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corporate and investments. It is corporate because you're determining doing a forecast of how much

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money or capital or combination of those you are going to need for the next period. Now this one

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focuses primarily on capital funds. I'm sorry, I kind of glitched out there, but all you have to do

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is you can say not all of what we'll need will be capital. We can also add a cash buffer or another

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one I'll bring up later is we can actually drain off some of our cash to provide additional funds.

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Those are possibilities as well, but aside from that this is just sort of the block model that

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I'll be doing, but just to show you where it is and just if you want to bring it up right now so

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you can have it is go into spreadsheets, it's AFN, Additional Funds Needed, and just download it.

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Now you can tweak this, I would kind of encourage you to if you're going to save save a copy instead

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of saving over the first the thing itself, but it's AFN and we'll be using it after we look at

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the numbers and you'll see that it is a daunting, it looks daunting at first, but it is actually

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not hard and I patterned it after the one that you see in the textbook. It's different, but it's

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just enough the same that you can look at the textbook to see some of the details if it's not

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clear from the spreadsheets that I've built here, but this is just sort of like the numbers all come

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out to be pretty clean at least at first and then they get a little hairy later, but anyway that's

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where we are heading right now, but as I said first a look at the numbers as we always do

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just so we can see what's going on. Now this might not look like a spectacular day, but it is a

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turnaround from the bear market. If you've got a real bear market, when we say a bear market

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that's more than a day, that's more than a week, it's an enduring thing. We're seeing a bull day

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and yeah you can have bulls in a bear market and you can have bears in a bull market, but there is

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at least some reason to believe that we have enough of a bull day here that it kind of broke the bear

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mentality on the street. Now interestingly enough as you can see the Dow is still taking the brunt

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of the punishment of the bears right now and there's actually good reason for that. Some of those

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blue-chip stocks, the companies are not doing all that great and that's not really so much the economy

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is analysts say this is these companies really not performing up to what we would expect. The

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behemoths like Intel, Microsoft, even Apple are not really showing that they have what it takes to

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have robust growth over the foreseeable future. However the S&P 500, notice here that the bears

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did make a run. See that dip down there? The bears made a run around midday and they were beaten back.

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The bulls came back and just started scooping up bargains again. So that is something that we can

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take cheer in if nothing else. And the price of crude is dropping again, that's good news because

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that's hopefully cheaper fuel prices down the road. So that's always a yay. The gold bugs are in a

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good mood today. They think something bad is about to happen. So whatever that's the bulls. That's

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the bulls in gold that are having the time of their lives and all that kind of stuff. But anyway

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now let me take you over here just for a quicky look at yields and probably seeing something grim.

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Oh look at that. The yields, oh that's a pretty decent drop so far five basis points today. So we

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have some good news there with the yields on the bonds going down. They're not ready to break below

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four obviously right now but still they're going down and so we can be happy. Excuse me the yields

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are at least peeling backward a little bit in the bond market and that's going to be good for the

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economy. What concerns us is when there are yield, the yields just keep going up. That's what gives

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the banks the impetus to start jacking up mortgage rates, car loan rates, loans to corporations and

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all that. So the fact that we now have this turnaround is going to take that excitement off

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the banks to jack up their interest rates. And as long as it just keeps going down then what's

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most likely that will be a sign that the banks will probably not be making many loans until

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consumers, businesses and the banks know where this is all going to end up. Are we going to finally

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start seeing a slide in interest rates again? Probably but we've got to wait for everyone

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to think that's what's going on. Now interestingly the Nikkei even when it's having a bold day it's

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not anything to write home about. Tokyo, what I hear is Tokyo is in something of a recession

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and there's Tokyo Central Bank Japan Central Bank has talked about lowering their their interest

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rates trying to get interest rates down to stimulate the economy. So far it hasn't really

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juiced their economy much so Japan is in kind of a funk and that's what you're seeing here in the

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Nikkei 225 just that overall malaise in the Japanese economy. And of course London it went up and then

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it just slid right back down they're about to close out the day and they'll be lucky if they

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stay above water before the end of before they bell over there in London. So there's that. But

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like I said the good news is that we do have some strength and if you just look at some of the ones

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that we usually look at yeah banks that's interesting BAC should be down but I can't swear to that

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really. BAC should be down oh look at that well barely up. I mean it's really kind of a dead day

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on the street something like let's look at uh Kohi-Pol-Moff what's the other one? Oh I wanted

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to look at retail grocers. There is a shake-up happening rather noticeably in the retail

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grocery market. Several old grocery chains you might not have heard of because they are regionals

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in the south and in the west but they're buckling and it's a little bit troubling now that these

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old fairly well diversified regionally diversified stores are beginning to slip away and Kroger is

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one of them. But Kroger is not going to go away but it is taking some pretty big grief right now

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it's underpriced according to this according to PE ratio it's underpriced but looking on another one

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and we're talking about retail grocers here wait no that's not what I wanted why did I do that

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Walmart? Even Walmart's in kind of a malaise right now but a lot of it's just this is not a good

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time what we're hoping for is that these numbers are going to start looking better in the Christmas

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season than they do now target has been showing not very much oh look at that today target actually

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came up a little bit so there's some good news there but you have other sectors that just don't

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seem to want to do much right now so anyway the bottom line is that this is a kind of a difficult

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market now before I go to the topic today do you all know what I mean by a short sale by

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short selling have you ever heard some of you are nodding your head so let me get a poll of this

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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

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everyone something you already know have you ever done a short sale madam? Can I say that you have?

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okay okay now most people and I this is getting you out of the textbook for just a few minutes

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and getting you some extra knowledge that makes my file 341 a little richer than the typical one

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but here's the thing

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there is a common sentiment even among investors especially non-professional investors

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that you make money when stocks go up you lose money when stocks go down

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actually you can make money either way and I'm not talking about options call and put options

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I'm talking about just stocks themselves obviously if you buy a stock and the stock goes up in price

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you get a capital gain and you get a dividend oh everything good look everything's looking good

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the that's a that that's what most people think and stocks go down boo hiss there goes my pension

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fund or there goes my little investment I was making so I could put a down payment on a car and all that

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but in fact there is the other side of the market you can go long or you can go short

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long means buy short means kind of like a sell I caution you that this is going to be a very

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simplified example of it and I also caution you that in order to participate in short sales

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you must have a margin account in other words your brokerage account has to have a certain

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amount of money in it in case something nasty happens because the worst that can happen

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in when you buy is that you lose your investment the worst that can happen if you short sell

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is that your ass can be reclaimed by the great ether and again this is going to be a very simplified

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example of it and I will it dispense with a couple I'll mention them and then I'll step away from them

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but here's how it works let's take drl common stock currently at $35 a share

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now you think that that stock is going to fall you can't say yeah it's going to go up there

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sky's the limit but you think it's going to drop and let's say that you have a what we might call

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a cover trigger a cover point of $30 a share in other words if it gets that low well by God I've

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made my money and I'm getting out before it turns around the other way in other words you need to

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have a point in mind where enough is enough I'm getting out of this and there's a good reason for

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it too the first thing you think that it's going to fall to $35 a share so what you do is you borrow

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100 shares drl first thing you do is borrow now you're saying who do I borrow from you don't

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it's just out there there is not someone that you borrow it from there's not some institution you

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borrow it from you just borrow 100 shares because there's a vast ocean of shares out there and you're

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just borrowing 100 of drl you go and your broker will take care of that for you and then you immediately

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sell those 100 shares drl at the price of $35 now that will net you $3,500 you say wait a minute

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is that how does this work well first of all when you borrow those shares every day that you hold

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those you have that open borrowed position you are going to pay interest on it on that position

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so remember that the longer that you keep that borrowed those borrowed shares out there in the

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short position the more that accumulates that cost of the position and I'm going to ignore it for

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this but keep in mind that that is a real motivation to cover soon so let's say now that drl actually

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does fall to $30 a share so what you do is you buy 100 shares of drl at $30 a share so that means

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that you are out now 30 times 100 or out $3,000 you buy those and you pay back those to where

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that you borrowed that's the in other words you're covering your position you finish up game over

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that's the end of the story and so without talking about fees or that interest that you were

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accumulating how many days it took you to get it down there you waited you're up $500 that's how you

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make money on stock price falls that's that's a short and they okay first things first keep in

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mind again I can't emphasize this enough is that there is that interest payment per day that you're

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going to be accumulating on that position so you're going to want to cover as soon as you can

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now also notice that a drl goes up you're screwed because you will eventually panic and you will

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cover at 37 38 just to get the hell out because you're not if the stock price goes up you're going

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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

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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

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going to go back down so at that point you cover at 38 and so you lose $300 plus you probably waited

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a few days three four five days and so you were accumulating that interest cost hoping to God

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that it turned around and went down okay now a couple of pieces of terminology and of course

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they don't keep the bookmarks they think I really want in this so I'll have to go and get it again

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now there are a couple of different places you can look at short positions

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NASDAQ has one and I hate it because theirs has a little more information but it's really old

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information it's like last time I checked it was like in at the end of September what was going on

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then but I've never looked at this fintel I don't know see there's some information that I'm hoping

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for oh stop it of course I'm a human you toad that's not going to help me that's a little too

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confusing there let me go back here whoops okay I'll just go to the NASDAQ tracker I hate this

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one because it's just so lame but there are a couple of things the first thing is the short

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interest outstanding or short interest how many shares of the company are out there in a short

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position so let's look at say Tesla and I hate how late how how oh that's right gotta click that

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this will show you up the NASDAQ for all that they used to be they are so behind now but

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uh this is how many shares as on September on September the 30th how many shares of Tesla

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were in a short position the bigger the more bearish the sentiment is behind the scenes keep

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in mind that a stock as it's going up usually you'll see the short interest going up too

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because there will be this belief that it will top out and turn back over so you'll have

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shorters coming in to take their positions betting on the turnaround going down so Tesla

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as you can see that that's a hell of a lot of shares and that's one company think of all the

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hundreds of thousands of companies out there public companies that's just one so the aggregate

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short interest is something that's kind of interesting to us because as that short interest

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grows overall for all companies that says that there's market sentiment that is thinking there's

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a lot of market sentiment that's thinking that it's going to have there's going to be a pretty big

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drop in price uh of us of overall the stock markets so that's an important thing here now one thing

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that I hate on these is they don't show you another one is that's important is the and I'll put this

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in parentheses because almost no one said that the short float the short float that's a percentage

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of the company's stock that is in short position and they don't report it for Tesla so if Tesla had

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a billion shares then its float would be 7.4 percent the short float is important to the extent that

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it can get ridiculous I've seen the float get to 70 percent 80 percent was in short now in other

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words that many uh shorters on that stock were out there that that percentage of the shareholders

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of the corporation were betting against the stock possibly that that's a scary number now

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here's the bad part now this is how it can turn really nasty suppose that there is the stock price

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keeps going up and up and the you see more and more shorters coming in thinking yeah it's going to

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peak going to peak and the float gets bigger and bigger and it doesn't well you've got all these

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people who are holding call cover see on Tesla here one day to cover in other words most right now

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it's taking only one day for the shorts to say I'm covering that's a sign that the stock price

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is going down they're covering and they're out they're just they've got made some money and they

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leave after a day in this position that's that's decent if it gets to be five seven ten days

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to cover that is a sign that something is they're going to get killed because you see after a certain

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amount of time you get a mass freakout effect because let's say that you've got 70 percent of

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the uh of the uh is the float and the stock keeps going up and up and all these people are sitting

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there paying interest every day waiting for it to go down well some son of a bitch is going to say

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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

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cover and then okay look at the look at the place where you cover you have to buy the stock

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to cover so if you suddenly start having a few shorters covering themselves that pushes the price

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up the other short is a oh shit it's going up and they start getting out and then you have a heard

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it essentially something that qualifies as the hordes of Genghis Khan all sell all buying it

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wants to cover and all of them buying it once is going to drive the price through the roof and you've

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got a whole lot of shorters who are very very sad because they are covering at way above the price

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that they sold it at they got to buy it and when they buy it every buy pushes the price up and

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have a whole bunch of those son of a dogs buy it they're going to drive the price through the roof

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and then everyone is destroyed in the process as that happens that's how a short position that's

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the dark side of a short now I'm sure you've never heard of this stock it's this lousy little company

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called GameStop yeah you have heard of it haven't you GameStop was a favorite whipping boy of a

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couple of disrupting of all so bees on the street they were short GameStop every couple of weeks

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they just take these big positions in GameStop because they just knew the stock price was going

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to go down and so it was like guaranteed money and they would oftentimes the rumor was that they

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would help it go down by passing out another nasty rumor about GameStop oh man I hear it's

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almost about to go to bankruptcy oh god yeah it's unbelievable how bad it is of course that would

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drive the price down and they would cover their shorts and make themselves a couple of hundreds

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a hundred five hundred thousand dollars a million dollars then the this terrible thing happened

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this place this cesspool on the internet called Reddit and I am on Reddit there was a sub Reddit

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called Wall Street Bets where they were saying you should buy this stock and there was an analyst

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who was making note of something ancient that from my time a ratio that wasn't being paid attention

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to and she 26 years old she was really bright bright I've begun to follow her recommendations

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a little bit at least follow her blog she said ah GameStop is not going to go bankrupt GameStop

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if it gets a good management team in there it is the the sky is the limit and so put those two

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forces together and suddenly all of these redditors and their mothers and their cousins started buying

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GameStop drove it sky high and these Wall Street boys were just sitting there they weren't even

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paying attention and before they knew it they were covering at a loss of several million dollars

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it was spectacular especially because after the blood had flowed these Wall Street boys were

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demanding that Congress pass legislation that they can't talk about stocks on Reddit in places

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but gee weren't you the free marketers and now you want government to regulate these these

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scoundrels but anyway yeah it can turn sometimes when it turns nasty it turns nasty on the people

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who were all making their coin just driving stock prices down so that they could profit on the cover

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on short positions they were taking so there's that that is a short sale okay that's enough

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about short but first things first and that's why I I hate this because they don't show the float

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and the second thing about it is uh well well that's the big thing that I don't like is what

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what percent of the stock is in that position but one percent oh I'd rather like that a one uh is

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a decent one let me try this Ford what okay fine we'll do GM

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search oh for having sex masak come on let's get real looks I've been let me see if I'm

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finding another service that's better short tracker that's UK I don't want to do that

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uh Finra I wonder if Finra has anything better

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or

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they're not reporting it either this is kind of depressing and look at that they're not

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reporting any better than NASDAQ was oh well you got the idea so if you want to walk on the wild

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side you can make money on short positions but remember don't this is a one night stand don't

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get married to a position hoping that it will improve it's sort of like you get into a relationship

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and your significant partner turns into a werewolf okay well I'm just going to wait this out tomorrow

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that my partner will be nice and loving and normal again but every night I'm going to eat your loins

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and soul get out don't hold shorts too long and make sure that you have to a certain extent see

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that one right there that is not a tight trigger that's a nasty trigger a trigger I mean you're

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going to do fine if you have triggers of a couple of dollars to share just make don't have

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unless you're absolutely sure that the stock is going to go to hell make it a trigger like 33 32

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you won't make as much money but at least it's a got a better chance of going to 33 or 32

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than it does of going clear down to 30 just the last piece of advice now AFM uh additional funds

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needed and I've made this spreadsheet for you folks to have and to use and this is a pretty trivial

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example but you can put real numbers in there and this is more or less how it's done and you can

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you can put some complications in the first thing that you're going to want to do is get a nice income

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statement and some additional information the dividends and the additional retained earnings

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additions to retained earnings how many shares are outstanding all that good stuff and a few ratios

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and a tax rate for for your troubles once you have gotten all of that into place

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and also you'll have a balance sheet too

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that will give some of the the same information now you notice something that I do here I have

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common size in other words these percentages are the percentages of sales

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and then on the balance sheet these are the percentages of total assets these are just

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common size now the purpose of the common size is a starting point you can use these

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percentages for the next year's forecast you forecast revenues and then all the numbers

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fall from the come out of the revenues as percentages so in other words if this goes up

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to 80 000 then everything would be a this same percentage of 80 000 you don't have to do it this

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way though you can actually alter these percentages you can say well that sgna

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sucks as you can see it does here that's 90 percent yeah that's a terrible sgna so you might

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declare 80 percent next year is the target for that 80 percent of sales not 90 percent 80 percent

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of sales and that will trickle down here to a higher net income you hope net operating income

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pre-tax and then at the end your net income you can target these you can put in another

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one you can also say let's see let's make all of these industry standards in other words let's

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see what the industry is for all these percentages easy to do you go to standard port of global net

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advantage and you they'll tell you percentages of the uh compared to the industry nothing hard

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about this part now i'm going to take keep pushing you here a little bit and you can put in a tax

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rate now technically it should be 21 percent right now i just used 25 percent there but

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now again the balance sheet the same thing you can forecast next year's by taking the

254
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percentages off the total asset for next year you or you can set new targets in this case you

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notice there are a couple of things that i would i'm looking at here deficiencies that concern me

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somewhat about this my um assets here well i shouldn't say cash is a little bit on the thin side

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it looks like they have some illiquidity here but we're not going to criticize them now for now

258
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but now over here one thing i want to point out and again you can use next year's uh

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00:34:12,720 --> 00:34:20,720
uh at total assets with this year's the current percentages and get all of these numbers so whatever

260
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that new current total assets you want to set it at you just take 25.35 percent of it and you get

261
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your accounts payable and all that all the way down the line this has a name that is more common

262
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you may not have heard this name before but if you take my 340 class you will hear it it's called

263
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spontaneous liabilities or spontaneous short-term liabilities another term for it is spontaneous

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financing because this is money that other companies are or your workers or whatever are

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giving you you're not paying them so they're financing your operations so the term that we

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use in cash management is this is spontaneous financing i think your book uses the term

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spontaneous liabilities or spontaneous current liabilities something like that but it is actually

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part of your financing package and as i told you this is actually you want this to be good

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you want to put off paying your bills and you want to accelerate collecting your accounts for

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receivable those increase those decrease your cash conversion cycle now obviously you're going to

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piss off your your suppliers if you don't pay them but as a matter of fact if you look at

272
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a company like walmart its accounts payable and accruable its spontaneous financing is so huge

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huge that literally its suppliers finance all of its short-term operations literally it's they

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00:36:06,960 --> 00:36:15,760
finance all the walmart suppliers finance all of walmart and some extra into long-term assets

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it's that severe and that puts walmart in the category of geniuses who are assholes

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it's a special category but anyway okay so now i'm going to take you through just some ratios

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that are that we care about operating costs over sales these are ratios that you have seen some of

278
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these but these are more specialized for calculate they have more meaning and some of them you wouldn't

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see typically in a usual find the ratio of no these are more things that we need to do if we're

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going to forecast financial need and operating sales over operating costs over sales now look

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00:36:58,640 --> 00:37:07,440
at this one this one is bloody for this company it is awful a healthy number it depends on the

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00:37:07,440 --> 00:37:14,400
industry but i get a little bit overly excited if i see that about 60 percent this company is

283
00:37:14,400 --> 00:37:23,200
essentially almost all of its sales revenue is being absorbed by operating costs and that's

284
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just a terrible situation now depreciation over fixed assets the and this is accumulated depreciation

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00:37:32,880 --> 00:37:40,400
or or well no this is current depreciation over your fixed assets how much are you shaving off

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00:37:40,400 --> 00:37:47,920
this year but in general how much are you shaving off your fixed asset value book value

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00:37:48,720 --> 00:37:55,680
through depreciation you don't certainly want that to get too high because what that means

288
00:37:55,680 --> 00:38:01,360
is that you don't have a whole lot of fixed assets of book value left and what you have left

289
00:38:01,360 --> 00:38:07,280
you're depreciating the hell out of it going you're driving toward book value of zero on

290
00:38:07,280 --> 00:38:13,280
your assets so you don't want this to be a very high number now in this case i did not and i

291
00:38:13,280 --> 00:38:19,040
apologize for that these black numbers those are the industry averages those are industry averages

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00:38:19,040 --> 00:38:27,760
in here so you can see that actually this is a high operating cost industry but even at that

293
00:38:28,000 --> 00:38:34,480
this company has even higher operating costs than the typical company does as a percent of sales

294
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as a percent of sales and cash over sales this is apparently an industry that is illiquid they

295
00:38:42,640 --> 00:38:50,960
maintain very tight cash balances or liquid balances i should say now the receivables as a percent of

296
00:38:50,960 --> 00:38:59,200
sales it's that that is a little higher than the industry remember that your receivables

297
00:38:59,200 --> 00:39:07,200
is revenue that you have recognized and that you have paid taxes on but you have not gotten that

298
00:39:07,200 --> 00:39:15,360
money right now i'm driving into the end of the year and my receivables i'll just tell you the

299
00:39:15,360 --> 00:39:24,000
number i'm projecting now but i'm seeing total sales of about 18 000 my receivables are disgraceful

300
00:39:24,000 --> 00:39:33,600
12 percent of that i'm sorry 12 uh $12 000 i've got out there i'm paying taxes on the 18 grand

301
00:39:34,240 --> 00:39:43,680
but i have got only uh about six grand in my pocket to pay those taxes the rest god knows

302
00:39:43,680 --> 00:39:50,560
when those scoundrels are going to pay me okay inventory over sales this is fairly close to

303
00:39:50,560 --> 00:39:58,400
the industry average in just remember that inventory allows you to be able to deliver to the customer

304
00:39:58,400 --> 00:40:04,880
as fast very quickly we've got it in the warehouse we'll get it to you the downside is that the more

305
00:40:04,880 --> 00:40:11,840
inventory you have the more you pay for it warehouse space security lighting heating

306
00:40:13,200 --> 00:40:20,480
insurance is a big thing these days for inventory and uh it gets pretty bad because a lot of

307
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insurance companies are they'll say well yeah we have standard policies and premiums for this this

308
00:40:27,120 --> 00:40:32,880
and this but this is unusual we'll have to put you into an excess line and that'll be a very expensive

309
00:40:32,880 --> 00:40:41,280
premium so that insurance can begin to bite you in the butt on this fixed assets to sales well

310
00:40:41,280 --> 00:40:48,640
they certainly are the over sales they certainly have a lot of fixed assets compared to sales

311
00:40:48,640 --> 00:40:55,360
uh relative to the industry they have they are overburdened to a certain extent with fixed assets

312
00:40:56,160 --> 00:41:02,640
compared to their sales in other words their their fixed assets are not generating sales as much as

313
00:41:02,640 --> 00:41:08,720
is typical in the industry so then we would go down to the accounts payable another spontaneous

314
00:41:08,720 --> 00:41:17,120
financing as a percent of sales uh there there's a high and these are actually kind of made up

315
00:41:17,120 --> 00:41:25,040
numbers but that's a little bit difficult okay the equity multiplier it basically all this is doing

316
00:41:25,040 --> 00:41:35,440
is telling you how many times over your company it has magnified your your uh base of what uh

317
00:41:36,320 --> 00:41:43,920
you've uh you got from those uh investors those equity investors then over total assets

318
00:41:43,920 --> 00:41:50,880
you notice here this is a highly leveraged company compared to its industry they borrow a lot

319
00:41:50,880 --> 00:41:58,160
compared to their industry and if their sales are not good that would explain it they're using a lot

320
00:41:58,160 --> 00:42:06,800
of their um they're using a lot of money uh borrowed money to cover the all the assets they've built

321
00:42:06,800 --> 00:42:14,320
total liabilities over total assets this is a company that is if you look at the TL over TA above

322
00:42:14,320 --> 00:42:20,560
50 percent this is a highly leveraged company that means it's a very risky company and this

323
00:42:20,560 --> 00:42:27,120
time's interest earned that is a consequence that's a low number they can cover their interest with

324
00:42:27,120 --> 00:42:34,080
the money available from the for to cover it only three and a three quarters times over that is a

325
00:42:34,080 --> 00:42:41,120
consequence of all of their debt they're borrowing a lot of money so these common sizes are doing a

326
00:42:41,120 --> 00:42:49,840
lot for to help us ROA sucks this is because they have their return on assets they their fixed assets

327
00:42:49,840 --> 00:42:56,960
are huge see this over here that's what's driving that ROA down remember ROA is in net income over

328
00:42:56,960 --> 00:43:06,240
fixed assets going to sales over assets you can clearly see as I had said before that those fixed

329
00:43:06,240 --> 00:43:12,560
assets are not generating a whole lot in sales they're not generating as much as the industry

330
00:43:12,560 --> 00:43:19,920
average now the price earnings ratio this is indicating to us that the price the market just

331
00:43:19,920 --> 00:43:25,440
does not like this stock they've got an earning they've got earnings no question about it but

332
00:43:25,440 --> 00:43:33,600
the market is not impressed by those earnings operating profit ratio obviously lower because

333
00:43:33,600 --> 00:43:46,080
of all that those sgna expenses the capital ratio is high because they've got so many fixed assets

334
00:43:46,080 --> 00:43:51,200
and they've returned on invested capital well they're not making enough money for all that money

335
00:43:51,200 --> 00:43:56,160
that was put into the company and the book has these formulas and you can certainly see them

336
00:43:56,160 --> 00:44:01,440
when you go over here to the spreadsheet you can see how I construct them in the spreadsheet

337
00:44:02,080 --> 00:44:11,280
but now here we go the proformas the proforma income statement I brought the numbers the

338
00:44:11,280 --> 00:44:20,080
percentages over from 19 from 2023 and I just plopped them right there and then I just took

339
00:44:20,080 --> 00:44:26,640
their projected sales and then took these percentages on to the new projected sales in

340
00:44:26,640 --> 00:44:33,280
other words these are the same ratios that they had last year percentages now you can change those

341
00:44:33,280 --> 00:44:40,160
well we don't want 90 we want 80 by god things like that you can change those ratios but I'm

342
00:44:40,160 --> 00:44:45,840
just starting you out with the ones from last year to create just a basic set of proforma

343
00:44:45,840 --> 00:44:51,840
income statements and balance sheets and a few other numbers around here that we're going to just

344
00:44:51,840 --> 00:44:57,920
toss in you can put about anything you want in here as long as you're being realistic

345
00:45:00,080 --> 00:45:06,080
so it's just one of those things you can do what you want now here this is a number that drives

346
00:45:06,080 --> 00:45:13,200
this one we're going to say that the company is going to increase its sales by 10 percent in

347
00:45:13,200 --> 00:45:19,760
2 that in 2024 you can make that number whatever you want you can make it smaller you can make it

348
00:45:19,760 --> 00:45:29,360
larger remember that the smaller you make it the more you're continuing the suck that was their

349
00:45:29,360 --> 00:45:35,600
income statements from last and balance sheet from last year the higher you make it ultimately

350
00:45:35,600 --> 00:45:43,760
that's going to increase the afn the additional funds needed by the company and then of course

351
00:45:43,760 --> 00:45:50,400
with the company it's already in so much debt and their price is so low that's not a very happy

352
00:45:50,400 --> 00:45:57,600
situation they're already leveraged 53 54 percent their price is already in the toilet from the

353
00:45:57,600 --> 00:46:05,280
p-e ratio so they don't have a whole lot of room to grow they're boxing themselves in in a bad way

354
00:46:06,080 --> 00:46:12,800
now the balance sheet my ass what did i do there i don't know why that balance sheet turned nasty

355
00:46:12,800 --> 00:46:19,920
i may have to fix it before you want to download okay now these are the numbers afn is just a

356
00:46:19,920 --> 00:46:28,880
formula additional funds needed and there is the formula right there and all you need are the growth

357
00:46:28,880 --> 00:46:36,000
in sales well we've said 10 percent i read my reference the sales last year well we got those

358
00:46:36,000 --> 00:46:43,920
we just do that one by reference the assets last year we've got those the total assets now the

359
00:46:43,920 --> 00:46:49,840
fund here's where i bring in that term spontaneous liabilities the spontaneous liabilities that was

360
00:46:49,840 --> 00:46:59,840
the accounts payable plus accruals and that's that number right there now here is where i forecast

361
00:46:59,840 --> 00:47:09,840
that number uh is the sales forecast sales and then increase in the sales is 7200 and number

362
00:47:09,840 --> 00:47:17,280
doesn't look right i should have did i do that right pro forma actually i could just do that as

363
00:47:17,280 --> 00:47:24,480
let me do this equals sales last year times

364
00:47:28,080 --> 00:47:32,800
one plus point one zero close those parentheses

365
00:47:32,800 --> 00:47:49,840
there we go increase in sales 7200 uh dollars okay so the profit margin it will just fall out on

366
00:47:49,840 --> 00:47:59,280
its own the whole that is net income divided by sales and the then you take do a couple of ratios

367
00:47:59,280 --> 00:48:06,400
assets over sales and you give your payout ratio now in this case the payout ratio is one minus the

368
00:48:06,400 --> 00:48:13,920
dividend ratio the dividend ratio is how much they paid in dividends over here how much they paid

369
00:48:13,920 --> 00:48:23,360
in dividends divided by the uh earnings net net income so that's the dividend ratio and the payout

370
00:48:23,360 --> 00:48:31,280
ratio is one minus that and so we come out with the payout ratio and we get spontaneous liabilities

371
00:48:31,280 --> 00:48:36,160
divided by sales we're going to need that now let me explain the formula to you fairly briefly

372
00:48:38,000 --> 00:48:47,520
now you're going to take the the a the assets to sales and then you're going to multiply that

373
00:48:47,520 --> 00:48:55,600
times the change in the sales and then you're going to take out your spontaneous liabilities

374
00:48:55,600 --> 00:49:04,000
divided by your sales times the change in sales and then you're going to take the profit margin

375
00:49:04,960 --> 00:49:10,320
times one minus the payout ratio so in other words this is the money that the company gets to keep

376
00:49:10,960 --> 00:49:17,200
the profit the the profit margin the amount of money that the company gets to keep times one

377
00:49:17,200 --> 00:49:26,480
minus what they pay out in dividends and this is their additional financing needed one uh

378
00:49:26,480 --> 00:49:32,560
thousand nine hundred nine dollars and four cents now the one thing that you would want to ask yourself

379
00:49:32,560 --> 00:49:38,160
is where are they going to do that where are they going to get that money if they get it from debt

380
00:49:38,160 --> 00:49:45,120
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

381
00:49:45,120 --> 00:49:49,600
b eight over b eight

382
00:49:53,360 --> 00:49:54,560
oh b eight

383
00:49:57,280 --> 00:50:04,160
equals i can fix that easily enough the balance sheet times

384
00:50:06,000 --> 00:50:13,600
i'm going to say one my times one plus i apologize for that i don't know 10 percent

385
00:50:13,600 --> 00:50:15,200
i could do that more elegantly

386
00:50:19,760 --> 00:50:31,440
oh balance sheet let me do that again equals the balance sheet pro the this was a pro forma

387
00:50:31,440 --> 00:50:35,440
balance sheet where's my pro forma balance sheet

388
00:50:35,440 --> 00:50:44,960
where the hell did my pro forma balance sheet go ha you aren't going to do this because somehow my

389
00:50:44,960 --> 00:50:52,880
pro forma balance sheet has disappeared that's why that isn't isn't feeding in properly i'll fix

390
00:50:52,880 --> 00:50:59,040
that before this is over though total let me do something here that is the pro no that is the pro

391
00:50:59,040 --> 00:51:14,560
forma balance sheet equals the balance sheet from 2003 total assets times open print open parentheses

392
00:51:14,560 --> 00:51:27,040
one plus point one zero close parentheses there we go that was rude yeah okay so there we go

393
00:51:27,040 --> 00:51:33,760
go i don't know why that did that i'll have to re upload that but anyway there you go so the bottom

394
00:51:33,760 --> 00:51:44,000
line though is they have got a lot of uh debt already sitting in their portfolio and they're

395
00:51:44,000 --> 00:51:49,360
if they finance that one nine let me do that real quick here i'm just going to do a quick

396
00:51:49,360 --> 00:51:58,240
scratch calculation here of the afn i'm going to take um this would be um debt

397
00:52:00,560 --> 00:52:09,920
afn over debt afn over debt and let me see what that is that would equal additional financing

398
00:52:09,920 --> 00:52:19,280
required divided by what they've got in debt right now uh right here

399
00:52:23,200 --> 00:52:26,720
and that's a percentage for having stakes okay percent

400
00:52:29,680 --> 00:52:36,880
they would have to increase their debt leverage 12 percent to finance their additional financing

401
00:52:36,880 --> 00:52:44,000
needs with debt that would be that's a lot of increased they're going to pay a very high interest

402
00:52:44,000 --> 00:52:51,360
rate to leverage themselves out that far but again the price of the stock is sucking right now

403
00:52:51,360 --> 00:53:02,320
so we could even look at afn over equity equity ups i mean slash equity

404
00:53:02,320 --> 00:53:13,440
equity and take that over here and say this number divided by their projected equity next year total

405
00:53:13,440 --> 00:53:26,880
common equity it looks to me like if i were a betting kind of person they probably it's better

406
00:53:26,880 --> 00:53:34,400
if they use equity at this point because that additional financing needed would increase their

407
00:53:34,400 --> 00:53:43,600
equity contribution capital only 7.3 percent and if you use debt to do it that increases your

408
00:53:43,600 --> 00:53:50,400
debt percentage by 12 more than 12 percent so the bottom line here is that it looks as if

409
00:53:50,400 --> 00:53:56,640
even though the stock price sucks based upon that price earnings ratio selling stock is

410
00:53:56,640 --> 00:54:02,640
probably going to be the best way that they can do what they need to get what they need to accomplish

411
00:54:05,120 --> 00:54:12,480
so that and let me save that that is how you do an additional financing required calculation

412
00:54:12,480 --> 00:54:18,160
now there are a few homework problems that you can use this into and i would recommend you go

413
00:54:18,160 --> 00:54:25,280
through get comfortable with the model and then use that and then i will add some more meat to this

414
00:54:25,280 --> 00:54:32,080
in the next couple of lectures saying okay what if we do it this way or that way there are a couple

415
00:54:32,080 --> 00:54:37,840
of other ways we can get out of this trap that this company is in but none of them are going to be

416
00:54:37,840 --> 00:54:56,320
quite very desirable but anyway that's all i have for you right now i thank you