Essential Learning for CTP Candidates TEXPO Conference 2017 Session #03

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1 TEXPO Conference 2017: Essential Learning for CTP Candidates Session #3 (Mon.1:45 3:00 pm) Overview of Basic CTP Math from ETM5 Chap 07: Earnings Credits Chap 11: Working Capital Chap 08: Fin. Statements Chap 09: Financial Analysis Essentials of Treasury Management, 5 th Ed. (ETM5) is published by the AFP which holds the copyright and all rights to the related materials. As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text. 1 ETM5: Calculations Chapters 7, 11, 8 & 9 These slides cover most of the basic calculations in ETM5 Examples include both those from the text and additional problems. Due to time constraints, we will NOT be able to cover all of the examples in this session. Students are encouraged to spend some time on their own reviewing these problems at a later date. 2 ETM5: Chapter 7 Calculations Managing Relationships with Service Providers Earnings Credit Collected Balance Required 3 All Rights Reserved 1

2 Earnings Credit D EC = CB (1 RR) ECR 365 Where: EC = Earnings credit CB = Average collected balances RR = Reserve requirement ECR = Earnings credit rate D = Number of days in the month 4 Earnings Credit Assume the following scenario: Average ledger balance $250,000 Deposit float $ 30,000 Reserve requirement 10% Earnings credit rate 1% Service charges for the month $ 1,000 Days in month 30 Average Collected Balance Calculation: Average ledger balance $250,000 Less: Deposit float ($30,000) Equals: Average collected balance $220,000 D EC = CB (1 RR) ECR = $220,000 (1 0.10) = $220, = $ Collected/Available Balances Required SC CB = D ECR (1 RR) 365 SC AB = D ECR 365 Where: CB = Average collected balances required to pay service charges AB = Average available balances required to pay service charges SC = Service charges ECR= Earnings credit rate RR = Reserve requirement D = Number of days in the month 6 All Rights Reserved 2

3 Collected/Available Balances Required Assume the following scenario: Monthly service charges $1,000 Earnings credit rate 1% Reserve requirement 10% Days in month 30 SC CB = D ECR (1 RR) 365 $1,000 = (1 0.10) 365 $1,000 = = $1,351, ( ) 7 ETM5: Chapter 7 Managing Relationships with Service Providers Additional Calculations 8 Assume ledger balance = $1.2M, deposit float = $0.4M, R/R = 10%, ECR = 0.5%, 31 days in the month. Calculate the earnings credits. A. $ B. $ C. $ D. $3, The Treasury Academy, Inc. - All Rights Reserved 9 All Rights Reserved 3

4 Earnings Credit Assume the following scenario: Average ledger balance $1,200,000 Deposit float $ 400,000 Reserve requirement 10% Earnings credit rate 0.5% Days in month 31 Average Balance Calculations: Average ledger balance $1,200,000 Less: Deposit float ($400,000) Equals: Average collected balance $800,000 Less: Reserve Requirement ($80,000) Equals: Average available balance $720,000 D D EC = CB (1 RR) ECR EC = AB ECR = $800,000 (1 0.10) = $720, = $ = $ Assume ledger balance = $1.2M, deposit float = $0.4M, R/R = 10%, ECR = 0.5%, 31 days in the month. Calculate the earnings credits. A. $ B. $ C. $ D. $3, days rather than 31 No reserve requirement Used 5% rather than 0.5% The Treasury Academy, Inc. - All Rights Reserved 11 Assume R/R = 10%, ECR = 0.4%, 30 days in the month. Calculate the collected balance required to support $1,200 in services. A. $392,473 B. $405,555 C. $3,650,000 D. $4,055, The Treasury Academy, Inc. - All Rights Reserved 12 All Rights Reserved 4

5 Collected/Available Balances Required Assume the following scenario: Monthly service charges $1,200 Earnings credit rate 0.4% Reserve requirement 10% Days in month 30 SC CB = D ECR (1 RR) 365 $1,200 = (1 0.10) 365 = $4,055,555 SC AB = D ECR 365 $1,200 = = $3,650, Assume R/R = 10%, ECR = 0.4%, 30 days in the month. Calculate the collected balance required to support $1,200 in services. A. $392,473 B. $405,555 C. $3,650,000 D. $4,055,555 Used 4% rather than 0.4% & 31 days Used 4% rather than 0.4% Calculated Available Balance The Treasury Academy, Inc. - All Rights Reserved 14 Practicing the Calculations The more times you work through a calculation, the more comfortable you will be with it Develop your own versions of the calculations and double check your math Share calculations with others that are studying for the exam Make a list of Study Buddies!! 15 All Rights Reserved 5

6 ETM5: Chapter 11 Calculations Working Capital Metrics Float Neutral Calculation Cost of Discount Cash Conversion Cycle (CCC) Days Sales Outstanding Aging Schedule A/R Balance Pattern 16 Focus of Treasury on Cash Flow Timeline Treasury focus is on the payment portion of the cycle Calculation: Float Neutral Calculation TD = total days difference in payment timing r = Opportunity cost as an annual rate 1 Discount 1 r 1 TD Float Neutral Calculation Assume r = 12% and TD = 3 days 1 Discount 1 12% (Rounded) or 0.10% If the buyer is allowed to take a discount of 0.10 %, they would be indifferent (in present value terms) between paying by check or by electronic transfer (a speedup of 3 days in loss of value) 18 All Rights Reserved 6

7 Cost of a Buyer Not Taking a Cash Discount D 365 Discount Cost = 100 D N T = = = =.3723 or 37.23% Where D = Discount percentage is 2% N = Net period is 30 days T = Discount period is 10 days The cost of not taking the discount can be compared with the organization s opportunity cost to borrow short-term funds. If we assume a rate of 8% for this example, then borrowing cost would be less than the cost of not taking the discount so the organization should borrow the funds and take the discount. 19 When Should a Buyer Forgo an Offered Discount? Short-term investment rates above annualized discount rate Buyer s cost of short-term borrowing greater than annualized discount rate Buyer can stretch payables enough to sufficiently lower annualized discount rate 20 Benefit to Seller of Offering a Cash Discount Assume credit terms of 2/10, net 30 and opp. cost = 5% Present Value of Receiving Discounted Payment Amount PV Disc Pmt PV Total Amount of Full Pmt 1 Disc Rate Annual Opp Cost 1 Days in Disc Period 365 Disc Pmt $1, $ $980 $ All Rights Reserved 7

8 Benefit to Seller of Offering a Cash Discount Assume credit terms of 2/10, net 30 and opp. cost = 5% Present Value of Receiving Full Payment Amount Total Amount of Full Pmt PVFull Pmt Annual Opp Cost 1 Days in Net Period 365 PV Full Pmt $1,000 $1, $1,000 $ NPV = PV Day 10 PV Day 30 = $ $ = $17.25 Source: ETM5 AFP 22 Cash Conversion Cycle (CCC) Days Inventory Days Receivables Days Payables Calculations of the Cash Conversion Cycle (CCC) Cash Turnover Ratio Days Inventory Days Payables Days Receivables Cash Conversion Cycle Working Capital Gap 23 Cash Conversion Cycle Elements in the cash conversion cycle: Days Inventory Inventory Cost of Goods Sold 365 Days Receivables Accounts Receivable Sales 365 Days Payables Accounts Payable Cost of G oods Sold All Rights Reserved 8

9 Cash Conversion Cycle Elements in the cash conversion cycle: Days Inventory Days Receivables Days Payables Inv 2, Days COGS 9,200 A/R 1, Days Sales 15,000 A/P 1, Days COGS 9, Cash Conversion Cycle (CCC) Calculates the time required to convert cash outflows (necessary to produce goods) into cash inflows (through the collection of accounts receivable) CCC Days' Inv. Days' Rec. - Days' Pay Days 365 Days Cash Turnover = Cash Conversion Cycle 365 = = 4.5 Times Days 26 Days Sales Outstanding (DSO) Assume that a company has outstanding receivables of $285,000 at the end of the first quarter and credit sales of $310,000 for the quarter. Using a 90-day averaging period, the DSO for this company can be computed as follows: Sales During Period $310,000 Avg. Daily Credit Sales = = = $3, Number of Days in Period 90 Outstanding A/R $285,000 DSO = = = Days Avg. Daily Credit Sales $3, If the company s credit terms are net 30, the average past due is computed as follows: Average Past Due = DSO Avg. Days of Credit Terms = Days 30 Days = Days 27 All Rights Reserved 9

10 Aging Schedule Separates A/R into current and past-due receivables in 30-day increments (on a customer or aggregate basis) and can determine the percent past due Age of A/R Amount of A/R % of Total A/R Current $1,750,000 70% 1-30 Days Past Due 375,000 15% Days Past Due 250,000 10% Over 60 Days Past Due 125,000 5% Total $2,500, % 28 A/R Balance Pattern for March 29 ETM5: Chapter 11 Calculations Working Capital Metrics Additional Calculations 30 All Rights Reserved 10

11 Assume a company is offered a 1.3% discount for paying on day 30 rather than day 90. At what opportunity cost would the company be indifferent between these two payment dates? A. 4% B. 6% C. 8% D. 10% 31 Assume a company is offered a 1.3% discount for paying on day 30 rather than day 90. At what opportunity cost would the company be indifferent between these two payment dates? A. 4% B. 6% C. 8% D. 10% Example of just trying all the answers to find the correct one. Alternative approach is to use discount cost formula 32 Float Neutral Calculation Assume: r = 8% and TD = 60 days 1 Discount 1 8% = 1.3% (Rounded) If the buyer is allowed to take a discount of 1.3 %, they would be indifferent (in present value terms) between paying electronically today or on day 60 by check (a speedup of 60 days in loss of value) 33 All Rights Reserved 11

12 A company is offered terms of 1/10, Net 40, but routinely takes 50 days to pay without incurring any penalties. What is the cost of not taking this discount? A. 7.4% B. 7.9% C. 9.2% D. 12.3% 34 Cost of a Buyer Not Taking a Cash Discount D 365 Discount Cost = 100 D N T = = = = or 9.2% Where D = Discount percentage is 1% N = Net period is 50 days T = Discount period is 10 days The cost of not taking the discount can be compared with the organization s opportunity cost to borrow short-term funds. If we assume a rate of 8% for this example, then borrowing cost would be less than the cost of not taking the discount so the organization should borrow the funds and TAKE the discount. 35 A company is offered terms of 1/10, Net 40, but routinely takes 50 days to pay without incurring any penalties. What is the cost of not taking this discount? A. 7.4% B. 7.9% C. 9.2% D. 12.3% Used 40 day net period Did not take out discount period Example of being sure to read the problem. Use the actual days taken, not the stated terms. 36 All Rights Reserved 12

13 ETM5: Chapter 8 Financial Accounting & Reporting 37 Sample Balance Sheet Snapshot Assets: Current assets Fixed assets Depreciable fixed assets Intangible assets Liabilities: Current liabilities Long-term liabilities Equity Assets = Liabilities + Shareholders Equity 2017 The Treasury Academy - All Rights Reserved 38 Sample Income Statement A record of revenues and expenses Shows the net change in shareholders equity from operations over a specified period 2017 The Treasury Academy - All Rights Reserved 39 All Rights Reserved 13

14 Sample Statement of Cash Flows Shows sources and uses of cash Sections: Operating Investing Financing Cash from operations calculated by adding back noncash charges (e.g., depreciation) Cash, not earnings, repays debt This example shows the indirect format 2017 The Treasury Academy - All Rights Reserved 40 ETM5: Chapter 9 Calculations Financial Planning and Analysis Time Value (PV & FV) Breakeven Point NPV, IRR, PI Ratios & Ratio Analysis Liquidity, Efficiency, Debt Management, Performance, DuPont Return vs. Residual Income Measures Operating and Financial Leverage 41 Future Value What is the future value of $100 if it can be invested for two years, compounded annually, at a rate of 10% per year? n Future Value = PV (1 + i) = $100 (1 +.10) = $ = $121 2 Where: FV = Future value PV = Present value i = Periodic interest rate n = Number of periods Alt Example: $100, 5 yrs, 10% $100 x (1.10) 5 $100 x (1.10)(1.10)(1.10)(1.10)(1.10) $100 x = $ All Rights Reserved 14

15 Present Value What is the present value of $2,382 to be received after three years, discounted at a rate of 6.00% annually? FV Present Value = = Where: FV = Future value i = Periodic interest rate n = Number of periods $2, i n 3 $2,382 = = $2, PV of a Stream of Payments C C C C PV (1i) (1i) (1i) (1i) n n As an example, assume the following annual cash flows: $200 in year one, $400 in year two and $600 in year three. If the appropriate discount rate is 12%, then the PV of the stream would be: $200 $400 $600 PV (1.12) (1.12) (1.12) $200 $400 $ $ $ $ $ Breakeven Analysis Breakeven point: Level of activity for an operation at which costs exactly equal benefits Fixed Costs Unit B / E Point = Selling Price Per Unit Variable Cost Per Unit $10,000 = $10 $6 = 2,500 Units 45 All Rights Reserved 15

16 Net Present Value (NPV) Evaluates the present value (PV) of all inflows and outflows of a project using the weighted average cost of capital as a discount rate NPV = PV of Cash Inflows PV of Cash Outflows If the only cash outflow takes place in the present : NPV = PV of Cash Inflows Cash Cost C1 C2 C3 Cn NPV = Cost n (1+ i) (1+ i) (1+ i) (1+ i) 46 Net Present Value (NPV) Year 1 Year 2 Year 3 Year 4 Year 5 Project A $300 $300 $400 $100 $100 Project B $300 $300 $400 $1,000 $1,000 Assume an initial outlay of $1,000 and a cost of capital of 10% $300 $300 $400 $100 $100 NPV A = (1 +.10) (1 +.10) (1 +.10) (1 +.10) (1 +.10) $1,000 = $ $300 $300 $400 $1,000 $1,000 NPV B = (1 +.10) (1 +.10) (1 +.10) (1 +.10) (1 +.10) $1,000 = $1, Profitability Index (PI) Ratio of the PV gained to the cost required to obtain that value; shows value gained per dollar of investment Present Value of Cash Inflows Profitability Index = Present Value of Cash Outflows If the only cash outflow is in the present (period 0): $ PI A = = $1,000 $2, PI B = = $1, All Rights Reserved 16

17 Internal Rate of Return (IRR) Discount rate (i) for NPV = 0 or PV of Cash Inflows = PV of Cash Outflows NPV = PV of Cash Inflow Cost = 0 $300 $300 $400 $100 $100 NPV A = $1,000 = (1 + i) (1 + i) (1 + i) (1 + i) (1 + i) i = 7.7% $300 $300 $400 $1,000 $1,000 NPV B = $1,000 = (1 + i) (1 + i) (1 + i) (1 + i) (1 + i) i = 38.1% 49 Capital Expenditure Analysis Summary Method Project Acceptance Criterion Project A Project B Net Present Value (NPV) NPV > 0 $ $ Profitability Index (PI) Internal Rate of Return (IRR) PI > IRR > WACC* 7.7% 38.1% Source: ETM5 AFP * Weighted Average Cost of Capital (WACC) = 10% in the example 50 Liquidity or Working Capital Current Ratio Measures the degree to which current obligations are covered by current assets Total Current Assets Current Ratio = Total Current Liabilities $8,000 = = 2.35 $3, All Rights Reserved 17

18 Liquidity or Working Capital: Quick Ratio Measures the degree to which a company s current liabilities are covered by its most liquid current assets (Cash) + (S-T Investments) + (A/R) Quick Ratio = Total Current Liabilities ($1,500 + $1,300 + $1,700) = = 1.32 $3, Liquidity or Working Capital: Working Capital Indicates the dollar amount by which current assets exceed current liabilities Working Capital = Current Assets Current Liabilities = $8,000 $3,400 = $4, The Treasury Academy - All Rights Reserved 53 Efficiency and Asset Management: Total Asset Turnover Measures how many times the asset base is turned over with the flow of revenue Revenues Total Asset Turnover = Total Assets $15,000 = = Times $16, The Treasury Academy - All Rights Reserved 54 All Rights Reserved 18

19 Efficiency and Asset Management: Fixed Asset Turnover Focuses on how efficiently fixed assets, or plant and equipment, are used Revenue Fixed Asset Turnover = Net Property, Plant & Equip $15,000 = = 2.0 Times $7, The Treasury Academy - All Rights Reserved 55 Efficiency and Asset Management: Current Asset Turnover Measures how many times the stock of most liquid assets is turned over with the flow of revenue Revenues Current Asset Turnover = Current Assets $15,000 = = 1.88 Times $8, The Treasury Academy - All Rights Reserved 56 Efficiency and Asset Management: Cash Conversion Efficiency Measures the efficiency with which a company converts sales into cash Cash Conversion Cash Flow from Operations Efficiency = Sales $550 = $15,000 = 0.37 or 3.7% 2017 The Treasury Academy - All Rights Reserved 57 All Rights Reserved 19

20 Debt Management: Total Liabilities to Total Assets Measures the percentage of all liabilities relative to total investments or total assets Total Liabilities Total Liabilities to Total Assets = Total Assets $7,300 = =.456 or 45.6% $16, The Treasury Academy - All Rights Reserved 58 Debt Management: Long-Term Debt to Capital L / T Debt to Capital = Measures the percentage of a company s capitalization that is provided by long-term debt Long-Term Debt Long-Term Debt + Equity $3,900 = =.310 or 31.0% $3,900 + $8, The Treasury Academy - All Rights Reserved 59 Debt Management: Debt to Equity Measures the degree of debt financing used per dollar of equity capital Total Debt Debt to Equity = Total Equity $1,800 + $3,900 = =.655 or 65.5% $8, The Treasury Academy - All Rights Reserved 60 All Rights Reserved 20

21 Debt Management: Debt to Tangible Net Worth Measures a company s debt as a percentage of its tangible net worth Total Debt Debt to Tangible N/W = Total Equity Intangible Assets $1,800 + $3,900 = =.695 or 69.5% $8,700 $ The Treasury Academy - All Rights Reserved 61 Debt Management/Coverage: Times Interest Earned (TIE) Ratio Measures a firm s ability to service debt through interest payments Operating Profit TIE = Interest Expense EBIT = Interest Expense $1,600 = = 5.33 Times $ The Treasury Academy - All Rights Reserved 62 Debt Management/Coverage: Fixed Charge Coverage Ratio Measures a firm s ability to service all fixed-charge items with operating profits EBIT + Lease Pmts Fixed Charge Coverage = Interest Expense + Lease Pmts $1,600 + $500 $2,100 = = = Times $300 + $500 $800 * Assuming $500 of annual lease payments 2017 The Treasury Academy - All Rights Reserved 63 All Rights Reserved 21

22 Performance: Gross Profit Margin Measures the percentage of revenues remaining after the cost of goods sold is deducted from revenue it is also a typical common-size ratio measure Gross Profit $5,800 Gross Profit Margin = = Revenues $15,000 =.387 or 38.7% 2017 The Treasury Academy - All Rights Reserved 64 Performance: Operating & EBITDA Profit Margins Measures the flow of commonly used operating income measures in relation to the flow of revenue EBIT Operating Profit Margin = Revenues $1,600 = = or 10.7% $15,000 EBITDA EBITDA Margin = Revenues $1,800 = = or 12.0% $15, The Treasury Academy - All Rights Reserved 65 Performance: Net Profit Margin Measures the flow of net income in relation to the flow of revenue Net Income Net Profit Margin = Revenues $850 = $15,000 =.057 or 5.7% 2017 The Treasury Academy - All Rights Reserved 66 All Rights Reserved 22

23 Performance: Return on Total Assets Measures net income in relation to the stock of assets Net Income Return on Total Assets = Total Assets $850 = $16,000 =.053 or 5.3% 2017 The Treasury Academy - All Rights Reserved 67 Performance: Return on Common Equity Measures earnings available to common shareholders (net income less any preferred stock dividends) expressed as a percentage of common equity Earnings Avail. to Common S / Hs Return on Common Equity = Common Equity Net Income Preferred Dividends = Total Equity Preferred Stock $850 0 = = or 9.8% $8, The Treasury Academy - All Rights Reserved 68 Integrated Ratio Analysis: DuPont Equation Looks at the return on total assets as a product of the return on sales and total asset turnover Return on Total Assets = Return on Sales Total Asset Turnover Net Income Total Revenues = Total Revenues Total Assets = = = 5.3% 2017 The Treasury Academy - All Rights Reserved 69 All Rights Reserved 23

24 Performance Measurement Return on Investment (ROI) Economic Value Added (EVA) Free Cash Flow (FCF) 2017 The Treasury Academy - All Rights Reserved 70 Performance Measurement Return on investment (ROI) ROI does not include charge for cost of capital. Positive NPV project can be rejected if it lowers overall ROI ROI over a partial period may be misleading. Net Income Net Income ROI = = Invested Capital Long-Term Debt + Equity $850 $850 = = = or 6.75% $3,900 + $8,700 $12, The Treasury Academy - All Rights Reserved 71 Economic Value Added (EVA) A measure of the incremental value that a company s investments add. What is the EVA for the following company? Long-term debt of $3,900,000 Equity of $8,700,000 Marginal tax rate of % Weighted average cost of capital (WACC) of 9% Operating income (EBIT) of $1,600,000 EVA = EBIT x (1Tax Rate) (WACC) x (Long-term Debt + Equity) = $1,600 x ( ) (.09) x ($3,900 + $8,700) = $1,046 (.09)($12,600) = $1,046 $1,134 = $ The Treasury Academy - All Rights Reserved 72 All Rights Reserved 24

25 Performance Measurement: Free Cash Flow Free Cash Flow (FCF) A type of RI analysis, but also includes adjustments for noncash items, operating working capital investments and capital expenditures (CapEx) There are many different formulas used for FCF Considered a better representation of the value of the firm to shareholders FCF = Net Income + (D&A) Change in Op W/C CapEx = $850 + $200 $500 $900 = $ The Treasury Academy - All Rights Reserved 73 Operating and Financial Leverage Source: ETM5 Exhibit AFP 2017 The Treasury Academy - All Rights Reserved 74 Operating Risk and Leverage (DOL) Operating risk is a function of the mix of variable and fixed costs in a company s operations It is assessed by looking at the changes in a company s EBIT for given change in sales % Change in EBIT Degree of Operating Leverage = % Change in Sales Using the information from the text Exhibit % Degree of Operating Leverage = = 1.65 Times 20% 2014 The Treasury Academy - All Rights Reserved 75 All Rights Reserved 25

26 Financial Risk and Leverage (DFL) Financial risk is a function of the mix of capital sources used to finance the company It is assessed by looking at the changes in a company s net income for given change in EBIT % Change in Net Income Degree of Fin. Leverage = % Change in EBIT Using the information from the text Exhibit % Degree of Fin. Leverage = = Times 33% 2014 The Treasury Academy - All Rights Reserved 76 Total Leverage (DTL) This is a measure of the total risk of the company It is assessed by looking at the relationship between Net Income and Sales It can also be calculated as: DTL = DOL X DFL % Change in Net Income Degree of Total Leverage = % Change in Sales 50% Degree of Total Leverage = = 2.5 Times 20% or DTL = DOL X DFL = X = 2.5 Times 2014 The Treasury Academy - All Rights Reserved 77 ETM5: Chapter 9 Financial Planning and Analysis Additional Calculations 78 All Rights Reserved 26

27 Liquidity or Working Capital: Quick Ratio Measures the degree to which a company s current liabilities are covered by its most liquid current assets A company currently has Cash of $200,000, ST Investments of $500,000, A/R of $600,000, and Inventory of $700,000. If their bank has imposed a loan covenant which requires the company maintain a quick ratio of 1.5 or better, what is the maximum level of current liabilities they can have? A. $666,667 B. $866,667 C. $1,333,333 D. $2,000, This Slide Intentionally Blank 80 Liquidity or Working Capital: Quick Ratio (Cash) + (S-T Investments) + (A/R) Quick Ratio = Total Current Liabilities ($200,000 + $500,000 + $600,000) = = 1.50 Total Current Liabilities $1,300, = Total Current Liabilities 1.50 (Total CL) = $1,300,000 $1,300,000 Total CL = = $866, All Rights Reserved 27

28 Liquidity or Working Capital: Quick Ratio Measures the degree to which a company s current liabilities are covered by its most liquid current assets A company currently has Cash of $200,000, ST Investments of $500,000, A/R of $600,000, and Inventory of $700,000. If their bank has imposed a loan covenant which requires the company maintain a quick ratio of 1.5 or better, what is the maximum level of current liabilities they can have? A. $666,667 B. $866,667 C. $1,333,333 D. $2,000,000 Subtracted Cash from Result B Included Inventory Just added all items in problem 82 Practice Calculation A company has a Return on Total Assets of 20%, Return on Sales of 10% and Net Income of $100,000. What is the level of Total Assets for this company? A. $ 250,000 B. $ 500,000 C. $ 750,000 D. $1,000, Practice Calculation A company has a Return on Total Assets of 20%, Return on Sales of 10% and Net Income of $100,000. What is the level of Total Assets for this company? A. $ 250,000 B. $ 500,000 C. $ 750,000 D. $1,000, All Rights Reserved 28

29 Integrated Ratio Analysis: DuPont Equation Return on Total Assets = Return on Sales Total Asset Turnover Net Income Total Revenues = Total Revenues Total Assets $100,000 Total Revenues 20% = Total Revenues Total Assets 20% = 0.10 TATO => TATO = 2.0 $100,000 Return on Sales = 0.10 = Total Revenues Total Revenues = $1,000,000 Total Revenues $1,000,000 TATO = 2.0 = = Total Assets Total Assets Total Assets = $500, Session Wrap-up What did we learn in this session? What topics do we need to learn more about? 86 TEXPO Conference 2017 Essential Learning for CTP Candidates End of This Session We will reconvene at 3:45 pm today. The topic will be Let s Go to the Markets Money & Capital Markets S-T & L-T Investing & Capital 87 All Rights Reserved 29