03model 11/30/2020 7:21 12/2/2002
Chapter 3. Model for Analysis of Financial Statements
Financial statements are analyzed by calculating certain key ratios and then comparing them with the ratios of
other firms and by examining the trends in ratios over time. We can also combine ratios to make the analysis
more revealing, as is done with the Du Pont analysis, and graphs can be used to facilitate trend analysis.
Spreadsheet models such as the one below are exceptionally useful for this type of analysis.
Note that financial analysis is generally the starting point for a forecast of future performance. We analyze
historical data, then plan changes in operations, and then forecast what results will be under the new operating
plan. This is where spreadsheets become REALLY useful, as we can make changes in assumptions and instantly
see the results of those changes. Thus, the Chapter 3 model is really a lead-in to later chapters.
INPUT DATA
2002 2001
Year-end common stock price $23.00 $26.00
Year-end shares outstanding (in millions) 50 50
Tax rate 40% 40%
After-tax cost of capital 11.0% 10.3%
Lease payments $28 N/A
Principal payments $20 N/A
Balance Sheets
(in millions of dollars)
Assets 2002 2001
Cash and marketable securities $10 $80
Accounts receivable $375 $315
Inventories $615 $415
Total current assets $1,000 $810
Net plant and equipment $1,000 $870
Total assets $2,000 $1,680
Liabilities and equity
Accounts payable $60 $30
Notes payable $110 $60
Accruals $140 $130
Total current liabilities $310 $220
Long-term bonds $754 $580
Total debt $1,064 $800
Preferred stock (400,000 shares) $40 $40
Common stock (50,000,000 shares) $130 $130
Retained earnings $766 $710
Total common equity $896 $840
Total liabilities and equity $2,000 $1,680
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