Hi everybody. In this class, we are going to use an example to review financial statement analysis, multiple method, and pre and post money evaluation. Suppose, Yonsei Corporation shows the following information on it's 2015 income statement. It has sales of $270,000. It's cost of goods sold is $150,000. Depreciation is $18,000. Interest expenses are $12,000 and dividends are $16,000 and so on. Using information on income statement, we can compute the 2015 operating cash flow. First, let's make the 2015 income statement. From sales of $270,000, subtract cost of goods sold of $150,000, other expenses of $8,000 and depreciation of $18,000. Results in earnings before interest and taxes of $94,000. From table, interest paid in 2015 is $12,000. So the taxable income is EBIT minus interest paid, then taxable income is $82,000. From table, taxes are $20,000. Net income is taxable income minus taxes, then net income is $62,000. Also, dividends are given, $16,000. Next, addition to retained earnings is net income minus dividends. Then the result is $46,000. In summary, earnings before interest and taxes are $94,000. From EBIT of $94,000 subtract interest expenses of $12,000 and taxes of $20,000. Net income is $62,000. Dividend amount is $16,000, so addition to retained earnings is $46,000. Next let's find operating cash flow. EBIT of $94,000 plus depreciation of $18,000 minus taxes of $20,000. Operating cash flow is, EBIT plus depreciation minus taxes. Results in the 2015 operating cash flow of $92,000. Next let's find cash flow to creditors. Yonsei Corporation's interest paid is $12,000, but it has paid back $5,000 of long term debt. So its net new borrowing is $-5,000. Cash flow to creditors is interest paid minus net new borrowing. Therefore, the 2015 cash flow to creditors is $17,000. Next let's find cash flow to stockholders. Yonsei corporation's dividends paid is $16,000 and it's new equity is $6,000. Cash flow to stockholders is dividends paid minus net new equity raised. So the 2015 cash flow to stockholders is $16,000 minus $6,000 is equal to $10,000. Next let's find net capital spending. Yonsei Corporation's increase in net fixed assets is $25,000 and it's depreciation is $18,000. Net capital spending is increase in net fixed assets plus depreciation. So it's net capital spending is $43,000. We learned that the cash flow from assets is equal to cash flow to investors and cash flow from assets is equal to cash flow from operations minus net capital spending minus change in net working capital. Therefore, cash flow to investors is equal to cash flow from operation minus net capital spending, minus change in networking capital. So far, we found the 2015 Yonsei Corporation's cash flow from operations, cash flow to creditors and stock holders and net capital spending, but we do not know how much was the addition to net working capital. Yonsei Corporation has operating cash flow of $92,000 and net capital spending of $43,000. And cash flow to investors is operating cash flow minus net capital spending. Cash flow to investors is $27,000. We can find net working capital by subtracting net capital spending and cash flow to investors from operating cash flow. So the changes in net working capital is $22,000. Next, let's apply multiple method to estimate the value of Yonsei Corporation. If the comparable company’s PE ratio is 10, the value of Yonsei Corporation is $620,000 because it's net income of $62,000 times 10 equals $620,000. Suppose what you estimated for Yonsei Corporation is for year 2018 instead of year 2015, then what is the value of Yonsei Corporation in 2015? What you have to do is discount estimated value for three years. In order to discount the value for three years, you need a discount rate. Since Yonsei Corporation is a start up, let's assume that the discount rate is 50% per year. Then using PV function in Excel we can find the present value of Yonsei Corporation. PV(50%, 3, 0- 620,000) = $183,704. Next, let's consider a case where Yonsei Corporation's net income is negative. Let's suppose it's cost of goods sold is $300,000, then it's net income becomes $88,000. You can confirm this with excel template you have constructed in the previous example. Then you cannot use PER to make an estimation of Yonsei Corporation's value. What you can use is PS ratio, as you learned in the previous class. Let's suppose, comparable company's PSR is 3. Then the value of Yonsei Corporation is sales of $270,000 times PSR of 3 is equal to $810,000. If this is the value in three years, then the present value is $240,000.