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Financial History: The next section of your report should focus on the financial history and capital structure of your organization. A. Quantitatively analyze three years of the corporation’s finances using the provided Excel template. You will submit this template along with your report, and may embed pieces of the Excel template into your report to show key financial highlights for the following section. Please note that, for this assignment, you only need to complete the “Financial History” tab in the spreadsheet.   B. Summarize the financial highlights you determined from the analysis in the Excel template, explaining the significance of the key ratios for the overall financial health of the organization. asreported Powered by Clearbit Southwest Airlines Co (NYS: LUV) Exchange rate used is that of the Year End reported date As Reported Annual Retained Earnings Report Date 12/31/2020 12/31/2019 12/31/2018 Currency USD USD USD Audit Status Not Qualified Not Qualified Not Qualified Consolidated Yes Yes Yes Scale Thousands Thousands Thousands Previous retained earnings (accumulated deficit) 17945000 15967000 13832000 Cumulative effect of adopting Accounting Standards Update No. 2016-02, Leases, codified in Accounting Standards Codification 842 - 55000 - Previous retained earnings (accumulated deficit) after adjustment for the new accounting standard - 16022000 - Cumulative effect of new accounting standards - - 18000 Cash dividends 94000 377000 348000 Retained earnings (accumulated deficit) 14777000 17945000 15967000 asreported Powered by Clearbit Southwest Airlines Co (NYS: LUV) Exchange rate used is that of the Year End reported date As Reported Annual Cash Flow Report Date 12/31/2020 12/31/2019 12/31/2018 Currency USD USD USD Audit Status Not Qualified Not Qualified Not Qualified Consolidated Yes Yes Yes Scale Thousands Thousands Thousands Net income (loss) -3074000 2300000 2465000 Depreciation & amortization 1255000 1219000 1201000 Loss on asset impairment 32000 - - Unrealized realized loss (gain) on fuel derivative instruments 15000 - -14000 Deferred income taxes -716000 -55000 301000 Gain on sale-leaseback transactions -222000 - - Accounts & other receivables -294000 -94000 117000 Other assets 415000 239000 -227000 Accounts payable & accrued liabilities 231000 298000 545000 Air traffic liability 1623000 440000 506000 Other liabilities -306000 -277000 - Cash collateral received from (provided to) derivative counterparties 9000 25000 -15000 Other operating activities, net -95000 -108000 14000 Net cash flows from operating activities -1127000 3987000 4893000 Capital expenditures -515000 -1027000 -1922000 Supplier proceeds 428000 400000 - Proceeds from sale-leaseback transactions 815000 - - Assets constructed for others - - -54000 Purchases of short-term investments -5080000 -2122000 -2409000 Proceeds from sales of short-term & other investments 4336000 2446000 2342000 Other investing activities, net - - 5000 Net cash flows from investing activities -16000 -303000 -2038000 Issuance of common stock 2294000 - - Proceeds from issuance of long-term debt 5622000 - - Proceeds from term loan credit facility 3683000 - - Proceeds from revolving credit facility 1000000 - - Proceeds from convertible notes 2300000 - - Proceeds from Payroll Support Program loans & warrants 1016000 - - Proceeds from employee stock plans 48000 40000 35000 Reimbursement for assets constructed for others - - 170000 Payments of long-term debt & finance lease obligations -839000 -615000 -342000 Payments of term loan credit facility -3683000 - - Payments of revolving credit facility -1000000 - - Payments of cash dividends -188000 -372000 -332000 Payments of terminated interest rate derivative instruments -59000 - - Repayment of construction obligation - - -30000 Capitalized financing items -134000 - - Repurchase of common stock -451000 -2000000 -2000000 Other financing activities, net 49000 -43000 3000 Net cash flows from financing activities 9658000 -2990000 -2496000 Net change in cash & cash equivalents 8515000 694000 359000 Cash & cash equivalents at beginning of period 2548000 1854000 1495000 Cash & cash equivalents at end of period 11063000 2548000 1854000 Cash payments for interest, net of amount capitalized 212000 88000 107000 Cash payments for income taxes 19000 779000 327000 asreported Powered by Clearbit Southwest Airlines Co (NYS: LUV) Exchange rate used is that of the Year End reported date As Reported Annual Balance Sheet Report Date 12/31/2020 12/31/2019 12/31/2018 Currency USD USD USD Audit Status Not Qualified Not Qualified Not Qualified Consolidated Yes Yes Yes Scale Thousands Thousands Thousands Cash & cash equivalents 11063000 2548000 1854000 Short-term investments 2271000 1524000 1835000 Accounts & other receivables 1130000 1086000 568000 Inventories of parts & supplies, at cost 414000 529000 461000 Prepaid expenses & other current assets 295000 287000 310000 Total current assets 15173000 5974000 5028000 Flight equipment 20877000 21629000 21753000 Ground property & equipment 6083000 5672000 4960000 Deposits on flight equipment purchase contracts 305000 248000 775000 Assets constructed for others 309000 164000 1768000 Property & equipment, at cost 27574000 27713000 29256000 Less allowance for depreciation & amortization 11743000 10688000 9731000 Property & equipment, net 15831000 17025000 19525000 Goodwill 970000 970000 970000 Operating lease right-of-use assets 1892000 1349000 - Derivative contracts 90000 49000 95000 Intangible assets, net 295000 296000 400000 Finance lease receivable - - 61000 Other assets 337000 232000 164000 Other assets 722000 577000 720000 Total assets 34588000 25895000 26243000 Accounts payable 931000 1574000 1416000 Extended Emergency Time Off 393000 - - Voluntary Separation Program 2020 143000 - - Profitsharing & savings plans 25000 695000 580000 Accrued vendor prepayment 600000 - - Accrued aircraft & other lease related obligations - - 37000 Accrued vacation pay 436000 434000 403000 Accrued health 111000 120000 107000 Accrued workers compensation 161000 166000 166000 Accrued property & income taxes 84000 79000 68000 Accrued interest 49000 - - Other accrued expenses 257000 255000 388000 Accrued liabilities 2259000 1749000 1749000 Current operating lease liabilities 306000 353000 - Air traffic liability 3790000 4457000 4134000 Current maturities of long-term debt 220000 819000 606000 Total current liabilities 7506000 8952000 7905000 Notes 6200000 1400000 1692000 Convertible notes 1945000 - - Term loan agreement 462000 312000 417000 Aircraft notes payable - 20000 67000 Payroll support program loan 976000 - - Pass through certificates 137000 197000 250000 Debentures 119000 122000 125000 Finance leases 542000 627000 845000 Long-term debt including current portion 10381000 2678000 3396000 Less current maturities 220000 819000 606000 Less: debt discount & issuance costs -50000 -13000 -19000 Long-term debt less current maturities 10111000 1846000 2771000 Air traffic liability - noncurrent 3343000 1053000 936000 Deferred income taxes 1634000 2364000 2427000 Construction obligation 309000 164000 1701000 Noncurrent operating lease liabilities 1562000 978000 - Postretirement obligation 428000 288000 232000 Extended Emergency Time Off 57000 - - Voluntary Separation Program 2020 321000 - - Non-current lease-related obligations - - 48000 Other deferred compensation 353000 313000 247000 Derivative contracts - - 12000 Other long-term liabilities 88000 105000 111000 Other noncurrent liabilities 1247000 706000 650000 Common stock 888000 808000 808000 Capital in excess of par value 4191000 1581000 1510000 Retained earnings 14777000 17945000 15967000 Fuel derivatives -119000 -125000 -56000 Interest rate derivatives -66000 -33000 - Defined benefit plan items -43000 20000 58000 Other accumulated other comprehensive income 91000 59000 25000 Deferred tax impact 32000 18000 -7000 Accumulated other comprehensive income (loss) -105000 -61000 20000 Treasury stock, at cost 10875000 10441000 8452000 Total stockholders' equity 8876000 9832000 9853000 asreported Powered by Clearbit Southwest Airlines Co (NYS: LUV) Exchange rate used is that of the Year End reported date As Reported Annual Income Statement Report Date 12/31/2020 12/31/2019 12/31/2018 Currency USD USD USD Audit Status Not Qualified Not Qualified Not Qualified Consolidated Yes Yes Yes Scale Thousands Thousands Thousands Passenger revenues 7665000 20776000 20455000 Freight revenues 161000 172000 175000 Other revenues 1222000 1480000 1335000 Total operating revenues 9048000 22428000 21965000 Salaries, wages & benefits 6811000 8293000 7649000 Payroll support & voluntary employee programs, net -967000 - - Fuel & oil 1849000 4347000 4616000 Maintenance materials & repairs 750000 1223000 1107000 Landing fees & airport rentals 1240000 1363000 1334000 Depreciation & amortization 1255000 1219000 1201000 Other operating expenses 1926000 3026000 2852000 Total operating expenses, net 12864000 19471000 18759000 Operating income (loss) -3816000 2957000 3206000 Interest expense 349000 118000 131000 Capitalized interest 35000 36000 38000 Interest income 32000 90000 69000 Other gains (losses), net -158000 -8000 -18000 Total other expenses (income) -440000 - -42000 Income before income taxes -4256000 2957000 3164000 Current income taxes provision (benefit) - federal -273000 610000 338000 Current income taxes provision (benefit) - state -5000 102000 60000 Change in federal statutory rate -188000 - - Total current income taxes provision (benefit) -466000 712000 398000 Deferred income taxes provision (benefit) - federal -589000 -18000 299000 Deferred income taxes provision (benefit) - state -76000 -6000 2000 State net operating losses -51000 - - Change in federal statutory tax rate - -31000 - Total deferred income taxes provision (benefit) -716000 -55000 301000 Provision for income taxes -1182000 657000 699000 Net income -3074000 2300000 2465000 Weighted average shares outstanding - basic 565000 538000 573000 Weighted average shares outstanding - diluted 565000 539000 574000 Year end shares outstanding 590474.337 519064.316 552603.359 Net income (loss) per share - basic -5.44 4.28 4.3 Net income (loss) per share - diluted -5.44 4.27 4.29 Cash dividends declared per common share 0.18 0.7 0.605 Number of full time employees 56500 60800 58800 Total number of employees - 60800 58800 Number of common stockholders 11858 11920 12267 Financial History START HERE Comments to help you fill in yellow data entry boxes are in blue or red font. Take one row at a time: read row comment and enter data in the yellow cells only. CURRENCY: USD <-- This is the organization's home or functional currency. E.g., USD, INR (Indian Rupee), BRL (Brazilian Real), EUR (Euro), CNY (Chinese Yuan). Information is found on financial statements. SCALING: x 1,000 <-- Local currency units: Usually 1000 is used. For example, if financial statement on Mergent Online says Scale = Thousands, 2,822,795 listed is actually 2,822,795,000. Southwest Airlines (LUV) <-- Any financial report should show the name of the organization in the heading. INCOME STATEMENT HIGHLIGHTS <-- Always identify the type of report. Unaudited; Amounts USD x 1000 <-- The currency and scaling needs to be defined. For Fiscal Years ending: <-- An organization's fiscal year might end on Dec 31, or June 30, or something else. State it here. % Growth vs Prior Year 2020 2019 2018 2020 2019 <-- Replace leftmost year number (Cell C9) with most recent year of data available. TOTAL REVENUES 0.0% 0.0% Cost of revenues 0.0% 0.0% <-- Cost of revenues is also referred to as cost of goods sold Gross Profit or (Loss) $ - 0 $ - 0 $ - 0 0.0% 0.0% Other Operating Expenses 0.0% 0.0% <-- To enter multiple numbers, the formula would start with the equal sign like this: =1278022+1052778+863568 OPERATING INCOME or (Loss) $ - 0 $ - 0 $ - 0 0.0% 0.0% <-- Confirm this matches what is listed on the financial statement you downloaded. Interest expense 0.0% 0.0% Interest & other income (expense) 0.0% 0.0% INCOME (LOSS) BEFORE INCOME TAXES $ - 0 $ - 0 $ - 0 0.0% 0.0% <-- Confirm this matches what is listed on the financial statement you downloaded. Provision for (or benefit from) Income Taxes 0.0% 0.0% Net Income or (Loss) from Continuing Operations $ - 0 $ - 0 $ - 0 0.0% 0.0% <-- FYI, most analysts consider this better than total Net Income as an indicator of underlying business performance. Discontinued Operations Income (Loss), Net $ - 0 $ - 0 $ - 0 0.0% 0.0% <-- Typically, from shutting down or selling part of the business. NET INCOME OR (LOSS) $ - 0 $ - 0 $ - 0 0.0% 0.0% <-- Confirm this matches what is listed on the financial statement you downloaded. Weighted average (Number of) Diluted Shares Outstanding 0.0% 0.0% <-- Make sure this value is scaled the same way as the other numbers (thousands or millions). DILUTED EARNINGS OR (LOSS) PER SHARE $ - 0 $ - 0 $ - 0 0.0% 0.0% Net Income Margin % 0.0% 0.0% 0.0% <-- Net income or Loss / Total Revenue. Typical values are 2% to 20%, but it can be negative, too. Common Stock Share Price at each Year-End 0.0% 0.0% <-- Mergent Online instructions include how to find historical stock prices. Go back four years because you will need fourth year for Line 123. Total Equity Value (= share price x shares) $ - 0 $ - 0 $ - 0 <-- Better to use end-of-year shares outstanding, but this figure is close enough for this course. Price / Earnings Ratio (P/E) - 0 - 0 - 0 0.0% 0.0% <-- Market price at the end of the year divided by that year's earnings per share. Typical values are 10 to 30. Source. (Publication Year). Title Retrieved from: http://www.?????????????? <-- Include APA citation for where you found the financial statement data. Southwest Airlines (LUV) CASH FLOW STATEMENT HIGHLIGHTS Unaudited; Amounts USD x 1000 For Fiscal Years ending: % Growth vs Prior Year 2020 2019 2018 2020 2019 Net Income or (Loss), from Above $ - 0 $ - 0 $ - 0 0.0% 0.0% Depreciation and Amortization Expense 0.0% 0.0% <-- This is a noncash expense, so we add it back to net income here. Other Operating Sources and (Uses) $ - 0 $ - 0 $ - 0 0.0% 0.0% <-- These are working capital changes and other adjustments. Cash Flow from Operating Activities 0.0% 0.0% <-- By entering the total here, the row above will be automatically calculated. Purchases of property & equip., & other capital expenditures 0.0% 0.0% <-- This is normally a negative number. Other Investing Activities $ - 0 $ - 0 $ - 0 0.0% 0.0% <-- This is normally a negative number. Cash Flow from Investing Activities 0.0% 0.0% <-- This is normally a negative number. By entering the total here, the row above will be automatically calculated. Increase or (Decrease) in Debt 0.0% 0.0% <-- Borrowing money (debt) is a source of cash, "proceeds," repaying it is a use of cash. Increase or (Decrease) in Common Stock 0.0% 0.0% <-- Issuing stock is a source of cash, "proceeds," repurchasing it is a use of cash Dividend Payments $ - 0 $ - 0 $ - 0 0.0% 0.0% <-- Dividend payments should normally be a negative number, because they are a cash outflow. Other Financing Activities $ - 0 $ - 0 $ - 0 0.0% 0.0% Cash Flow from Financing Activities 0.0% 0.0% <-- By entering the total here, the row above will be automatically calculated. Cumulative Translation Adjustment 0.0% 0.0% <-- Don't try to understand what this exchange rate-related number means at this time. It is applicable to most multicurrency organizations. NET CASH FLOW $ - 0 $ - 0 $ - 0 0.0% 0.0% <-- Confirm this matches what is listed on the financial statement you downloaded. Memo: Free Cash Flow $ - 0 $ - 0 $ - 0 0.0% 0.0% <-- Usually defined as Cash Flow from Operating Actitivies less Capital Expenditures. Note: If cap exp is a negative number, you will use the Source. (Publication Year). Title Retrieved from: http://www.?????????????? absolute value of that number; this means change the negative sign to positive for the calculation. If Cap Expenditures are -$100: Southwest Airlines (LUV) Formula is Op Cash Flow less absolute value of Cap Exp, e.g., 1,000-100 = 900. Free Cash Flow must be less than Operating Cash Flow. BALANCE SHEET HIGHLIGHTS Unaudited; Amounts USD x 1000 For Fiscal Years ending: % Growth vs Prior Year 2020 2019 2018 2020 2019 Current Assets Cash & cash equivalents 0.0% 0.0% <-- Cash equivalents include Accounts Receivable (invoices the organization has sent to clients, but that they have not yet paid) although some disagree AR should be considered this. All Other Current Assets $ - 0 $ - 0 $ - 0 0.0% 0.0% Total Current Assets 0.0% 0.0% <-- Enter total current assets values, and the spreadsheet will calculate "other current assets." Non-current Assets Property, Plant and Equipment, Net 0.0% 0.0% <-- These are for PP&E net of accumulated depreciation. Other Non-current Assets $ - 0 $ - 0 $ - 0 0.0% 0.0% <-- Includes intellectual property (IP), such as patents and acquired technology. Total Non-current Assets $ - 0 $ - 0 $ - 0 0.0% 0.0% TOTAL ASSETS 0.0% 0.0% <-- Enter Total Assets, and the spreadsheet will calculate Total Noncurrent Assets and Other Noncurrent Assets. Current Liabilities Accounts Payable, Net 0.0% 0.0% <-- These are for bills the organization has received but not yet paid. Other Current Liabilities $ - 0 $ - 0 $ - 0 0.0% 0.0% Total Current Liabilities 0.0% 0.0% Note: Working Capital, capital used for day-to-day operations, is Total Current Assets - Total Current Liabilities Non-current Liabilities Long-term Debt 0.0% 0.0% Other Non-current Liabilities $ - 0 $ - 0 $ - 0 0.0% 0.0% Total Non-current Liabilities $ - 0 $ - 0 $ - 0 0.0% 0.0% TOTAL LIABILITIES 0.0% 0.0% <-- Enter Total Liabilities and spreadsheet will calculate other non-current and total liabilities. SHAREHOLDERS' EQUITY Note: Working Capital is Total Current Assets - Total Current Liabilities Common Stock, at par Additional Paid-in Capital Retained Earnings Cumulative Translation Adjustment and Other $ - 0 $ - 0 $ - 0 TOTAL SHAREHOLDERS' EQUITY $ - 0 $ - 0 $ - 0 <-- Confirm this matches what is listed on the financial statement you downloaded. By definition, Shareholders' equity equals total assets minus total liabilities. Total Liabilities+Total Shareholders' Equity $ - 0 $ - 0 $ - 0 <-- Confirm this matches Total Assets since Total Assets = Total Liabilities + Total Shareholders' Equity Source. (Publication Year). Title Retrieved from: http://www.?????????????? Southwest Airlines (LUV) SELECTED FINANCIAL RATIOS Unaudited; Amounts USD x 1000 For Fiscal Years ending: % Growth vs Prior Year 2020 2019 2018 2020 2019 FINANCIAL RATIOS Price / Earnings Ratio 0.0 0.0 0.0 0.0% 0.0% <-- Price per Share / Earnings per Share. Typical values are 10 to 40 times. Debt Ratio 0% 0% 0% 0.0% 0.0% <-- Total Liabilities / Total Assets. Result < 0.5, most of the assets are financed through equity. Result > 0.5, most of the assets are financed through debt. Total Debt / Equity Ratio 0.0 0.0 0.0 0.0% 0.0% <-- Total Liabilities / Total Shareholders' Equity. Typical values are 0.2 to 0.6. Return on Equity (ROE) % 0.0% 0.0% 0.0% 0.0% 0.0% <-- Net Income / Total Shareholders' Equity. Typical values are 2% to 40%. Return on Assets (ROA) % 0.0% 0.0% 0.0% 0.0% 0.0% <-- Net Income / Total Assets. Typical values are 2% to 40%. Almost always LOWER than ROE. Net Profit Margin % 0.0% 0.0% 0.0% 0.0% 0.0% <-- Net Income / Total Revenue. Typical values are 1% to 15%. Free Cash Flow $ - 0 $ - 0 $ - 0 0.0% 0.0% <-- If FCF is negative, consider what that means. Is a negative FCF a bad thing? OTHER USEFUL RATIOS Earnings per Share or EPS $ - 0 $ - 0 $ - 0 0.0% 0.0% <-- Net Income / Diluted Shares Outstanding. Typical values are $1.00 to $10.00. May also be negative. Current Ratio 0.0 0.0 0.0 0.0% 0.0% <-- Current Assets / Current Liabilities. Typical values are 0.7 to 1.5. COMMON STOCK PRICE Adjusted Close Price on or near $ - 0 $ - 0 $ - 0 0.0% 0.0% <-- Usually, somewhere between a few dollars and a couple of hundred dollars per share RATE OF RETURN CALCULATIONS 2017 2018 2019 2020 Pct Change <-- Need fiscal end-of-year information for four years to calculate three-year percentage change. Adjusted Close Stock Price at fiscal End of Year (EOY) $ - 0 0.0% <-- For this, ROI% = ($End - $Beg) / $Beg. More precisely, you would add dividends received to the $End value. Annual Dividends per Share $ - 0 $ - 0 $ - 0 <-- Approximate dividends/share are calculated here, but you may want to override those with disclosed div/share figures. If you buy 1 share at end of fiscal 2017, collect dividends, then sell at end of fiscal 2020, your 3-year percent gain would be: 0.0% <-- Not required here, but a more complete measurement. BUT WHAT IF WE VIEW THIS AS A TIME VALUE OF MONEY QUESTION? Investor's Annual Cash Flow for 1 Share $ - 0 C. Jeffrey Smith: This is negative because we're assuming you pay this out ("cash outflow") to buy your 1 share of stock. $ - 0 $ - 0 $ - 0 <-- For an investor who buys 1 share at beginning, collects dividends, then sells at end of third year. Solve for the annual Internal Rate of Return or IRR, with N=3 Yrs ERROR:#NUM! C. Jeffrey Smith: This will always be LESS THAN 1/3 of the total 3-yr Percent Change figures above. Why? Because of time value of money and compounding. When N = 1, ROI and IRR will be the same. For N > 1, they will be different because IRR calculates the return on an annualized basis; average annual return over the investment period. <-- This IRR is the best overall measure of this stock's performance over the time period. Source. (Publication Year). Title Retrieved from: http://www.?????????????? &F Printed &D Page &P of &N Capital Structure This tab is used to calculate Weighted Average Cost of Capital (WACC). Enter data in the yellow cells only. Comments to help you are indicated by a red triangle in the top right corner of cell; hover over the cell to review. Enter Company Full Name: Southwest Airlines (LUV) Enter Fiscal Year: 2020 Southwest Airlines (LUV) CAPITAL STRUCTURE For End of Fiscal Year 2020 Unaudited; Amounts USD x 1000 SIMPLE METHOD TEXTBOOK METHOD Capital Funding Amount C. Jeffrey Smith: C. Jeffrey Smith: All of the funds the organization has received from banks, bond-buyers, stockholders, and other investors. (Does not include Accounts Payable and accrued expenses.) Funds invested found on Form 10-K (Annual Report) filed with the Securities and Exchange Commission (SEC) https://www.sec.gov/edgar/searchedgar/companysearch.html Form 10-K also available on Mergent Online under Reports tab. Important to review cost of capital reading in text. Cost of Capital: Estimated % Return Req'd by Investors Regis, Kristin: Regis, Kristin: See Cost of Capital in text. For cost of debt, we would use current market value; however, that is not feasible for this project. For this project, review Form 10-K filed with the SEC https://www.sec.gov/edgar/searchedgar/companysearch.html to see debt interest rates so you may estimate here. Consider why market values would be more appropriate. Corporate Marginal Tax Rate % C. Jeffrey Smith: C. Jeffrey Smith: Always 0% for stock and retained earnings; may be 0% - 50% for debt and leases. See marginal tax rate explanation in the course text. Research corporate tax rate for fiscal year listed on this spreadsheet (e.g. IRS site). Tax information also available in Form 10-K. 1 - Corp Tax Rate % Cost of Capital, After Tax Savings C. Jeffrey Smith: C. Jeffrey Smith: Equals Column D times column F. $ Cost of Capital per Year (Column C x Coumn G) Wgt x Cost % of Total Debt: Bank Loans $ - 0 0.0% 20.0% 80.0% 0.0% $ - 0 ERROR:#DIV/0! ERROR:#DIV/0! Debt: Bonds - 0 0.0% 20.0% 80.0% 0.0% - 0 ERROR:#DIV/0! ERROR:#DIV/0! Debt: Commercial Paper - 0 0.0% 20.0% 80.0% 0.0% - 0 ERROR:#DIV/0! ERROR:#DIV/0! Debt: Other or Unidentified - 0 0.0% 20.0% 80.0% 0.0% - 0 ERROR:#DIV/0! ERROR:#DIV/0! Leases (a form of Debt) - 0 0.0% 20.0% 80.0% 0.0% - 0 ERROR:#DIV/0! ERROR:#DIV/0! Preferred Stock (if any) - 0 0.0% 0.0% 100.0% 0.0% - 0 ERROR:#DIV/0! ERROR:#DIV/0! Common Stock: At Par - 0 0.0% Regis, Kristin: Regis, Kristin: "Cost of equity" C. Jeffrey Smith: C. Jeffrey Smith: All of the funds the organization has received from banks, bond-buyers, stockholders, and other investors. (Does not include Accounts Payable and accrued expenses.) Funds invested found on Form 10-K (Annual Report) filed with the Securities and Exchange Commission (SEC) https://www.sec.gov/edgar/searchedgar/companysearch.html Form 10-K also available on Mergent Online under Reports tab. Important to review cost of capital reading in text. Regis, Kristin: Regis, Kristin: See Cost of Capital in text. For cost of debt, we would use current market value; however, that is not feasible for this project. For this project, review Form 10-K filed with the SEC https://www.sec.gov/edgar/searchedgar/companysearch.html to see debt interest rates so you may estimate here. Consider why market values would be more appropriate. C. Jeffrey Smith: C. Jeffrey Smith: Always 0% for stock and retained earnings; may be 0% - 50% for debt and leases. See marginal tax rate explanation in the course text. Research corporate tax rate for fiscal year listed on this spreadsheet (e.g. IRS site). Tax information also available in Form 10-K. 0.0% 100.0% 0.0% - 0 ERROR:#DIV/0! ERROR:#DIV/0! Common Stock: Add'l Paid-in Capital - 0 0.0% 0.0% 100.0% 0.0% - 0 ERROR:#DIV/0! ERROR:#DIV/0! Retained Earnings - 0 0.0% 0.0% 100.0% 0.0% - 0 ERROR:#DIV/0! ERROR:#DIV/0! [Other] - 0 0.0% 0.0% 100.0% 0.0% - 0 ERROR:#DIV/0! ERROR:#DIV/0! TOTAL $ - 0 $ - 0 ERROR:#DIV/0! ERROR:#DIV/0! C. Jeffrey Smith: C. Jeffrey Smith: The % of Total should always add up to 100.0%. If not, you've done something wrong. C. Jeffrey Smith: C. Jeffrey Smith: Equals Column D times column F. WEIGHTED AVERAGE COST OF CAPITAL: WACC = [$ Total Annual Cost of Capital] / [$ Total Capital Funding] = $0 / $0 = ERROR:#DIV/0! Amount Pct of Total Total Debt, incl. Leases & Preferred Stock - 0 0.0% So Debt/Equity Ratio = 0.0000% Total Equity, incl "Other" - 0 0.0% And Debt/Total Capital Ratio = 0.0000% TOTAL CAPITAL $ - 0 0.0% NOTES: a) The Corporate Marginal Tax Rate only affects debt and leases. For businesses, it is usually between 0% and 50%. For nonprofits and goverments, it is always 0%. b) Leases are a form of debt. c) Retained Earnings are basically common stock dividends that have not been paid out. Retained earnings therefore have the same required rate of return as common stock. d) In an organization, the treasurer is typically the best source for all of this information. HOW TO ESTIMATE REQUIRED RATE OF RETURN FOR COMMON STOCK Dividend Constant Growth Stock Valuation Model: ($Dividend / $Current Price) + Expected % Dividend Growth Rate <-- Only works if constant future growth is expected. Example: ($1.50 / $20.00) + 6.5% = 0.075 + 0.065 = 0.140 = 14.0% Intrinsic Value Method The internal rate of return (IRR) of the future cash flows investors expect to receive. Use a spreadsheet IRR function to calculate. Industry Averages Evaluate reasonable estimates for industry averages or for other organizations with similar risk. Not easy, by the way. (Note to Instructional Designers and Teachers: Financial History tab data does not feed into this worksheet.) &8&F &A &8Printed &D &8Page &P of &N Valuation This tab is used for the corporate valuation report (Final Project I). Enter data (forecasts based on assumptions you will explain in written report) in yellow cells only. Past performance and trends, text, course resources, research and most recent Annual Report Form 10-K on https://www.sec.gov/edgar/searchedgar/companysearch.html and on Mergent Online (under Reports) will help you determine assumptions. Questions? Post to your class General Questions discussion board or ask your instructor. CURRENCY: USD <-- Probably U.S. dollars, or perhaps another (e.g., euros or pesos). We will use U.S. dollars. SCALING: x 1,000 <-- Could be x1 (such as just dollars), x1000 (meaning amounts in Thousands), or Millions (meaning amounts in millions). We will use x1000. Southwest Airlines (LUV) - COMPANY VALUATION (Unaudited; USD 1000) Fiscal Year --> 2020 2021 2022 2023 2024 2025 Total TOTAL REVENUES 0 0 0 0 0 0 0 Growth Rate vs Prior Year 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total Operating Expenses 0 0 0 0 0 0 0 OPERATING INCOME or (Loss) 0 0 0 0 0 0 0 Operating Margin 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Operating margin equals Operating Income (or Loss) divided by Revenue. Interest expense 0 0 0 0 0 0 Interest & other income (expense) 0 0 0 0 0 0 INCOME (LOSS) BEFORE INCOME TAXES 0 0 0 0 0 0 0 Provision for (or benefit from) Income Taxes 0 0 0 0 0 Discontinued Operations Income (Loss), Net 0 0 0 0 0 0 0 NET INCOME OR (LOSS) 0 0 0 0 0 0 0 Weighted average (Number of) Diluted Shares Outstanding 0 0 0 0 0 DILUTED EARNINGS OR (LOSS) PER SHARE $ - 0 $ - 0 $ - 0 $ - 0 $ - 0 $ - 0 $ - 0 Net Income or (Loss), from Above 0 0 0 0 0 0 0 Depreciation and Amortization Expense 0 0 0 0 0 0 Other Operating Sources and (Uses) 0 0 0 0 0 0 Cash Flow from Operating Activities 0 0 0 0 0 0 0 Purchases of property & equip., & other capital expenditures 0 0 0 0 0 0 Other Investing Activities 0 0 0 0 0 0 Cash Flow from Investing Activities 0 0 0 0 0 0 0 Increase or (Decrease) in Debt 0 0 0 0 0 0 Increase or (Decrease) in Common Stock 0 0 0 0 0 0 Dividend Payments 0 0 0 0 0 0 Payments would be entered as a negative. Other Financing Activities 0 0 0 0 0 0 Cash Flow from Financing Activities 0 0 0 0 0 0 0 Cumulative Translation Adjustment 0 0 0 0 0 0 0 For this course, we will assume zero change over 10 years. NET CASH FLOW 0 0 0 0 0 0 0 Free Cash Flow 0 0 0 0 0 0 0 VALUATION CALCULATIONS FREE CASH FLOW "FCF" (from above) 0 0 0 0 0 0 0 For the project analysis, we EXCLUDE the funding proceeds & repayment. NET PRESENT VALUE "NPV" OF FUTURE FREE CASH FLOWS NPV @ discount rate of 5.0% $0 For low-risk companies. The value here is what you may be willing to pay to buy the company under these assumptions. NPV @ discount rate of 10.0% $0 For medium-risk companies. The value here is what you may be willing to pay to buy the company under these assumptions. NPV @ discount rate of 18.0% $0 For high-risk companies. The value here is what you may be willing to pay to buy the company under these assumptions. If you had bought the whole company at the end of fiscal 2020 for its actual market value of ---> $0 (From Financial History worksheet, = share price x # of shares) Free Cash Flows w/Initial Investment 0 0 0 0 0 0 0 Initial Investment = initial cash outflow, which would be entered as a negative Cumulative (initial cash outflow and future FCF's) 0 0 0 0 0 0 Positive cumulative cash flows during the 10-year period? TRUE TRUE TRUE TRUE TRUE Breakeven point happens between the years when the negative cumulative NCF first changes to positive. (It could turn negative again in future years.) Discounted Payback Period formula needed to determine accurate year/months result. Internal Rate of Return (IRR) ERROR:#NUM! IRR At this discount rate (IRR,) the present value of future cash flows (Cells F56 through O56) equals initial invesment (E56) aka NPV will equal $0. Consider what the result means especially if it's negative. Also consider what forecasting additional years may do to this rate. MODIFIED INTERNAL RATE OF RETURN (MIRR) Financing Rate 0.0% <-- This is the assumed cost to obtain financing. It could be the firm's cost of equity (rate of return a shareholder requires for investing into the business). Reinivestment Rate ERROR:#NUM! <-- Assumes cash flows are reinvested at the IRR. In reality (vs. assumption), it might or might not equal the IRR from above. MIRR ERROR:#NUM! MIRR ECONOMIC VALUE ADDED (EVA), ALSO CALLED ECONOMIC PROFIT Assumed Tax Rate (for NOPAT calculation below) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Net Operating Profit After Tax (NOPAT) 0 0 0 0 0 0 Profit (the P in NOPAT) = Income Invested Capital 0 0 0 0 0 0 WACC ERROR:#DIV/0! 0.0% 0.0% 0.0% 0.0% 0.0% EVA Cash Flows ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! ERROR:#DIV/0! EVA = Net Income - (Invested Capital x WACC) NOTES: This introductory forecasting spreadsheet does not consider Terminal Value; the continuing value after the 5-year period. We are only looking five years in the future for this introductory course but many analysts would forecast to 10 years. Projections of future cash flows are always uncertain; consider doing several scenarios of cash flows, such as most likely, best case, and worst case. You should use a low discount rate to calculate NPV for low-risk projects such as replacing equipment; perhaps 5%. Use a higher rate, such as 10%, for medium-risk projects, and use a higher rate of, say, 15% or 20% for the riskiest projects. Company treasurer would have this information. &8&F &A &8Printed &D &8Page &P of &N Sheet1 Month -> 1 2 3 4 5 6 7 8 9 10 11 12 Interest Rate 0.8333% 0.8333% 0.8333% 0.8333% 0.8333% 0.8333% 0.8333% 0.8333% 0.8333% 0.8333% 0.8333% 0.8333% Start of Month $1,000.00 $1,008.33 $1,016.74 $1,025.21 $1,033.75 $1,042.37 $1,051.05 $1,059.81 $1,068.64 $1,077.55 $1,086.53 $1,095.58 Interest Charge $8.33 $8.40 $8.47 $8.54 $8.61 $8.69 $8.76 $8.83 $8.91 $8.98 $9.05 $9.13 End of Month $1,008.33 $1,016.74 $1,025.21 $1,033.75 $1,042.37 $1,051.05 $1,059.81 $1,068.64 $1,077.55 $1,086.53 $1,095.58 $1,104.71 Help-Depreciation DOES DEPRECIATION EXPENSE AFFECT CASH FLOW? SITUATION - Suppose you have a really simple business: you've bought a new 3-D printer, and you rent it out to fellow SNHU students for $4000/yr. - The students who rent the printer are responsible for supplies and maintenance. - You estimate the printer's useful life is 3 years, and at the end of that time you can sell it for $500. - Accounting rules require you to "recognize" the printer's cost by spreading it over the estimated useful life. YEAR 1 YEAR 2 YEAR 3 CUMULATIVE 1. You buy the printer for cash, & sell it 3 yrs later. Investment $ (10,000) $ - 0 $ 500 $ (9,500) 2. You rent it to other students for $4,000 / year Revenue $ 4,000 $ 4,000 $ 4,000 $ 12,000 3. You record depreciation expense for the printer Expense $ (3,167) $ (3,167) $ (3,167) $ (9,500) Notice the "Cumulative" column: Cumulative depreciation equals cumulative cash flow. Depreciation is simply a spreading out of the cash flow. IN A REALLY SIMPLE WORLD, YOUR FINANCIALS MIGHT LOOK LIKE THIS: REVENUE $ 4,000 $ 4,000 $ 4,000 $ 12,000 Buying and Selling of 3-D Printer $ (10,000) $ - 0 $ 500 $ (9,500) PRETAX PROFIT OR (LOSS), EQUALS PRETAX CASH FLOW $ (6,000) $ 4,000 $ 4,500 $ 2,500 Tax Refunds or (Payments), @ 40% Tax Rate $ 2,400 $ (1,600) $ (1,800) $ (1,000) NET PROFIT OR (LOSS), EQUALS NET CASH FLOW $ (3,600) $ 2,400 $ 2,700 $ 1,500 Notice that the net profit line is rather lumpy. BUT YOUR ACCOUNTING INCOME STATEMENTS WILL LOOK LIKE THIS: REVENUE $ 4,000 $ 4,000 $ 4,000 $ 12,000 Depreciation Expense $ (3,167) $ (3,167) $ (3,167) $ (9,500) OPERATING PROFIT OR (LOSS) $ 833 $ 833 $ 833 $ 2,500 Tax Provision Expense @40% Tax Rate $ (333) $ (333) $ (333) $ (1,000) NET PROFIT (OR LOSS) $ 500 $ 500 $ 500 $ 1,500 Notice that the net profit line above is smooth, but the Cumulative column hasn't changed. AND YOUR CASH FLOW STATEMENTS (STANDARD FORMAT) WILL LOOK LIKE THIS: Net Profit (Or Loss) from Above $ 500 $ 500 $ 500 $ 1,500 Add back: Depreciation Expense $ 3,167 $ 3,167 $ 3,167 $ 9,500 Change in Working Capital & Other Operating Activities $ - 0 $ - 0 $ - 0 $ - 0 Cash Flow From Operating Activities $ 3,667 $ 3,667 $ 3,667 $ 11,000 Capital Expenditures $ (10,000) $ - 0 $ - 0 $ (10,000) Proceeds from Sale of Assets $ - 0 $ - 0 $ 500 $ 500 Cash Flow from Investing Activities $ (10,000) $ - 0 $ 500 $ (9,500) Additional Paid-in Capital $ - 0 $ - 0 $ - 0 $ - 0 Dividends Paid $ - 0 $ - 0 $ - 0 $ - 0 Cash Flow from Financing Activities $ - 0 $ - 0 $ - 0 $ - 0 NET CASH FLOW $ (6,333) $ 3,667 $ 4,167 $ 1,500 Cash Balance at Beginning Of Year $ 10,000 $ 3,667 $ 7,333 Cash Balance at End of Year $ 3,667 $ 7,333 $ 11,500