Finance Management: Capital Structure, Working Capital, Pro Forma Balance Sheet, Pro Forma Profit and Loss Statement, Investment Appraisal Techniques

This presentation provides an overview of finance management, including topics such as capital structure, working capital, pro forma balance sheet, pro forma profit and loss statement, and investment appraisal techniques. It includes calculations and interpretations of financial data for a German company XYZ. The presentation concludes with the importance of financial decisions and their impact on the company's performance and profitability.

FINANCE MANAGEMENT

INTRODUCTION
Finance is at heart of every business. Financial management is
core activity of business to maintain its financial health and
improved performance every year.
 Capital structure of business is calculated in this report using
various ratios and forming Pro forma balance sheet and Profit and
loss account for a German company XYZ.
 Moreover this reports specifies the investment appraisal
techniques and detailed insight into calculation of overall cost of
capital.

CALCULATION OF WORKING
CAPITAL
2013 2014 2015 2016
Particulars Amount
in€millions
Amount in€
millions
Amount in€
millions
Amount
in€
millions
Current Assets (A) 5668 10083 13038 15581.6
Current Liabilities (B) 3826 7290 9378 13298.48
Working Capital (A-B) 1842 2793 3660 2283.12

INTERPRETATION
 Working capital is calculated by deducting current liabilities from
the current assets. Working capital is expected to decrease in 2016
due to decrease in cash. Account payables and Inventory are
increased for 20% in respect to sales.
 It can be observed form working capital calculations that
company has efficiently managed the working capital since 2013.
 Working capital is continuously growing depicting the efficiency
of current assets over current liabilities.

PRO FORMA BALANCE SHEET
FOR 2016
2013 2014 2015 2016
Particulars Amount
in€milli
ons
Amount in€
millions
Amount in€
millions
Amount in€ millions
Assets
Cash 205 375 245 230
Notes and Acc.
Receivables
2920 5883 7013 8415.6
Inventory 2543 3825 5780 6936
Total current assets 5668 10083 13038 15581.6
Net Fixed assets 903 2208 2433 2578
Other Assets 184 907 892.00 967.24
Total Assets 6755 13198 16363 19126.84

PRO FORMA BALANCE SHEET
FOR 2016
Liabilities
Bank loans 2323 4355 6075 9334.88
Accounts and trade
payables
1503 2935 3303 3963.6
Total current
Liabilities
3826 7290 9378 13298.48
Long term Debt 1236 3785 4122 4122
Total Liabilities 5062 11075 13500 17420.48
Common stock 53 55 58 60
Paid-in-capital 740 763 815 845
Retained earnings 900 1305 1990 801
Total Liabilities and
net worth
6755 13198 16363 19126.84

INTERPRETATIONS
 From the above balance sheet it can be observed that financial
wealth of the company is rising since 2013.
 Further financial halt and performance of the company is good
based on the balance sheet figures.
 Further growth in working capital depicts that liquidity is
maintained and current assets are adequate to meet the current
obligations.

PRO FORMA PROFIT AND LOSS
STATEMENT
2013 2014 2015 2016
Particulars Amount in€
millions
Amount in€
millions
Amount in€ millions Amount in€ millions
Net Sales 8055 12765 16253 19503.60
COGS 5690 8785 10540 12648.00
Gross Profit 2365 3980 5713 6855.60
Sales, delivery, warehousing 1015 1793 2373 2847.60
General and administration expenses 547 945 1125 1372.77
Total expenses 1562 2738 3498 4220.37
EBIT (Operating market) 803 1242 2215 2658.00
Interest Expense 495 605 950 1000.30
Profit before tax 308 637 1265 1657.70
Taxes 113 225 481 630.32
Net Income 195 412 784 1027.38
Less : Dividend 226.02
Retained earnings 801.36

INTERPRETATIONS
 XYZ has performed significantly well in year 2016 as compared
to previous years due to rise ins ales at the Rate of 20% and
further decrease in interest cost has contributed towards it.
 In year 2016 company is distributing dividends at the rate of
22% which will increase its market value in terms of rise in
share prices and increased demand.

APPLICATION OF INVESTMENT
APPRAISAL TECHNIQUES
Table : Calculation
of NPV and IRR
(Amount in€
millions)
Particulars
Year 0 Year
1
Year2 Year 3 Year
4
Year
5
Year
6
Year 7 Year 8 Year
9
Year 10
Initial investment 210 0 0 0 0 0 0 0 0 0 0
Savings in Raw Materials 0 135 135 135 135 135 135 135 135 135 135
Additional expenses 0 95 95 95 95 95 95 95 95 95 95
Working Capital 37 0 0 0 0 0 0 0 0 0 0
Working capital recovery 0 0 0 0 0 0 0 0 0 0 33.3
Loss of sales 0 10 10 10 10 10 10 10 10 10 10
Tax benefit on depreciation 0 7.35 7.35 7.35 7.35 7.35 7.35 7.35 7.35 7.35 7.35 IRR
Net cash flows 247.00 37.35 37.35 37.35 37.35 37.35 37.35 37.35 37.35 37.35 70.65 9.58%
Discounting factor @4.36% 1.00 0.96 0.92 0.88 0.84 0.81 0.77 0.74 0.71 0.68 0.65 NPV
Present value of Cash-flows 247.00 35.79 34.29 32.86 31.49 30.17 28.91 27.70 26.55 25.44 46.11 72.32

INTERPRETATION
 In the current context of XYZ company it can be evaluated that
NPV is positive which implies that net value is added to the
company from accepting the project.
 Further savings in cash outflows are treated as equivalent to
cash inflows.
 Since IRR is greater than cost of capital of 4.36% therefore
project should be accepted by company.

CONCLUSION
 From the above report it can be concluded that performance of
XYZ has increased significantly in year 2016 due to its decisions
of financial findings and rising sales up to 20%.
 Further, NPV and IRR calculation indicated that project is
acceptable as it will add value to the firm and will bring
profitability.

REFERENCES
Baños-Caballero, S., García-Teruel, P.J. and Martínez-Solano, P., 2014.
Working capital management, corporate performance, and financial
constraints. Journal of Business Research. 67(3). pp.332-338.
Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John
Wiley & Sons.
Biddle, G.C., 2015. The Role of Financial Statements in Reporting
Financial Performance. In Accounting & Finance/IASB Research
Forum.

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