1 / 26

Module 2: Introduction to Reformulation- Joy Global

Module 2: Introduction to Reformulation- Joy Global. Thomas Maguire 1/22/2014. Enterprise vs. Financing Activities. Enterprise Operations- business/production a ctivities u ndertaken by company Joy Global- Worldwide leader in manufacturing m ining e quipment

kateb
Download Presentation

Module 2: Introduction to Reformulation- Joy Global

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Module 2: Introduction to Reformulation- Joy Global Thomas Maguire 1/22/2014

  2. Enterprise vs. Financing Activities • Enterprise Operations- business/production activities undertaken by company • Joy Global- Worldwide leader in manufacturing mining equipment • Financing Activities- Tangential to core business of manufacturing leading mining equipment • Borrowing/Lending- Interest Expense/Interest Income • Current Financial Statements prepared under GAAP do not distinguish between these two • It is our responsibility through reformulation to separate these two activities

  3. Reformulation • Separates the income and the assets/liabilities associated with operating and financing activities • Allows us to focus solely on the Enterprise Operations of a company in our forecasting and valuation • The process of reformulation requires examining each line item in the Income Statement and Balance Sheet separately and asking: • Is this element a part of enterprise operations or the financing of Joy Global?

  4. Starting Point • To begin the process of reformulation we must identify the current and past: • Enterprise Profit After Tax (EPAT) • Net Enterprise Assets (NEA) • We are trying to identify the Enterprise Operations of Joy Global • Enterprise Assets reported on the Balance Sheet as components of NEA generate the components of EPAT on the Income Statement • After identification, we can use these amounts to forecast future EPAT and NEA allowing us to ultimately come to a valuation

  5. Identifying NEA • Pick through Joy Global’s Balance Sheet line by line • Determine which items are associated with enterprise operations • At each step, we must ask ourselves whether this line item is an integral part of the enterprise operations of the company • Application to Joy Global’s Balance Sheet…

  6. Joy Global Balance Sheet Split (2% Sales) NEA= $3,868,510

  7. Joy Global Balance Sheet (Cont.)

  8. Net Enterprise Asset Calculation

  9. Identifying NFL • Now, we must identify the effect of the company’s net financing activities on the balance sheet • Because Joy Global is a “net borrower”, we will have Net Financial Liabilities (NFL)

  10. Joy Global Balance Sheet NFL= $1,010,141 Split

  11. Joy Global Balance Sheet (Cont.)

  12. Net Financial Liability Calculation

  13. Joy Global Balance Sheet CSE= $2,858,369

  14. Identifying EPAT • Now we must identify the enterprise profitability • (EPAT) • We must go through the companies Income Statement on a line by line basis • Also must consider items in other comprehensive income

  15. Joy Global Income Statement EPAT = $570,956 Adjusted

  16. Joy Global OCI

  17. Income Tax Adjustment • Provision for Income Tax reported on Financial Statements is based on all line items above it: • Some Enterprise Profits, some not • We must take out the tax effect of any financing revenue or expenses (Interest Income and Interest Expense) • Need to take out the tax shield of interest expense deduction • To make this adjustment in 2013 we would:

  18. 2013 Income Tax Adjustment • Have a Net Income that was $57,504 higher • ($66,285- $8,781) • Assuming a Marginal Tax Rate of 37% we can calculate the tax benefit gained through the financing activity • ($57,504 x.37) = $21,277 • Tax should have been $21,277 higher than reported • Total Tax To Include in EPAT= $251,495 • ($230,219 + $21,277)

  19. EPAT Calculation

  20. Identifying FEAT • Financing Expenses after Tax must now be identified • This represents the companies net financing • As most companies are net borrowers, they will usually have a net expense related to financing • This calculation will later be used as an input in determining the cost of capital

  21. Joy Global Income Statement FEAT = $36,228 Adjusted

  22. Joy Global OCI

  23. 2013 Income Tax Adjustment • Ass identified previously, there was a net tax benefit associated with Interest Income and Interest Expense • This amount must now be included in FEAT

  24. FEAT Calculation

  25. Checking our Work! • If we did all calculations right, then thee must hold true: • Current Stockholders Equity = NEA – NFL • $2,858,369= $3,868,510 - $1,010,141 • Comprehensive Income = EPAT – FEAT • $534,728 = $570,956 - $36,228 • They Do! So we can now be confident in our reformulations and use them as inputs in our valuation

  26. Thank You! • Questions?

More Related