Financial Management 2 - Birmingham

8/12/2019 Financial Management 2 - Birmingham

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Financial Statements, CashFlow, and Taxes

Key Financial Statements Balance Sheet Income Statement Statement of Stockholders Equity Statement of Cash Flows

Free Cash Flow

Federal Tax System

Chapter 2

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The Annual Report

Balance sheet provides a snapshot of afirms financial position at one point in time. Income statement summarizes a firmsrevenues and expenses over a given period oftime.Statement of stockholders equity showshow much of the firms earnings wereretained, rather than paid out as dividends.Statement of cash flows reports the impactof a firms activities on cash flows over a

given period of time. 2-2


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Balance Sheet: Assets

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2008 2007 AssetsCash $208,323 $102,024

Accounts receivable 690,294 824,979Inventories 942,374 715,414

Total current assets $1,840,991 $1,642,417Gross fixed assets 317,503 232,179Less accumulated depreciation 54,045 34,187Net fixed assets $263,458 $197,992

Total assets $2,104,449 $1,840,409


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Balance Sheet: Liabilities and Equity

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2008 2007

Short-term Borrow $288,798 $296,149 Accounts payable 636,318 414,611

Accruals 106,748 103,362Total current liabilities $1,031,864 $814,122Long-term debt 410,769 372,931Common stock (100,000 shares) 550,000 550,000

Retained earnings 111,816 103,356

Total equity $661,816 $653,356

Total liabilities and equity $2,104,449 $1,840,409


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Income Statement

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2008 2007Sales $2,325,967 $2,220,607Cost of goods sold 1,869,326 1,655,827Other expenses 287,663 273,870

Total operating costs excludingdepreciation and amortization $2,156,989 $1,929,697

Depreciation and amortization 25,363 26,341

EBIT $143,615 $264,569

Interest expense 31,422 13,802

EBT $112,193 $250,767Taxes (40%) 44,877 100,307

Net income $67,316 $150,460


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Other Data

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2008 2007

EPS $0.67 $1.50

DPS $1.00 $1.42

Book value per share $6.62 $6.53

Stock price $15.60 $21.80

Share outstanding 100,000 100,000

Tax rate 40% 40%


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Did the expansion create additionalafter-tax operating income?

Sales increased by $105,330. AT operating income 08 = EBIT(1 Tax rate)

= $143,615(1 0.4)= $143,615(0.6)= $86,169.

AT operating income07

= $158,741.

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What effect did the expansion haveon net working capital?

NWC08= ($208,323 + $690,294 + $942,374) ($636,318 + $106,748) = $1,097,925 .

NWC07= ($102,024 + $824,979 + $715,414) ($414,611 + $103,362)= $1,124,444 .

NWC = $1,097,925 $1,124,444 = ($26,519).

Net working capital decreased by $26,519 .2-8


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What was the free cash flow (FCF)for 2008?

NWCesexpenditur

Capital onamortizati

andDepr. T)EBIT(1FCF

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FCF08 = EBIT(1 T) Net investment in operating capital= ($86,169) ($1,097,925 $1,124,444)= ($86,169 + 26,519 = ($59,650)

Is negative free cash flow always a bad sign?


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What caused Everelites total assets toincrease in 2008?

Everelites note payable and long-term debtincreased to support its increasing inventories

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Does it appear that Everelites salesprice exceeds its cost per unit sold?

NO, the negative after-tax operating incomeand decline in cash position shows thatEverelite is spending more on its operations

than it is taking in.

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What if Everelites sales manager decided tooffer 60-day credit terms to customers,rather than 30-day credit terms?

If competitors match terms, and sales remainconstant...

A/R would .

Cash would .If competitors dont match, and sales double...

Short-run: Inventory and fixed assets tomeet increased sales. A/R , Cash .Company may have to seek additionalfinancing.Long-run: Collections increase and thecompanys cash position would improve.

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How did Everelite finance itsexpansion?

Everelite financed its expansion with externalcapital.Everelite issued long-term debt which

reduced its financial strength and flexibility.

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Would Everelite have required externalcapital if they had broken even in 2008(Net income = 0)?

YES, the company would still have to financeits increase in assets. Looking at theStatement of Cash Flows, we see that the

firm made an investment of $711,950 in netfixed assets. Therefore, Everelite would haveraised additional funds.

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What happens if Everelite depreciates fixedassets over 7 years (as opposed to thecurrent 10 years)?

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No effect on physicalassets.

Fixed assets on the balancesheet would decline.Net income would decline.Tax payments woulddecline.Cash position wouldimprove.


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Federal Income Tax System

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Corporate and Personal Taxes

Both have a progressive structure (the higherthe income, the higher the marginal tax rate).Corporations

Rates begin at 15% and rise to 35% forcorporations with income over $10 million,although corporations with income between$15 million and $18.33 million pay amarginal tax rate of 38%.

Also subject to state tax (around 5%).

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Corporate and Personal Taxes

IndividualsRates begin at 10% and rise to 35% forindividuals with income over $349,700.

May be subject to state tax.


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Tax Treatment of Various Uses andSources of Funds

Interest paid tax deductible for corporations(paid out of pre-tax income), but usually notfor individuals (interest on home loans beingthe exception).Interest earned usually fully taxable (anexception being interest from a muni). Dividends paid paid out of after-tax income.

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Tax Treatment of Various Uses andSources of Funds

Dividends received Most investors pay 15%taxes.

Investors in the 10% or 15% tax bracket

pay 0% on dividends in 2008-2010.Dividends are paid out of net income whichhas already been taxed at the corporatelevel, this is a form of double taxation.

A portion of dividends received bycorporations is tax excludable, in order toavoid triple taxation.


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More Tax Issues

Tax Loss Carry-Back and Carry-Forward sincecorporate incomes can fluctuate widely, the TaxCode allows firms to carry losses back to offsetprofits in previous years or forward to offsetprofits in the future.Capital gains defined as the profits from thesale of assets not normally transacted in the

normal course of business, capital gains forindividuals are generally taxed as ordinaryincome if held for less than a year, and at thecapital gains rate if held for more than a year.Corporations face somewhat different rules.

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Documents

Financial Management 2 - Birmingham