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7/30/2019 MBA 7200 Chapter 2
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Financial Statements, Taxes, and CashFlow
Chapter 2
Copyri ght 2013 by The McGraw-H il l Companies, I nc. All ri ghts reserved.McGraw-Hill/Irwin
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Chapter Outline
The Balance Sheet The Income Statement Taxes Cash Flow
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Balance SheetThe most important relationshipyou can bring to this class (from your accounting), is the formula of theBalance Sheet Identity : Total Assets = Total Liabilities +
Stockholders Equity
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The Balance SheetFigure 2.1
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Net Working Capital
NWC = Current Assets Current LiabilitiesPositive when the cash that will be receivedover the next 12 months exceeds the cash thatwill be paid out
Usually positive in a financially healthy firm
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LiquidityAbility to convert to cash quicklywithout a significant loss in valueLiquid firms are less likely toexperience financial distressBut liquid assets typically earn alower returnTrade-off to find balance betweenliquid and illiquid assets
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US Corporation Balance Sheet Table 2.1
Place Table 2.1 (US Corp Balance Sheet) here
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Book
Value
Market
Value
Versus
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Market Value vs. BookValue
The balance sheet provides thebook value of the assets,
liabilities, and equity.
Market value is the price at which
the assets, liabilities, or equity canactually be bought or sold.
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ar e a ue vs. oo a ueClassroom Discussion
Questions
1. Market value and book value areoften very different. Why?
2. Which is more important to thedecision-making process?
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US Corporation IncomeStatement Table 2.2
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Work the Web Example
Publicly traded companies must file regular reports with the Securities and Exchange
CommissionThese reports are usually filed electronicallyand can be searched at the SEC public site
called EDGARClick on the web surfer, pick a company, andsee what you can find!
http://www.sec.gov/edgar/searchedgar/webusers.htmhttp://www.sec.gov/edgar/searchedgar/webusers.htm7/30/2019 MBA 7200 Chapter 2
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TaxesThe one thing we can rely on with taxes isthat they are always changing!Marginal vs. average tax rates
Marginal tax rate
the percentage paid on thenext dollar earned Average tax rate the tax bill / taxable income
Other taxes
StateLocal (City or Town)
http://www.irs.gov/7/30/2019 MBA 7200 Chapter 2
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Corporate ProgressiveTaxes
Just like personal tax rates in theUnited States, corporations paytaxes on their taxable earnings
A significant difference is thatcorporate tax rates fit into just 8
categories
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Corporate ProgressiveTaxes
A significant difference betweenindividual tax rates andcorporate tax rates is that there
are only 8 categories:
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Corporate ProgressiveTaxes
Marginal Tax Rate : The tax rateyou would pay if you had onemore taxable dollar
Average Tax Rate : The tax rateyou are paying on all of your
taxable income which averagesacross all of your corporate taxcategories
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Corporate Tax Rates
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Example: Marginal Vs.Average Rates
Suppose your firm earns $4 million intaxable income.
What is the firms tax liability?
What is the average tax rate?What is the marginal tax rate?
If you are considering a project that
will increase the firms taxable incomeby $1 million, what tax rate should youuse in your analysis?
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Corporate Tax RatesEach major industry has different tax incentivesprovided by the US Government and as such, mayactually pay a different average tax rate:
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The Concept of Cash FlowCash flow is one of the most importantpieces of information that a financialmanager can derive from financialstatements
The Statement of Cash Flows does
not provide us with the sameinformation that we are looking at here
We will look at how cash is generatedfrom utilizing assets and how it is paidto those that finance the purchase of
the assets .
C h Fl S T bl
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Cash Flow Summary Table2.6
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Cash Flow From Assets
Cash Flow From Assets (CFFA) = Cash Flowto Creditors + Cash Flow to Stockholders
CFFA = CF to creditors + CF toStockholders
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Example of CCFA: Part I
CF to Creditors ( B/S and I/S) = interestpaid net new borrowing = $24
CF to Stockholders ( B/S and I/S) =dividends paid net new equity raised =$63
CFFA = CF to creditors + CF toStockholders
CFFA = 24 + 63 = $87
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Cash Flow From Assets
Cash Flow From Assets = Operating CashFlow Net Capital Spending Changes inNWC
CFFA = OCF NCS - NWC
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Example of CCFA: Part IIOCF ( I/S) = EBIT + depreciation taxes= $547
NCS ( B/S and I/S) = ending net fixedassets beginning net fixed assets +depreciation = $130
Changes in NWC ( B/S ) = ending NWC
beginning NWC = $330CFFA = OCF NCS - NWC
CFFA = 547 130 330 = $87
g Balance
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e g c ure ro em: BalanceSheet and Income Statement
Information
Current Accounts2009: CA = 3625; CL = 17872008: CA = 3596; CL = 2140
Fixed Assets and Depreciation2009: NFA = 2194; 2008: NFA = 2261Depreciation Expense = 500
Long-term Debt and Equity2009: LTD = 538; Common stock & APIC =
4622008: LTD = 581; Common stock & APIC =372
Income StatementEBIT = 1014; Taxes = 368Interest Expense = 93; Dividends = 285
C h Fl P bl
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Cash Flow ProblemAnswers:
OCF = 1,014 + 500 368 = 1,146NCS = 2,194 2,261 + 500 = 433Changes in NWC = (3,625 1,787) (3,596 2,140) = 382CFFA = 1,146 433 382 = 331CF to Creditors = 93 (538 581) = 136
CF to Stockholders = 285 (462 372) = 195CFFA = 136 + 195 = 331The CF identity holds!
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Comprehensive ProblemCurrent Accounts
2009: CA = 4,400; CL = 1,5002008: CA = 3,500; CL = 1,200
Fixed Assets and Depreciation2009: NFA = 3,400; 2008: NFA = 3,100
Depreciation Expense = 400Long-term Debt and Equity (R.E. not given)
2009: LTD = 4,000; Common stock & APIC = 4002008: LTD = 3,950; Common stock & APIC = 400
Income StatementEBIT = 2,000; Taxes = 300Interest Expense = 350; Dividends = 500
Task: Compute the CFFA
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Ethics Issues
Why is manipulation of financialstatements not only unethical and
illegal, but also bad for stockholders?
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Formulas
Total Assets = Total Liabilities +Stockholders Equity
CFFA = CF to creditors + CF toStockholders
CFFA = OCF NCS - NWC
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Key Concepts and Skills Identify the difference between book value
and market value
Identify the difference between accountingincome and cash flow
Differentiate between average and marginaltax rates
Calculate a firms cash flow from itsfinancial statements
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1. Know the difference between book value and the market value of a
company
2. Be able to compute the average andthe marginal tax rates of a company
3. Be able to compute the firms cashflow from its financial statements
What are the mostimportant topics of this
chapter?
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