lecture02 - Financial Statements, Taxes, and Cash Flows...

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Unformatted text preview: Financial Statements, Taxes, and Cash Flows Taxes, 1 Agenda • • • • The Balance Sheet The Income Statement Taxes Cash Flow 2 Balance Sheet • The balance sheet is a snapshot of the firm’s The assets and liabilities at a given point in time assets • Assets are listed in order of decreasing liquidity – Ease of conversion to cash – Without significant loss of value • Balance Sheet Identity – Assets = Liabilities + Stockholders’ Equity 3 The Balance Sheet - Figure 2.1 4 Net Working Capital and Net Liquidity Liquidity • Net Working Capital – Current Assets – Current Liabilities – Positive when the cash that will be received over the next 12 months Positive exceeds the cash that will be paid out exceeds – Usually positive in a healthy firm • Liquidity – – – – Ability to convert to cash quickly without a significant loss in value Liquid firms are less likely to experience financial distress But liquid assets earn a lower return Trade-off to find balance between liquid and illiquid assets 5 US Corporation Balance Sheet – US Table 2.1 Table 6 Nike 10-K Market Vs. Book Value • The balance sheet provides the book value of The the assets, liabilities, and equity. the • Market value is the price at which the assets, Market liabilities, or equity can actually be bought or sold. sold. • Market value and book value are often very Market different. Why? different. • Which is more important to the decision-making Which process? process? 8 Income Statement • The income statement is more like a video of the The firm’s operations for a specified period of time. firm’s • You generally report revenues first and then You deduct any expenses for the period deduct • Matching principle – GAAP says to show Matching revenue when it accrues and match the expenses required to generate the revenue expenses 9 US Corporation Income Statement US – Table 2.2 Table 10 10 SEC Filing • Publicly traded companies must file regular Publicly reports with the Securities and Exchange Commission Commission • These reports are usually filed electronically and These can be searched at the SEC public site called EDGAR EDGAR • Search for Apple’s (AAPL) annual report on Search EDGAR. EDGAR. 11 11 Taxes • The one thing we can rely on with taxes is that The they are always changing they • Marginal vs. average tax rates – Marginal tax rate – the percentage paid on the next Marginal dollar earned dollar – Average tax rate – the tax bill / taxable income • Other taxes 12 12 Corporate Tax Rates Taxable Income $0 — 50,000 — 75,000 50,001 — 100,000 75,001 — 335,000 100,001 — 10,000,000 335,001 — 15,000,000 10,000,001 — 18,333,333 15,000,001 + 18,333,334 Tax rate 15% 25% 34% 39% 34% 35% 38% 35% Example: Marginal Vs. Average Example: Rates Rates • Suppose your firm earns $4 million in taxable Suppose income. (Use Table 2.3) income. – What is the firm’s tax liability? – What is the average tax rate? – What is the marginal tax rate? • If you are considering a project that will If increase the firm’s taxable income by $1 million, what tax rate should you use in your analysis? analysis? 14 14 The Concept of Cash Flow • Cash flow is one of the most important pieces of Cash information that a financial manager can derive from financial statements from • The statement of cash flows does not provide us The with the same information that we are looking at here here • We will look at how cash is generated from We utilizing assets and how it is paid to those that finance the purchase of the assets finance 15 15 Cash Flow From Assets • Cash Flow From Assets (CFFA) = Cash Cash Flow to Creditors + Cash Flow to Stockholders Stockholders • Cash Flow From Assets = Operating Cash Cash Flow – Net Capital Spending – Change in NWC NWC – Operating Cash Flow = EBIT + Depreciation Operating Taxes Taxes 16 16 Example: US Corporation – Part I • OCF (I/S) = EBIT + depreciation – taxes = • = 694 + 65 – 212 = $547 $547 • NCS ( B/S and I/S) = ending net fixed assets – beginning net fixed assets + depreciation = beginning • = 1709 – 1644 + 65 = $130 $130 • Changes in NWC (B/S) = ending NWC – ending beginning NWC = beginning • = 1014 – 684 = $330 $330 • CFFA = OCF – NCS – ΔNWC= CFFA • = 547 – 130 – 330 = $87 17 17 Example: US Corporation – Part II • CF to Creditors (B/S and I/S) = iinterest paid nterest I/S – net new borrowing = net • = 70 – (454 – 408) = $24 • CF to Stockholders (B/S and I/S) = dividends I/S dividends paid – net new equity raised = • = 103 – (640 – 600) = $63 • CFFA = 24 + 63 = $87 18 18 Cash Flow Summary Table 2.5 19 19 Example: Balance Sheet and Example: Income Statement Information Income • Current Accounts • Fixed Assets and Depreciation • Long-term Debt and Equity – – – 2007: CA = 3625; CL = 1787 – 2006: CA = 3596; CL = 2140 – 2007: NFA = 2194; 2006: NFA = 2261 – Depreciation Expense = 500 2007: LTD = 538; Common stock & APIC = 462 2006: LTD = 581; Common stock & APIC = 372 • Income Statement – EBIT = 1014; Taxes = 368 – Interest Expense = 93; Dividends = 285 20 20 Example: Cash Flows • • • • • • • • OCF = 1,014 + 500 – 368 = 1,146 NCS = 2,194 – 2,261 + 500 = 433 Changes in NWC = (3,625 – 1,787) – (3,596 – 2,140) = Changes 382 382 CFFA = 1,146 – 433 – 382 = 331 CF to Creditors = 93 – (538 – 581) = 136 CF to Stockholders = 285 – (462 – 372) = 195 CFFA = 136 + 195 = 331 The CF identity holds. 21 21 Quick Quiz • What is the difference between book value and What market value? Which should we use for decisionmarket making purposes? • What is the difference between accounting income What and cash flow? Which do we need to use when making decisions? making • What is the difference between average and marginal What tax rates? Which should we use when making financial decisions? financial • How do we determine a firm’s cash flows? What are How the equations and where do we find the information? the 22 22 For Next Time • Homework due on Tuesday, 09/02 – Chapter 2, pp. 43-47: 1, 2, 8, 14, 18, 22 • Practice problems: – Chapter 2, pp. 43-47: 5, 6, 7, 9, 15, 19, 21 • Quiz 1 on Tuesday 09/02 ...
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