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Ch02 Show - Chapter 2 Financial Statements Cash Flow and...

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1 Chapter 2 Financial Statements,  Cash Flow, and Taxes
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2 Topics in Chapter n Income statement n Balance sheet n Statement of cash flows n Free cash flow n MVA and EVA n Corporate taxes  n Personal taxes
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3 Value =                         +                         +     + FCF1 FCF2 FCF (1 + WACC)1 (1 + WACC) (1 + WACC)2 Free cash  flow (FCF) Market interest rates Firm’s business risk Market risk aversion Firm’s debt/equity mix Cost of debt Cost of equity Weighted  average cost of capital (WACC) Sales revenues Operating costs and taxes Required investments in operating capital = Determinants of Intrinsic Value: Calculating FCF ...
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4 Income Statement 2009 2010 Sales $3,432,000  $5,834,400  COGS 2,864,000  4,980,000  Other expenses 340,000  720,000  Deprec. 18,900   116,960      Tot. op. costs 3,222,900   5,816,960      EBIT 209,100  17,440  Int. expense 62,500   176,000      EBT 146,600  (158,560) Taxes (40%) 58,640   (63,424)
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5 What happened to sales and  net income? n Sales increased by over $2.4 million. n Costs shot up by more than sales. n Net income was negative. n However, the firm received a tax refund  since it paid taxes of more than $63,424  during the past two years.
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6 Balance Sheet: Assets 2009 2010 Cash $        9,000  $       7,282  S-T invest. 48,600  20,000  AR 351,200  632,160  Inventories 715,200   1,287,360      Total CA 1,124,000  1,946,802  Gross FA 491,000  1,202,950  Less: Depr. 146,200   263,160      Net FA 344,800  939,790 
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7 Effect of Expansion on Assets n Net fixed assets almost tripled in size. n AR and inventory almost doubled. n Cash and short-term investments fell.
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8 Balance Sheet: Liabilities &  Equity 2009 2010 Accts. payable $   145,600  $   324,000  Notes payable 200,000  720,000  Accruals 136,000   284,960      Total CL 481,600  1,328,960  Long-term debt 323,432  1,000,000  Common stock 460,000  460,000  Ret. earnings 203,768   97,632      Total equity 663,768  557,632 
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9 What effect did the expansion  have on liabilities & equity? n CL increased as creditors and suppliers  “financed” part of the expansion. n Long-term debt increased to help  finance the expansion. n The company didn’t issue any stock. n Retained earnings fell, due to the year’s  negative net income and dividend  payment.
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10 Statement of Cash Flows:  2010 Operating Activities Net Income ($   95,136) Adjustments:   Depreciation 116,960    Change in AR (280,960)   Change in inventories (572,160)   Change in AP 178,400    Change in accruals 148,960  
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11 Investing Activities    Cash used to acquire FA ($711,950)   Change in S-T invest. 28,600   Net cash prov. (used) by inv. act. ($683,350)
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