Ch 02 Show
Transcript of Ch 02 Show
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Balance sheet Income statementStatement of cash flowsAccounting income versus cash flowMVA and EVAPersonal taxesCorporate taxes
CHAPTER 2Financial Statements,Cash Flow, and Taxes
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Balance Sheets: Assets
2001 2000Cash 7,282 9,000Short-term inv. 0 48,600AR 632,160 351,200Inventories 1,287,360 715,200
Total CA 1,926,802 1,124,000
Gross FA 1,202,950 491,000Less: Depr. 263,160 146,200
Net FA 939,790 344,800Total assets 2,866,592 1,468,800
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1,733,760
Liabilities and Equity
2001 2000Accts payable 524,160 145,600Notes payable 720,000 200,000Accruals 489,600 136,000
Total CL 481,600Long-term debt 1,000,000 323,432
Common stock 460,000 460,000Retained earnings (327,168) 203,768
Total equity 132,832 663,768Total L&E 2,866,592 1,468,800
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(519,936)
Income Statement
Sales 5,834,400 3,432,000COGS 5,728,000 2,864,000Other expenses 680,000 340,000Deprec. 116,960 18,900
Tot. op. costs 6,524,960 3,222,900EBIT (690,560) 209,100
Interest exp. 176,000 62,500EBT (866,560) 146,600
Taxes (40%) (346,624) 58,640Net income 87,960
2001 2000
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Other Data
No. of shares 100,000 100,000
EPS ($5.199) $0.88
DPS $0.110 $0.22Stock price $2.25 $8.50
Lease pmts $40,000 $40,000
2001 2000
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Statement of Retained Earnings (2001)
Balance of retained
earnings, 12/31/00 $203,768
Add: Net income, 2001 (519,936)
Less: Dividends paid (11,000)
Balance of retained
earnings, 12/31/01 ($327,168)
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Statement of Cash Flows: 2001
OPERATING ACTIVITIESNet Income (519,936)Adjustments:
Depreciation 116,960Change in AR (280,960)Change in inventories (572,160)Change in AP378,560Change in accruals 353,600
Net cash provided by ops.
(523,936)
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L-T INVESTING ACTIVITIES
Investments in fixed assets (711,950)FINANCING ACTIVITIES
Change in s-t investments 48,600Change in notes payable 520,000
Change in long-term debt 676,568Payment of cash dividends (11,000)
Net cash from financing 1,234,168Sum: net change in cash (1,718)
Plus: cash at beginning of year 9,000Cash at end of year 7,282
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Net cash from operations = -$523,936,mainly because of negative net income.
The firm borrowed $1,185,568 and sold$48,600 in short-term investments to
meet its cash requirements.
Even after borrowing, the cash accountfell by $1,718.
What can you conclude about the
companys financial condition from itsstatement of cash flows?
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What effect did the expansion have on
net operating working capital (NOWC)?
NOWC01 = ($7,282 + $632,160 + $1,287,360)
- ($524,160 + $489,600)
= $913,042.
NOWC00 = $793,800.
= -Operating
CA
Operating
CLNOWC
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What effect did the expansion have on
capital used in operations?
= NOWC + Net fixed assets.
= $913,042 + $939,790
= $1,852,832.
= $1,138,600.
Operatingcapital01
Operatingcapital00
Operatingcapital
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Did the expansion create additional net
operating profit after taxes (NOPAT)?
NOPAT = EBIT(1 - Tax rate)
NOPAT01 = -$690,560(1 - 0.4)
= -$690,560(0.6)
= -$414,336.
NOPAT00 = $125,460.
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What is your initial assessment of the
expansions effect on operations?
2001 2000
Sales $5,834,400 $3,432,000NOPAT ($414,336) $125,460
NOWC $913,042 $793,800
Operating capital $1,852,832 $1,138,600
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What effect did the companys
expansion have on its net cash flowand operating cash flow?
NCF01
= NI + DEP= -$519,936 + $116,960= -$402,976.
NCF00 = $87,960 + $18,900 = $106,860.
OCF01 = NOPAT + DEP
= -$414,336 + $116,960= -$297,376.OCF00= $125,460 + $18,900
= $144,360.
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What was the free cash flow (FCF)
for 2001?
FCF = NOPAT - Net capital investment
= -$414,336 - ($1,852,832 - $1,138,600)
= -$414,336 - $714,232
= -$1,128,568.
How do you suppose investors reacted?
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What is the companys EVA?
Assume the firms after-tax cost ofcapital (COC) was 11% in 2000
and 13% in 2001.
EVA01 = NOPAT- (COC)(Capital)= -$414,336 - (0.13)($1,852,832)= -$414,336 - $240,868= -$655,204.
EVA00 = $125,460 - (0.11)($1,138,600)= $125,460 - $125,246= $214.
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Would you conclude
that the expansion increased ordecreased MVA?
MVA = - .
During the last year stock price hasdecreased 73%, so market value ofequity has declined. Consequently,MVA has declined.
Equity capitalsuppliedMarket valueof equity
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Probably not.
A/P increased 260% over the pastyear, while sales increased by only70%.
If this continues, suppliers may cutoff trade credit.
Does the company pay its suppliers
on time?
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No, the negative NOPAT showsthat the company is spendingmore on its operations than it is
taking in.
Does it appear that the sales price
exceeds the cost per unit sold?
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1. The company offers 60-day creditterms. The improved terms arematched by its competitors, so salesremain constant.
What effect would each of these
actions have on the cash account?
A/R would
Cash would
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2. Sales double as a result of thechange in credit terms.
Short-run: Inventory and fixed
assets to meet increasedsales. A/R , Cash . Companymay have to seek additionalfinancing.
Long-run: Collections increaseand the companys cashposition would improve.
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The expansion was financedprimarily with external capital.
The company issued long-term debtwhich reduced its financial strength
and flexibility.
How was the expansion financed?
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Would external capital have been
required if they had broken even in2001 (Net income = 0)?
Yes, the company would still haveto finance its increase in assets.
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What happens if fixed assets are
depreciated over 7 years (as opposedto the current 10 years)?
No effect on physical assets.Fixed assets on balance sheet
would decline.
Net income would decline.Tax payments would decline.
Cash position would improve.
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Other policies that
can affect financial statements
Inventory valuation methods.
Capitalization of R&D expenses.
Policies for funding the companysretirement plan.
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Does the companys positive stock
price ($2.25), in the face of large losses,suggest that investors are irrational?
No, it means that investorsexpect things to get better in
the future.
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Why did the stock price fall
after the dividend was cut?
Management was signaling thatthe firms operations were in trouble.
The dividend cut lowered investors
expectations for future cash flows,which caused the stock price todecline.
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What were some other sources of
financing used in 2001?
Selling financial assets: Short term
investments decreased by $48,600.Bank loans: Notes payable increased
by $520,000.
Credit from suppliers: A/P increasedby $378,560.
Employees: Accruals increased by$353,600.
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What is the effect of the $346,624
tax credit received in 2001.
This suggests the company paid at least
$346,624 in taxes during the past 2 years. If the payments over the past 2 years were
less than $346,624 the firm would havehad to carry forward the amount of its lossthat was not carried back.
If the firm did not receive a full refund itscash position would be even worse.
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2000 Tax Year Single Individual
Tax Rates
Taxable Income Tax on Base Rate*
0 - 26,250 0 15%25,620 - 63,550 3,937.50 28%63,550 - 132,600 14,381.50 31%132,600 - 288,350 35,787.00 36%
Over 288,350 91,857.00 39.6%
*Plus this percentage on the amount over thebracket base.
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Assume your salary is $45,000, and you
received $3,000 in dividends.You are single, so your personal
exemption is $2,800 and your itemized
deductions are $4,550.
On the basis of the information
above and the 2000 tax year tax rateschedule, what is your tax liability?
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Calculation of Taxable Income
Salary $45,000
Dividends 3,000
Personal exemptions (2,800)
Deductions (4,550)
Taxable Income $40,650
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Tax Liability:
TL = $3,937.50 + 0.28($14,400)
= $7,969.50.
Marginal Tax Rate = 28%.
Average Tax Rate:
Tax rate = = 19.6%.
$40,650 - $26,250
$9,969.5$40,650
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2000 Corporate Tax Rates
Taxable Income Tax on Base Rate*
0 - 50,000 0 15%
50,000 - 75,000 7,500 25%75,000 - 100,000 13,750 34%100,000 - 335,000 22,250 39%
Over 18.3M 6.4M 35%
*Plus this percentage on the amount over thebracket base.
... ... ...
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Assume a corporation has $100,000 of
taxable income from operations, $5,000of interest income, and $10,000 of
dividend income.
What is its tax liability?
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Operating income $100,000
Interest income 5,000
Taxable dividendincome 3,000*
Taxable income $108,000
Tax = $22,250 + 0.39 ($8,000)= $25,370.
*Dividends - Exclusion= $10,000 - 0.7($10,000) = $3,000.
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State and local government bonds(municipals, ormunis) aregenerally exempt from federaltaxes.
Taxable versus Tax Exempt Bonds
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Exxon bonds at 10% versus Californiamuni bonds at 7%.
T = Tax rate = 28%.
After-tax interest income:
Exxon = 0.10($5,000) - 0.10($5,000)(0.28)
= 0.10($5,000)(0.72) = $360.CAL = 0.07($5,000) - 0 = $350.
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Solve for T in this equation:
Muni yield = Corp Yield(1-T)
7.00% = 10.0%(1-T)
T = 30.0%.
At what tax rate would you be
indifferent between the muni and thecorporate bonds?
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If T > 30%, buy tax exempt munis.
If T < 30%, buy corporate bonds.
Only high income, and hence hightax bracket, individuals should buymunis.
Implications