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Ch #3 (1)

# Ch #3 (1)

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Published by: Waleed Ayaz Utmanzai on Mar 14, 2013
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# CHAPTER 3

BA II Plus 2 . 9 Enter Financial Statements, Cash Flow, and Taxes
    
nd

Balance sheet Income statement Accounting income vs. cash flow MVA and EVA Federal tax system

The Annual Report Balance sheet – provides a snapshot of a firm’s financial position at one point in time.

Income statement – summarizes a firm’s revenues and expenses over a given period of time.

Statement of retained earnings – shows how much of the firm’s earnings were retained, rather than paid out as dividends.

Statement of cash flows – reports the impact of a firm’s activities on cash flows over a given period of time.

Balance Sheet: Assets Cash Accounts Receivable Inventories Total Current Assets Gross Fixed Assets Less: Depreciation Net Fixed Assets Total Assets 2012 7,282 632,160 1,287,360 1,926,802 1,202,360 263,160 939,790 2,866,592 2011 57,600 351,200 715,200 1,124,000 491,000 146,200 344,800 1,468,800

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828 146.568 723. and the company pays a 40 percent tax rate.960 100.866. Pearson Brothers recently reported an EBITDA of \$7.600 58.160 636.528.960) (106.600 1.960 (130.000 0.864.000 2.25 40.768 1.000 1.5 million and \$1.650.988) 116.900 190.428 43.592 2012 6.000 358.800 2011 3.640 87. What was the company's interest expense for the year? [Hint: Divide \$3 million by (1 .808 489.50 40. recently reported net income of \$3 million.328 18.T) = 0.88 0.000 481.000 -1.034.6 to find taxable income.432. EBT Taxes Net income Other data No.602 0.948) 136.000 100.8 million 2 .432 460. Its operating income Income Statement (EBIT) was \$6 million.11 2.592 492.000 32.672 209.012 (266.468.432 460.600 200.768 663. Little Books Inc.988 (13.] 2.000 519.176) 2011 145.000 203.784) (160.600 323. of shares EPS DPS Stock price Lease pmts Liabilities and Equity 2012 544.000 5.592 2. & Amort.000 136.Accts payable Notes payable Accruals Total Current Liabilities Long-term debt Common stock Retained earnings Total Equity Total L & E Income statement Sales COGS Other expenses EBITDA Depr. EBIT Interest Exp.22 8.

569 NOPAT11 = \$114. The company has \$2. Statement of related earnings In its most recent financial statements. its balance sheet showed \$780 million of retained earnings. reported \$50 million of net income and \$810 million of retained earnings.282 + \$632.948(1 – 0.592 3. What were the total dividends paid to shareholders during the most recent year? Did the expansion create additional net operating profits after taxes (NOPAT)? NOPAT = EBIT (1 – Tax rate) NOPAT12 = -\$130.176) (11. What was the company's depreciation and amortization expense? Statement of Retained Earnings (2011) Balance of Retained Earnings 12/31/11 Add: Net Income 2012 Less: Dividends paid Balance of Retained Earnings 12/31/12 \$203.832.000) 32. Newhouse Inc.160 + \$1.4) = -\$130.360) – (\$544.790 = \$1.768 (160.948(0.0 million of interest expense and the corporate tax rate is 40 percent.257 What effect did the expansion have on net operating working capital? NOWC Non-interest bearing Current Liabilities (Acct pay + Accruals) NOWC12 = (\$7.042 = - Current Assets (cash + Acct Rec + Inv) NOWC11 = \$842.600) = \$893.160 + \$489.042 + \$939.400 What effect did the expansion have on operating capital? Operating capital = NOWC + Net Fixed Assets Operating Capital12 = \$893.832 3 .Income statement of net income.6) = -\$78. The previous year.287.

391 OCF11 = \$114. a firm has to more than just cover operating costs.960 = \$38. What is the company's approximate net cash flow? Assume the firm has no amortization expense. What is the firm’s EVA? Assume the firm’s after-tax percentage cost of capital  4 .187. which includes the cost of equity. its net cash flow. and its operating cash flow? Economic Value Added (EVA) EVA = After-tax Operating Income __ After-tax Capital costs = NOPAT – After-tax Cost of Capital (Operating Capital) EVA Concepts In order to generate positive EVA. and it faces a 40 percent tax rate.257 + \$18.900 = \$106.  EVA takes into account the total cost of capital. It must also provide a return to those who have provided the firm with capital.860 4. recently reported net income of \$3. Kendall Comers Inc.Operating Capital11 = \$1. OCF12 = NOPAT + Dep = (\$78. The company's Cash flow depreciation expense is \$200. The company's Net cash flow depreciation expense was \$500. Assume that the firm has no amortization expense.216 NCF11 = \$87.176) + \$116. The Klaven Corporation has operating income (EBIT) of \$750. What are its net income.000.960 = -\$43.157 5.1 million.900 = \$133.200 What is your assessment of the expansion’s effect on operations? What effect did the expansion have on net cash flow and operating cash flow? NCF12 = NI + Dep = (\$160. Klaven is 100 percent equity financed.569) + \$116.000.000.960 + \$18.

000 EBT \$ 2.500.569 .was 10% in 2011 and 13% in 2012.000.000.257 – (0.463 6. and the company is in the 40 percent tax bracket.000.000.000 Taxes (40%) 1.500.\$238.000 EBITDA \$ 7.000 Operating costs excluding depreciation and amortization 7. The company's after-tax cost of that capital is 11.832.\$118.000 Interest 1.000.720 = -\$4. What is Bailey's net cash flow for the year? c. EVA Kordell Company recently reported \$170.832) -\$78. The company's total operating capital is \$800. What is Bailey's EVA for the year? Did the expansion increase or decrease MVA? MVA = Market value __ of equity Equity capital supplied 5 .000. What is Kordell's EVA? 7. a.000 Depreciation and amortization 3.268 -\$316. What is Bailey's NOPAT for the year? b.10)(\$1.837 EVA11 = \$114.569 – (0.000 in operating income (EBIT).500.625 percent. Bailey Corporation recently reported the following income statement (dollars Cash flow are in thousands): Sales \$14. What is Bailey's operating cash flow for the year? e.187.257 .000 EBIT \$ 4.200) = \$114.000. EVA12 = = = = NOPAT – (A-T cost of capital) (Operating Capital) -\$78.000 Bailey's total operating capital is \$20 billion and its after-tax cost of capital is 10 percent.000 Net income \$ 1.13)(\$1.

\$5.500 of operating costs other than depreciation.250 of depreciation.750 of sales.550.000 .500 of bonds that carry a 6. These expenditures were necessary for it to sustain operations and generate future sales and cash flows.8. Taxable Income \$0 . What was its free cash flow? Federal Income Tax System Corporate and Personal Taxes  Both have a progressive structure (the higher the income. The company's current stock price is \$60 per share. and \$1.000 50. Investment in Plant and Equipment) .75. the higher the marginal tax rate).  Corporations  Rates begin at 15% and rise to 35% for corporations with income over \$10 million. The company had \$3. the firm had expenditures on fixed assets and net working capital that totaled \$1.000 Marginal Tax Rates 15% 25% 6 . Henderson Industries has \$500 million of common equity on its balance sheet.  Also subject to state tax (around 5%). During the year.50. Shrives Publishing recently reported \$10. How many shares of the company's stock are currently outstanding? Free Cash Flows Free Cash Flows = OCF – Gross Inv in Operating Capital Gross Investment in Oper Cap = Net Inv in Oper Cap + Depreciation Net Inv in Oper Cap. = Change in NOWC + Change in Operating Long Term Assets (less depr) Free Cash Flow = NOPAT – Net Investment in Operating Capital Total Operating Assets = NOWC + Oper LT Assets (ex. and its Market Value Added (MVA) is \$130 million.25% interest rate. and its federal-plus-state income tax rate was 35%.

333 38% 18.15. and at the capital gains rate if held for more than a year.000 .  Dividends paid – paid out of after-tax income.  Interest earned – usually fully taxable (an exception being interest from a (muni”).000 .000 34% 10. 2. dividends received from other corporations are largely exempt from taxation for a corporation Corporate Tax Rate: Average versus Marginal Tax Rates 1. A portion of dividends received by corporations is tax excludable. in order to avoid “triple taxation”.18.000 34% 100.000 . capital gains for individuals are generally taxed as ordinary income if held for less than a year. This means that dividends received by individuals are taxed twice – legislation may change this.000.333.000 35% 15. but usually not for individuals (interest on home loans being the exception).333 + 35% Taxes Corporations pay taxes at the corporate income tax rate Taxes are paid by individuals on dividends received by them that are paid out from net income.333.000.335.000 39% 335.100.000 .  7 . the tax code allows firms to carry losses back to offset profits in previous years or forward to offset profits in the future. Capital gains – defined as the profits from the sale of assets not normally transacted in the normal course of business.000. Corporations face somewhat different rules.10. Average tax rate: Marginal tax rate: Total taxes paid Total taxable income amount of tax payable on the next dollar earned - Tax treatment of various uses and sources of funds  Interest paid – tax deductible for corporations (paid out of pre-tax income).  Dividends received – taxed as ordinary income for individuals (“double taxation”).  Tax Loss Carry-Back and Carry-Forward – since corporate incomes can fluctuate widely. To avoid triple taxation.75.000 .000.

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