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Ch #3 (3)

Ch #3 (3)

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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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recently reported net income of $3 million. Pearson Brothers recently reported an EBITDA of $7.000 -1.864.960 (130.592 492.866.8 million 2 .768 1.000 100.988 (13.25 40.592 2.000 2.602 0.948) 136.600 58. EBT Taxes Net income Other data No.600 323. Its operating income Income Statement (EBIT) was $6 million.11 2.5 million and $1.T) = 0.428 43.650.960 100. Little Books Inc.034.176) 2011 145.432.000 5.000 481.988) 116.640 87. & Amort.528.600 1.600 200.432 460.000 136.468.000 32. What was the company's interest expense for the year? [Hint: Divide $3 million by (1 .] 2.6 to find taxable income.000 0.000 519.50 40.000 203.808 489.768 663.88 0.592 2012 6.784) (160.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.160 636.672 209.960) (106. EBIT Interest Exp.800 2011 3.000 358. of shares EPS DPS Stock price Lease pmts Liabilities and Equity 2012 544.012 (266.000 1.432 460.900 190.22 8. and the company pays a 40 percent tax rate.568 723.328 18.828 146.

042 = - Current Assets (cash + Acct Rec + Inv) NOWC11 = $842.160 + $1.600) = $893.832 3 .948(1 – 0.4) = -$130.160 + $489.790 = $1.257 What effect did the expansion have on net operating working capital? NOWC Non-interest bearing Current Liabilities (Acct pay + Accruals) NOWC12 = ($7.0 million of interest expense and the corporate tax rate is 40 percent. 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 = -$130.360) – ($544.287. reported $50 million of net income and $810 million of retained earnings.832. The previous year.042 + $939. its balance sheet showed $780 million of retained earnings. Statement of related earnings In its most recent financial statements.400 What effect did the expansion have on operating capital? Operating capital = NOWC + Net Fixed Assets Operating Capital12 = $893.592 3.000) 32. 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 $203.176) (11. Newhouse Inc.282 + $632.569 NOPAT11 = $114.948(0.768 (160.6) = -$78. The company has $2.Income statement of net income.

960 + $18.391 OCF11 = $114. its net cash flow.Operating Capital11 = $1.187. Kendall Comers Inc. Klaven is 100 percent equity financed.216 NCF11 = $87.960 = -$43. OCF12 = NOPAT + Dep = ($78.  EVA takes into account the total cost of capital. What is the firm’s EVA? Assume the firm’s after-tax percentage cost of capital  4 .000.900 = $133.1 million. It must also provide a return to those who have provided the firm with capital.900 = $106. Assume that the firm has no amortization expense. What is the company's approximate net cash flow? Assume the firm has no amortization expense. and it faces a 40 percent tax rate. What are its net income. recently reported net income of $3.000. a firm has to more than just cover operating costs.569) + $116.860 4. The company's Cash flow depreciation expense is $200.257 + $18. The Klaven Corporation has operating income (EBIT) of $750. 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.157 5. which includes the cost of equity. The company's Net cash flow depreciation expense was $500.176) + $116.200 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 = ($160.000.960 = $38.

720 = -$4.000.000 Bailey's total operating capital is $20 billion and its after-tax cost of capital is 10 percent. Bailey Corporation recently reported the following income statement (dollars Cash flow are in thousands): Sales $14.832. What is Bailey's EVA for the year? Did the expansion increase or decrease MVA? MVA = Market value __ of equity Equity capital supplied 5 .463 6. The company's total operating capital is $800. What is Bailey's NOPAT for the year? b. a.000.000 EBITDA $ 7.000.was 10% in 2011 and 13% in 2012.257 .569 .000.$238.187.000.000.200) = $114.837 EVA11 = $114.000 Net income $ 1.000 Operating costs excluding depreciation and amortization 7. What is Bailey's operating cash flow for the year? e.000.000 EBIT $ 4. The company's after-tax cost of that capital is 11. EVA Kordell Company recently reported $170. and the company is in the 40 percent tax bracket.268 -$316.000 in operating income (EBIT).500.000 Taxes (40%) 1.000 Interest 1.13)($1.500.500. What is Kordell's EVA? 7.10)($1.$118.257 – (0. What is Bailey's net cash flow for the year? c.625 percent. EVA12 = = = = NOPAT – (A-T cost of capital) (Operating Capital) -$78.569 – (0.000 Depreciation and amortization 3.000 EBT $ 2.832) -$78.

Taxable Income $0 . the higher the marginal tax rate).000 . and $1.000 Marginal Tax Rates 15% 25% 6 .000 50. During the year. The company's current stock price is $60 per share.750 of sales. and its federal-plus-state income tax rate was 35%.500 of operating costs other than depreciation.50.8. and its Market Value Added (MVA) is $130 million.250 of depreciation. The company had $3.  Also subject to state tax (around 5%). Investment in Plant and Equipment) .  Corporations  Rates begin at 15% and rise to 35% for corporations with income over $10 million. the firm had expenditures on fixed assets and net working capital that totaled $1.25% interest rate. Shrives Publishing recently reported $10. What was its free cash flow? Federal Income Tax System Corporate and Personal Taxes  Both have a progressive structure (the higher the income. $5.500 of bonds that carry a 6. 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. Henderson Industries has $500 million of common equity on its balance sheet. = 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.550.75. These expenditures were necessary for it to sustain operations and generate future sales and cash flows.

000 .000 .000.15.000 35% 15.  Interest earned – usually fully taxable (an exception being interest from a (muni”). but usually not for individuals (interest on home loans being the exception). A portion of dividends received by corporations is tax excludable.000 .10.000 39% 335.335. in order to avoid “triple taxation”.  Tax Loss Carry-Back and Carry-Forward – since corporate incomes can fluctuate widely. capital gains for individuals are generally taxed as ordinary income if held for less than a year. dividends received from other corporations are largely exempt from taxation for a corporation Corporate Tax Rate: Average versus Marginal Tax Rates 1.000.000.  Dividends received – taxed as ordinary income for individuals (“double taxation”). To avoid triple taxation.000 34% 100. the tax code allows firms to carry losses back to offset profits in previous years or forward to offset profits in the future.000 .  Dividends paid – paid out of after-tax income. 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).100.000.333 38% 18.  7 .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. This means that dividends received by individuals are taxed twice – legislation may change this.75.333. Capital gains – defined as the profits from the sale of assets not normally transacted in the normal course of business.333.18. Corporations face somewhat different rules.000 34% 10. 2.000 . and at the capital gains rate if held for more than a year.

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