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1、,Balance sheetIncome statementStatement of cash flowsAccounting income vs.cash flowMVA and EVAPersonal taxesCorporate taxes,CHAPTER 2Financial Statements,Cash Flow,and Taxes,Balance Sheet:Assets,Cash,7,282,57,600,AR,632,160,351,200,Inventories,1,287,360,715,200,Total CA,1,926,802,1,124,000,Gross FA,
2、1,202,950,491,000,Less:Deprec.,263,160,146,200,Net FA,939,790,344,800,Total Assets,2,866,592,1,468,800,2000,1999,Liabilities and Equity,2000,1999,Accts payable,524,160,145,600,Notes payable,720,000,200,000,Accruals,489,600,136,000,Total CL,1,733,760,481,600,Long-term debt,1,000,000,323,432,Common st
3、ock,460,000,460,000,Retained earnings,(327,168),203,768,Total equity,132,832,663,768,Total L&E,2,866,592,1,468,800,Income Statement,Sales,5,834,400,3,432,000,COGS,5,728,000,2,864,000,Other expenses,680,000,340,000,EBITDA,(573,600),228,000,Depr.&Amort.,116,960,18,900,EBIT,(690,560),209,100,Interest e
4、xp.,176,000,62,500,EBT,(866,560),146,600,Taxes(40%),(346,624),58,640,Net income,(519,936),87,960,2000,1999,Other Data,No.of shares,100,000,100,000,EPS,($5.199),$0.88,DPS,$0.110,$0.22,Stock price,$2.25,$8.50,Lease pmts,$40,000,$40,000,2000,1999,Statement of Retained Earnings(2000),Balance of retained
5、 earnings,12/31/99$203,768 Add:Net income,2000(519,936)Less:Dividends paid(11,000)Balance of retained earnings,12/31/00($327,168),(523,936),Statement of Cash Flows(2000),OPERATING ACTIVITIES,Net income,(519,936),Add(Sources of cash):,Depreciation,116,960,Increase in A/P,378,560,Increase in accruals,
6、353,600,Subtract(Uses of cash):,Increase in A/R,(280,960),Increase in inventories,(572,160),Net cash provided by ops.,L-T INVESTING ACTIVITIES,Investment in fixed assets,(711,950),FINANCING ACTIVITIES,Increase in notes payable,520,000,Increase in long-term debt,676,568,Payment of cash dividends,(11,
7、000),Net cash from financing,1,185,568,NET CHANGE IN CASH,(50,318),Plus:Cash at beginning of year,57,600,Cash at end of year,7,282,Net cash from operations=-$523,936,mainly because of negative NI.The firm borrowed$1,185,568 to meet its cash requirements.Even after borrowing,the cash account fell by$
8、50,318.,What can you conclude about DLeons financial condition from its statement of CFs?,Did the expansion create additional net operating profit after taxes(NOPAT)?,NOPAT=EBIT(1 Tax rate)NOPAT00=-$690,560(1 0.4)=-$690,560(0.6)=-$414,336.NOPAT99=$125,460.,What effect did the expansion have onnet op
9、erating working capital(NOWC)?,NOWC,=,Currentassets,Non-interestbearing CL,NOWC00=($7,282+$632,160+$1,287,360)($524,160+$489,600)=$913,042.NOWC99=$842,400.,What effect did the expansion have on capital used in operations?,Operatingcapital,=NOWC+Net fixed assets.=$913,042+$939,790=$1,852,832.=$1,187,
10、200.,Operatingcapital00,Operatingcapital99,What is your initial assessment of the expansions effect on operations?,2000 1999 Sales$5,834,400$3,432,000NOPAT($414,336)$125,460NOWC$913,042$842,400Operating capital$1,852,832$1,187,200Net Income($519,936)$87,960,What effect did the companys expansion hav
11、e on its net cash flow and operating cash flow?,NCF00=NI+DEP=($519,936)+$116,960=($402,976).,NCF99=$87,960+$18,900=$106,860.,OCF00=NOPAT+DEP=($414,336)+$116,960=($297,376).,OCF99=$125,460+$18,900=$144,360.,What was the free cash flow(FCF)for 2000?,FCF=NOPAT Net capital investment=-$414,336($1,852,83
12、2$1,187,200)=-$414,336$665,632=-$1,079,968.Is negative free cash flow always a badsign?,Economic Value Added(EVA),EVA=NOPAT After-Tax Cost of Capital,Operating IncomeAfter Tax,After-TaxCapital Costs,Funds Availableto Investors,Cost ofCapital Used,In order to generate positive EVA,a firm has to more
13、than just cover operating costs.It must also provide a return to those who have provided the firm with capital.EVA takes into account the total cost of capital,which includes the cost of equity.,EVA Concepts,What is the companys EVA?Assume the firms after-tax cost of capital was 11%in 1999 and 13%in
14、 2000.,EVA00=NOPAT(A-T cost of capital)(Capital)=-$414,336(0.13)($1,852,832)=-$414,336$240,868=-$655,204.,EVA99=$125,460(0.11)($1,187,200)=$125,460$130,592=-$5,132.,Would you conclude that the expansion increased or decreased MVA?,MVA=,Market valueof equity,Equity capitalsupplied,During the last yea
15、r stock price has decreased 73%,so market value of equity has declined.Consequently,MVA has declined.,CompanyMarket Value AddedMicrosoft$328,257 millionGeneral Electric$285,320 millionIntel$166,902 millionWal-Mart Stores$159,444 millionCoca-Cola$157,536 millionMerck$153,170 millionPfizer$148,245 mil
16、lionCisco Systems$135,650 millionLucent Technologies$127,265 millionBristol-Myers Squibb$119,350 million,Leading Creators of Wealth in the U.S.Market Value Added in 1999,Probably not.A/P increased 260%over the past year,while sales increased by only 70%.If this continues,suppliers may cut off DLeons
17、 trade credit.,Does DLeon pay its suppliers on time?,No,the negative NOPAT and decline in cash position shows that DLeon is spending more on its operations than it is taking in.,Does it appear that DLeons sales price exceeds its cost per unit sold?,1.The company offers 60-day credit terms.The improv
18、ed terms are matched by its competitors,so sales remain constant.,What effect would each of these actions have on DLeons cash account?,A/R would Cash would,2.Sales double as a result of thechange in credit terms.,Short run:Inventory and fixed assets to meet increased sales.A/R,Cash.Company may have
19、to seek additional financing.Long-run:Collections increase and the companys cash position would improve.,DLeon financed its expansion with external capital.DLeon issued long-term debt which reduced its financial strength and flexibility.,How did DLeon finance its expansion?,Would DLeon have required
20、 external capital if they had broken even in 2000(Net Income=0)?,YES,the company would still have to finance its increase in assets.,No effect on physical assets.Fixed assets on balance sheet would decline.Net income would decline.Tax payments would decline.Cash position would improve.,What happens
21、if DLeon depreciates its fixed assets over 7 years(as opposed to the current 10 years)?,Other policies that affect financial statements,Inventory valuation methods.Capitalization of R&D expenses.Policies for funding the companys retirement plan.,Does the companys positive stock price($2.25),in the f
22、ace of large losses,suggest that investors are irrational?,NO,it means that investors expect things to get better in the future.,Why did the stock fall after the dividend was cut?,Management was“signaling”that the firms operations were in trouble.The dividend cut lowered expectations for future cash
23、 flows,which caused the stock price to decline.,What were some other sources of financing for DLeon in 2000?,Bank loans:Notes payable increased by$520,000.Credit from suppliers:A/P increased by$378,560.Employees:Accruals increased by$353,600.,DLeon received a tax credit of$346,624 in 2000.,This sugg
24、ests the company paid at least$346,624 in taxes during the past 2 years.If DLeons payments over the past 2 years were less than$346,624 the firm would have had to carry forward the amount of its loss that was not carried back.If the firm did not receive a full refund its cash position would be even
25、worse.,INCOME TAXES,April 2000 Single Individual Tax Rates,Taxable Income,Tax on Base,Rate*,0-25,750,0,15%,25,750-62,450,3,862.50,28%,62,450-130,250,14,138.50,31%,130,250-283,150,35,156.50,36%,Over 283,150,90,200.50,39.6%,*Plus this percentage on the amount over the bracket base.,Assume your salary
26、is$45,000,and you received$3,000 in dividends.You are single,so your personal exemption is$2,750 and your itemized deductions are$4,850.,On the basis of the information above and the April 2000 tax rate schedule,what is your tax liability?,Calculation of Taxable Income,Salary,$45,000,Dividends,3,000
27、,Personal exemptions,(2,750),Deductions,(4,850),Taxable Income,$40,400,Tax Liability:TL=$3,862.50+0.28($14,650)=$7,964.50$7,965.Marginal Tax Rate=28%.Average Tax Rate:Tax rate=19.71%19.7%.,40,400-25,750,$7,965$40,400,January 2000 Corporate Tax Rates,Taxable Income,Tax on Base,Rate*,0-50,000,0,15%,50
28、,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 the bracket base.,.,Assume a corporation has$100,000 of taxable income from operations,$5,000 of interest income,and$10,000 of dividend income.,Whats its tax liabil
29、ity?,Operating income,$100,000,Interest income,5,000,Taxable dividend,income,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.,State and local government bonds(munis)are generally exempt from federal taxes.,Taxable vs.Tax-Exempt Bonds,
30、Exxon bonds at 10%vs.California muni 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.,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 to muni vs.corp?,If T 30%,buy tax-exempt munis.If T 30%,buy corporate bonds.Only high income people should buy munis.,Implications,
