Transcript Financial Management - Frostburg State University
Ch. 2 Understanding Financial Statements, Taxes, and Cash Flows
2002 , Prentice Hall, Inc.
Income Statement
SALES - EXPENSES = PROFIT
Income Statement
Revenue SALES - EXPENSES = PROFIT
Income Statement
SALES - EXPENSES = PROFIT
Income Statement
SALES - EXPENSES = PROFIT
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Cost of Goods Sold
Income Statement
SALES - EXPENSES = PROFIT
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Cost of Goods Sold
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Operating Expenses
Income Statement
SALES - EXPENSES = PROFIT
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Cost of Goods Sold
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Operating Expenses
(marketing, administrative)
Income Statement
SALES - EXPENSES = PROFIT
•
Cost of Goods Sold
•
Operating Expenses
(marketing, administrative)
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Financing Costs
Income Statement
SALES - EXPENSES = PROFIT
•
Cost of Goods Sold
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Operating Expenses
(marketing, administrative)
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Financing Costs
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Taxes
SALES - Cost of Goods Sold GROSS PROFIT - Operating Expenses
Income Statement
OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) - Income Taxes EARNINGS AFTER TAXES (EAT) - Preferred Stock Dividends NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
SALES - Cost of Goods Sold GROSS PROFIT - Operating Expenses
Income Statement
OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) - Income Taxes EARNINGS AFTER TAXES (EAT) - Preferred Stock Dividends NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
SALES - Cost of Goods Sold GROSS PROFIT - Operating Expenses
Income Statement
OPERATING INCOME (EBIT) Interest Expense EARNINGS BEFORE TAXES (EBT) - Income Taxes EARNINGS AFTER TAXES (EAT) - Preferred Stock Dividends - NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
Balance Sheet
Total Assets = Outstanding Debt + Shareholders’ Equity
Balance Sheet
Assets
Balance Sheet
Assets
Balance Sheet
Liabilities (Debt) & Equity
Assets
Balance Sheet
Liabilities (Debt) & Equity
Current Assets Cash Marketable Securities Accounts Receivable Inventories Prepaid Expenses Fixed Assets Machinery & Equipment Buildings and Land Other Assets Investments & patents Current Liabilities Accounts Payable Accrued Expenses Short-term notes Long-Term Liabilities Long-term notes Mortgages Equity Preferred Stock Common Stock (Par value) Paid in Capital Retained Earnings
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Current Assets :
Assets
Assets
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Current Assets : assets that are relatively liquid, and are expected to be converted to cash within a year.
Assets
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Current Assets : assets that are relatively liquid, and are expected to be converted to cash within a year.
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Cash, marketable securities, accounts receivable, inventories, prepaid expenses.
Assets
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Current Assets : assets that are relatively liquid, and are expected to be converted to cash within a year.
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Cash, marketable securities, accounts receivable, inventories, prepaid expenses.
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Fixed Assets :
Assets
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Current Assets : assets that are relatively liquid, and are expected to be converted to cash within a year.
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Cash, marketable securities, accounts receivable, inventories, prepaid expenses.
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Fixed Assets : machinery and equipment, buildings, and land.
Assets
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Current Assets : assets that are relatively liquid, and are expected to be converted to cash within a year.
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Cash, marketable securities, accounts receivable, inventories, prepaid expenses.
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Fixed Assets : machinery and equipment, buildings, and land.
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Other Assets :
Assets
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Current Assets : assets that are relatively liquid, and are expected to be converted to cash within a year.
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Cash, marketable securities, accounts receivable, inventories, prepaid expenses.
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Fixed Assets : machinery and equipment, buildings, and land.
Other Assets : any asset that is not a current asset or fixed asset.
Assets
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Current Assets : assets that are relatively liquid, and are expected to be converted to cash within a year.
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Cash, marketable securities, accounts receivable, inventories, prepaid expenses.
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Fixed Assets : machinery and equipment, buildings, and land.
Other Assets : any asset that is not a current asset or fixed asset.
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Intangible assets such as patents and copyrights.
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Debt Capital :
Financing
Financing
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Debt Capital : financing provided by a creditor.
Financing
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Debt Capital : financing provided by a creditor.
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Short-term debt :
Financing
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Debt Capital : financing provided by a creditor.
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Short-term debt : borrowed money that must be repaid within the next 12 months.
Financing
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Debt Capital : financing provided by a creditor. Short-term debt : borrowed money that must be repaid within the next 12 months.
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Accounts payable, other payables such as interest or taxes payable, accrued expenses, short-term notes.
Financing
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Debt Capital : financing provided by a creditor.
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Short-term debt : borrowed money that must be repaid within the next 12 months.
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Accounts payable, other payables such as interest or taxes payable, accrued expenses, short-term notes.
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Long-term debt :
Financing
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Debt Capital : financing provided by a creditor. Short-term debt : borrowed money that must be repaid within the next 12 months.
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Accounts payable, other payables such as interest or taxes payable, accrued expenses, short-term notes.
Long-term debt : loans from banks or other sources that lend money for longer than 12 months.
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Equity Capital :
Financing
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Financing
Equity Capital : shareholders’ investment in the firm.
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Financing
Equity Capital : shareholders’ investment in the firm.
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Preferred Stockholders :
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Financing
Equity Capital : shareholders’ investment in the firm.
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Preferred Stockholders : receive fixed dividends, and have higher priority than common stockholders in event of liquidation of the firm.
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Financing
Equity Capital : shareholders’ investment in the firm.
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Preferred Stockholders : received fixed dividends, and have higher priority than common stockholders in event of liquidation of the firm.
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Common Stockholders :
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Financing
Equity Capital : shareholders’ investment in the firm.
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Preferred Stockholders : received fixed dividends, and have higher priority than common stockholders in event of liquidation of the firm.
Common Stockholders : residual owners of a business. They receive whatever is left after creditors and preferred stockholders are paid.
Corporate Income Tax Rates
Since 1993
Taxable Income Corporate Tax Rate $1 - $50,000 15% $50,001 - $75,000 25% $75,001 - $100,000 34% $100,001 - $335,000 39% $335,001 - $10,000,000 34% $10,000,001 - $15,000,000 $15,000,001 - $18,333,333 over $18,333,333 35% 38% 35%
Free Cash Flows
Free cash flow: cash flow that is free and available to be distributed to the firm’s investors (both debt and equity investors)
Free Cash Flows
Firm’s Operating Free cash flows = Firm’s Financing Free cash flows Cash flows generated through the firm’s operations and investments in assets = Cash flows paid to - or received by - the firm’s investors (creditors & stockholders)
Calculating Free Cash Flows:
An Operating Perspective After-tax cash flow from operations
less
investment in net operating working capital
less
investments in fixed and other assets
Calculating Free Cash Flows:
An Operating Perspective After-tax cash flow from operations
less
investment in net operating working capital
less
investments in fixed and other assets Operating income + depreciation - cash tax payments
Calculating Free Cash Flows:
An Operating Perspective After-tax cash flow from operations
less
investment in net operating working capital
less
investments in fixed and other assets [Change in current assets] [change in non-interest bearing current liabilities]
Calculating Free Cash Flows:
An Operating Perspective After-tax cash flow from operations
less
investment in net operating working capital
less
investments in fixed and other assets Change in gross fixed assets, and any other assets that are on the balance sheet.
Calculating Free Cash Flows:
A Financing Perspective Interest payments to creditors change in debt principal dividends paid to stockholders change in stock = Financing Free Cash Flows
Tax Example:
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Space Cow Computer has sales of $32 million , cost of goods sold at 60% of sales, cash operating expenses of $2.4 million , and $1.4 million in depreciation expense. The firm has $12 million in 9.5% bonds outstanding. The firm will pay $500,000 in dividends to its common stock holders.
Calculate the firm’s tax liability.
Sales Cost of Goods Sold Operating Expenses Depreciation Expense EBIT or NOI Interest Expense Taxable Income $32,000,000 (19,200,000) (2,400,000) (1,400,000) 9,000,000 (1,140,000) 7,860,000
Income tax rate tax payment $50,000 x .15 = $ 7,500 $25,000 x .25 = 6,250 $25,000 x .34 = 8,500 $235,000 x .39 = 91,650 $7,525,000 x .34 = 2,558,500 Total Tax payment $2,672,400
short cut:
$7,860,000 x .34 = $2,672,400