Tài chính doanh nghiệp - Chapter 02: Financial statements, cash flow, and taxes

CHAPTER 2Financial Statements, Cash Flow, and TaxesBalance sheet Income statementStatement of cash flowsAccounting income vs. cash flowMVA and EVAFederal tax systemThe Annual ReportBalance 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 CashA/RInventories Total CAGross FALess: Dep. Net FATotal Assets 20027,282 632,1601,287,3601,926,8021,202,950 263,160 939,7902,866,592 200157,600351,200 715,2001,124,000491,000 146,200 344,8001,468,800Balance sheet: Liabilities and Equity Accts payable Notes payableAccruals Total CLLong-term debtCommon stockRetained earnings Total EquityTotal L & E 2002524,160 636,808 489,6001,650,568723,432460,000 32,592 492,5922,866,592 2001145,600200,000 136,000481,600323,432460,000 203,768 663,7681,468,800Income statementSales COGSOther expenses EBITDADepr. & Amort. EBITInterest Exp.EBTTaxesNet income 20026,034,000 5,528,000 519,988(13,988) 116,960(130,948) 136,012(266,960) (106,784) (160,176) 20013,432,0002,864,000 358,672209,328 18,900190,428 43,828146,600 58,640 87,960Other dataNo. of sharesEPSDPSStock priceLease pmts2002100,000-$1.602$0.11$2.25$40,0002001100,000$0.88$0.22$8.50$40,000Statement of Retained Earnings (2002)Balance of retained earnings, 12/31/01 Add: Net income, 2002 Less: Dividends paidBalance of retained earnings, 12/31/02$203,768(160,176) (11,000)$32,592Statement of Cash Flows (2002)OPERATING ACTIVITIES Net incomeAdd (Sources of cash): Depreciation Increase in A/P Increase in accrualsSubtract (Uses of cash): Increase in A/R Increase in inventoriesNet cash provided by ops.(160,176)116,960378,560353,600(280,960)(572,160)(164,176)Statement of Cash Flows (2002)L-T INVESTING ACTIVITIES Investment in fixed assetsFINANCING ACTIVITIES Increase in notes payable Increase in long-term debt Payment of cash dividend Net cash from financingNET CHANGE IN CASHPlus: Cash at beginning of yearCash at end of year(711,950)436,808400,000 (11,000)825,808(50,318) 57,6007,282What can you conclude about D’Leon’s financial condition from its statement of CFs?Net cash from operations = -$164,176, mainly because of negative NI.The firm borrowed $825,808 to meet its cash requirements.Even after borrowing, the cash account fell by $50,318.Did the expansion create additional net operating after taxes (NOPAT)?NOPAT = EBIT (1 – Tax rate)NOPAT02 = -$130,948(1 – 0.4) = -$130,948(0.6) = -$78,569NOPAT01 = $114,257What effect did the expansion have on net operating working capital?NOWC = Current - Non-interest assets bearing CLNOWC02 = ($7,282 + $632,160 + $1,287,360) – ( $524,160 + $489,600) = $913,042NOWC01 = $842,400What effect did the expansion have on operating capital?Operating capital = NOWC + Net Fixed AssetsOperating Capital02 = $913,042 + $939,790 = $1,852,832Operating Capital01 = $1,187,200What is your assessment of the expansion’s effect on operations? SalesNOPATNOWCOperating capitalNet Income 2002 $6,034,000-$78,569$913,042$1,852,832-$160,1762001 $3,432,000$114,257$842,400$1,187,200$87,960What effect did the expansion have on net cash flow and operating cash flow?NCF02 = NI + Dep = ($160,176) + $116,960 = -$43,216NCF01 = $87,960 + $18,900 = $106,860OCF02 = NOPAT + Dep = ($78,569) + $116,960 = $38,391OCF01 = $114,257 + $18,900 = $133,157What was the free cash flow (FCF) for 2002?FCF = OCF – Gross capital investment - OR -FCF02 = NOPAT – Net capital investment = -$78,569 – ($1,852,832 - $1,187,200) = -$744,201Is negative free cash flow always a bad sign?Economic Value Added (EVA)EVA = After-tax __ After-tax Operating Income Capital costs = Funds Available __ Cost of to Investors Capital Used = NOPAT – After-tax Cost of CapitalEVA ConceptsIn order to generate positive EVA, a firm has to more 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.What is the firm’s EVA? Assume the firm’s after-tax percentage cost of capital was 10% in 2000 and 13% in 2001.EVA02 = NOPAT – (A-T cost of capital) (Capital) = -$78,569 – (0.13)($1,852,832) = -$78,569 - $240,868 = -$319,437EVA01 = $114,257 – (0.10)($1,187,200) = $114,257 - $118,720 = -$4,463Did the expansion increase or decrease MVA?MVA = Market value __ Equity capital of equity suppliedDuring the last year, the stock price has decreased 73%. As a consequence, the market value of equity has declined, and therefore MVA has declined, as well.Does D’Leon pay its suppliers on time?Probably not.A/P increased 260%, over the past year, while sales increased by only 76%.If this continues, suppliers may cut off D’Leon’s trade credit.Does it appear that D’Leon’s sales price exceeds its cost per unit sold?NO, the negative NOPAT and decline in cash position shows that D’Leon is spending more on its operations than it is taking in.What if D’Leon’s sales manager decided to offer 60-day credit terms to customers, rather than 30-day credit terms?If competitors match terms, and sales remain constant A/R would éCash would êIf competitors don’t match, and sales double Short-run: Inventory and fixed assets é to meet increased sales. A/R é, Cash ê. Company may have to seek additional financing.Long-run: Collections increase and the company’s cash position would improve.How did D’Leon finance its expansion?D’Leon financed its expansion with external capital.D’Leon issued long-term debt which reduced its financial strength and flexibility.Would D’Leon have required external capital if they had broken even in 2001 (Net Income = 0)?YES, the company would still have to finance its increase in assets. Looking to the Statement of Cash Flows, we see that the firm made an investment of $711,950 in net fixed assets. Therefore, they would have needed to raise additional funds.What happens if D’Leon depreciates fixed assets over 7 years (as opposed to the current 10 years)?No effect on physical assets.Fixed assets on the balance sheet would decline.Net income would decline.Tax payments would decline.Cash position would improve.Federal Income Tax SystemCorporate and Personal TaxesBoth have a progressive structure (the higher the income, the higher the marginal tax rate).CorporationsRates begin at 15% and rise to 35% for corporations with income over $10 million.Also subject to state tax (around 5%).IndividualsRates begin at 10% and rise to 38.6% for individuals with income over $307,050.May be subject to state tax.Tax treatment of various uses and sources of fundsInterest paid – tax deductible for corporations (paid out of pre-tax income), but usually not for individuals (interest on home loans being the exception).Interest earned – usually fully taxable (an exception being interest from a (muni”).Dividends paid – paid out of after-tax income.Dividends received – taxed as ordinary income for individuals (“double taxation”). A portion of dividends received by corporations is tax excludable, in order to avoid “triple taxation”.More tax issuesTax Loss Carry-Back and Carry-Forward – since corporate incomes can fluctuate widely, 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, capital gains for individuals are generally taxed as ordinary income if held for less than a year, and at the capital gains rate if held for more than a year. Corporations face somewhat different rules.