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Financial Statement, Cash Flow

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Publicly traded companies must file an annual (10-K) report ... 5. Buy nonoperating assets (e.g., marketable securities, investments in other companies, etc. ... – PowerPoint PPT presentation

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Title: Financial Statement, Cash Flow


1
Financial Statement, Cash Flow Taxes
  • FIL 404
  • Prepared by Keldon Bauer

2
Financial Statement Fundamentals
  • Publicly traded companies must file an annual
    (10-K) report with the SEC.
  • The purpose of the 10-K is to report to owners on
    the status of their investment.
  • The 10-K report contains both verbal and
    quantitative information about the performance of
    the firm.

3
Financial Statement Fundamentals
Financial Sections Include
  • Income Statement (usually 3 years)
  • Balance Sheet (usually 2 years)
  • Statement of Retained Earnings
  • Statement of Cash Flows
  • Key operating statistics for 5-10 years
  • The purpose is both informative and marketing

4
Financial Statement Fundamentals
Income Statement (Profit/Loss)
  • Statement summarizing revenues and expenses over
    a period
  • Owners want to embellish permanent revenues up
    and permanent expenses down
  • Watch for window-dressing, etc.

5
Financial Statement Fundamentals
Balance Sheet - Overview
  • Statement of financial position at a specific
    point in time.
  • The philosophy is to demonstrate sources of funds
    and their uses.
  • Assets show the uses of funds, adjusted for
    current value.
  • Liabilities/Equity show where funds came from

6
Financial Statement Fundamentals
Balance Sheet - Assets
  • Assets are listed in order of decreasing
    liquidity.
  • The closer to the top the more accurate the
    estimate of market value.
  • All assets should be listed as lower of cost or
    market
  • Adjustments are at managements discretion.

7
Financial Statement Fundamentals
Balance Sheet - Liabilities
  • Claims against assets
  • Equity Assets - Liabilities
  • Book liabilities usually equal actual
    liabilities.
  • Since the actual value of assets is rarely in
    line with book value, any adjustments to actual
    asset value is picked up by actual equity.

8
Effect of Expansion on Assets
  • Net fixed assets grows with sales.
  • AR grows with sales.
  • Inventory moderates.
  • Cash seems to be following something else.

9
What effect did the expansion have on liabilities
equity?
  • CL increased as creditors and suppliers
    financed part of the expansion.
  • Note the current maturity of long-term debt.
  • Long-term debt has been falling of late.
  • The company didnt issue any stock.
  • Retained earnings grew.

10
Financial Statement Fundamentals
Statement of Cash Flow
  • Several ways of presenting cash flow.
  • Accountants use both a direct and indirect
    approach
  • 10-K must show the indirect approach
  • The indirect cash flow starts with net income and
    adjusts income for its effects on cash flow.

11
Financial Statement Fundamentals
Statement of Cash Flow
  • The indirect statement has three major parts
  • Operating cash flows
  • Investing cash flows
  • Financing cash flows
  • The line following financing shows the net change
    in cash position.

12
What is free cash flow (FCF)? Why is it
important?
  • FCF is the amount of cash available from
    operations for distribution to all investors
    (including stockholders and debtholders) after
    making the necessary investments to support
    operations.
  • A companys value depends upon the amount of FCF
    it can generate.

13
What are the five uses of FCF?
  • 1. Pay interest on debt.
  • 2. Pay back principal on debt.
  • 3. Pay dividends.
  • 4. Buy back stock.
  • 5. Buy nonoperating assets (e.g., marketable
    securities, investments in other companies, etc.)

14
What are operating current assets?
  • Operating current assets (OCA) are the current
    assets needed to support operations.
  • Operating current assets include cash,
    inventory, receivables.
  • Operating current assets exclude short-term
    investments, because these are not a part of
    operations.

15
What are operating current liabilities?
  • Operating current liabilities (OCL) are the
    current liabilities resulting as a normal part of
    operations.
  • Operating current liabilities include accounts
    payable and accruals.
  • Operating current liabilities exclude notes
    payable, because this is a source of financing,
    not a part of operations.

16
Important Operating Measures
  • Net Operating Working Capital (NOWC)
  • NOWC OCA - OCL
  • Total Net Operating Capital (TNOC)
  • TNOC NOWC Net Fixed Assets
  • Net Operating Profit After Tax (NOPAT)
  • NOPAT EBIT(1-Tax Rate)
  • EBIT Earnings Before Interest and Taxes

17
Important Operating Measures
  • Free Cash Flow (FCF)
  • FCF NOPAT - Net investment in
    operating capital
  • Return on Invested Capital (ROIC)
  • ROIC NOPAT / TNOC
  • Economic Value Added (EVA)
  • EVA NOPAT- (WACC)(TNOC)

18
Market Value Added
  • Market Value Added (MVA)
  • Market Value of Firm - Book Value of Firm
  • If the market value of debt is close to the book
    value of debt, then MVA is
  • MVA Market value of equity book value of
    equity

19
Reality Check
  • Financial managers know the things we are talking
    about today.
  • Many creative methods have been used to either
    mislead or make the ratios you calculate look a
    little better.

20
2004 Corporate Tax Rates
Taxable Income Tax on Base Rate on amount above base
0 -50,000 0 15
50,000 - 75,000 7,500 25
75,000 - 100,000 13,750 34
100,000 - 335,000 22,250 39
335,000 - 10M 113,900 34
10M - 15M 3,400,000 35
15M - 18.3M 5,150,000 38
18.3M and up 6,416,667 35
21
Features of Corporate Taxation
  • Progressive rate up until 18.3 million taxable
    income.
  • Below 18.3 million, the marginal rate is not
    equal to the average rate.
  • Above 18.3 million, the marginal rate and the
    average rate are 35.

22
Features of Corporate Taxes (Cont.)
  • A corporation can
  • deduct its interest expenses but not its dividend
    payments
  • carry-back losses for two years, carry-forward
    losses for 20 years.
  • exclude 70 of dividend income if it owns less
    than 20 of the companys stock
  • Losses in 2001 and 2002 can be carried back for
    five years.

23
Key Features of Individual Taxation
  • Individuals face progressive tax rates, from 10
    to 35.
  • The rate on long-term (i.e., more than one year)
    capital gains is 15. But capital gains are only
    taxed if you sell the asset.
  • Dividends are taxed at the same rate as capital
    gains.
  • Interest on municipal (i.e., state and local
    government) bonds is not subject to Federal
    taxation.

24
Taxable versus Tax Exempt Bonds
  • State and local government bonds (municipals, or
    munis) are generally exempt from federal taxes.

25
Breakeven Tax Rate
  • At what tax rate would you be indifferent between
    the muni and the corporate bonds?
  • Solve for T in this equation
  • Muni yield Corp Yield(1-T)
  • e.g. 7.00 10.0(1-T)
  • T 30.0.

26
Implications
  • If T gt 30, buy tax exempt munis.
  • If T lt 30, buy corporate bonds.
  • Only high income, and hence high tax bracket,
    individuals should buy munis.
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