Ch02 Show.pptx

8/17/2019 Ch02 Show.pptx

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Chapter 2

Financial Statements, Cash

Flow, and Taxes


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Topics in ChapterIncome statementBalance sheetStatement of cash owsFree cash ow

MVA and VACorporate taxes!ersonal taxes


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Value = + + +FCF 1 FCF 2 FCF ∞

(1 + WACC) 1 (1 +WACC) ∞

(1 + WACC) 2

Free cash fow(FCF)

Mar#et interest rates

Firm$s %&siness ris#Mar#et ris# a'ersion

Firm$s de%t(e)&it* mixCost of de%t

Cost of e)&it*

Weighted average

cost o capital(WACC)

ales reve!ues

"perati!g costs a!d ta#es

$e%uired i!vest&e!ts i! operati!g capital

'

'

=

eter&i!a!ts o !tri!sic Value*Calculati!g FCF


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Income Statement2 - 2 1

Sales .",+"2, ./,0"+,+

C S 2,03+, +,-0 ,therexpenses "+ , 42 ,5eprec6 10,- 113,-3

Tot6 op6 costs ",222,- /,013,-3BIT 2 -,1 14,++

Int6 expense 32,/ 143,BT 1+3,3 71/0,/3 8

Taxes 7+ 98 /0,3+ 73",+2+8:et income 04 -3 -/ 1"3


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;hat happened to sales

and net income<Sales increased %* o'er .26+million6Costs shot &p %* more than sales6:et income was ne=ati'e6>owe'er, the ?rm recei'ed a taxref&nd since it paid taxes of morethan .3",+2+ d&rin= the past two*ears6


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Balance Sheet@ Assets2 - 2 1

Cash . -, . 4,202

S T in'est6 +0,3 2 ,A "/1,2 3"2,13In'entories 41/,2 1,204,"3

Total CA 1,12+, 1,-+3,0 2ross FA +-1, 1,2 2,-/ess@ 5epr6 1+3,2 23",13:et FA "++,0 -"-,4-

Total assets .1,+30,0 .2,003,/-2


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Dect of xpansion on

Assets:et ?xed assets almost tripled insiEe6A and in'entor* almost do&%led6Cash and short term in'estmentsfell6


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Balance Sheet@ ia%ilities

)&it*2 - 2 1

Accts6 pa*a%le . 1+/,3 . "2+,

:otes pa*a%le 2 , 42 ,Accr&als 1"3, 20+,-3

Total C +01,3 1,"20,-3on= term de%t "2",+"2 1, ,

Common stoc# +3 , +3 ,et6 earnin=s 2 ",430 -4,3"2 Total e)&it* 33",430 //4,3"2

Total .1,+30,0 .2,003,/-2


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expansion ha'e on

lia%ilities e)&it*<C increased as creditors ands&ppliers G?nancedH part of theexpansion6

on= term de%t increased to help?nance the expansion6

The compan* didn$t iss&e an*stoc#6etained earnin=s fell, d&e to the

*ear$s ne=ati'e net income anddi'idend pa*ment6


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Statement of Cash Flows@

2 1peratin= Acti'ities

:et Income 7.

-/,1"38Ad &stments@ 5epreciation 113,-3

Chan=e in A 720 ,-3 8 Chan=e in in'entories 7/42,13 8 Chan=e in A! 140,+

Chan=e in accr&als 1+0,-3:et cash ro'ided &sed % / " -"3


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In'estin= Acti'itiesCash &sed to ac)&ire FA 7.411,-/

8 Chan=e in S T in'est6 20,3:et cash pro'6 7&sed8 %* in'6act6

7.30","/8


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Financin= Acti'ities Chan=e in notes pa*a%le .

/2 , Chan=e in lon= term de%t 343,/30

!a*ment of cash di'idends 711, 8:et cash pro'ided 7&sed8 %* ?n6act6

.1,10/,/30


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S&mmar* of Statement of

CF:et cash pro'ided 7&sed8 %*ops6

7./ ",-"38

:et cash to ac)&ire FA 730","/ 8:et cash pro'6 7&sed8 %* ?n6act6

1,10/,/30

:et chan=e in cash 71,4108Cash at %e=innin= of *ear -,

Cash at end of *ear . 4,202


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from the statement of

cash ows<:et CF from operations J ./ ",-"3,%eca&se of ne=ati'e net income and

increases in wor#in= capital6 The ?rm spent .411,-/ on FA6 The ?rm %orrowed hea'il* and soldsome short term in'estments to meet

its cash re)&irements6'en after %orrowin=, the cash acco&ntfell %* .1,4106


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7FCF8<

;h* is it important<FCF is the amo&nt of casha'aila%le from operations fordistri%&tion to all in'estors7incl&din= stoc#holders andde%tholders8 after ma#in= the

necessar* in'estments to s&pportoperations6A compan*$s 'al&e depends on the

amo&nt of FCF it can =enerate6


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;hat are the ?'e &ses of

FCF<16 !a* interest on de%t626 !a* %ac# principal on de%t6"6 !a* di'idends6+6 B&* %ac# stoc#6/6 B&* nonoperatin= assets 7e6=6,

mar#eta%le sec&rities,in'estments in other companies,etc68


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arnin= %efore interest and taxes

71 K Tax rate8

:et operatin= pro?t after taxes

,

peratin= c&rrent assets

peratin= c&rrent lia%ilities

:et operatin= wor#in= capital

'

Total net operatin= capital

peratin= lon= term assets+:et operatin= wor#in= capital

Free cash fow

' -et i!vest&e!t i! operati!g capital

-et operati!g pro.t a ter ta#es

'

Total net operatin= capital this *ear

Total net operatin= capital last *ear

:et in'estment in operatin= capital

Calculating Free Cash Flow in 5 Easy StepsStep 1 Step 2

Step 3

Step 4Step 5


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:et peratin= !ro?t after Taxes 7: !AT8

: !AT J BIT71 Tax rate8

: !AT 1 J .14,++ 71 6+8

J .1 ,+3+6

: !AT - J .12/,+3 6


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;hat are operatin=c&rrent assets<

peratin= c&rrent assets are theCA needed to s&pport operations6

p CA incl&de@ cash, in'entor*,recei'a%les6

p CA excl&de@ short term

in'estments, %eca&se these are not apart of operations6


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;hat are operatin=c&rrent lia%ilities<

peratin= c&rrent lia%ilities are theC res&ltin= as a normal part ofoperations6

p C incl&de@ acco&nts pa*a%le andaccr&als6

p C excl&de@ notes pa*a%le,%eca&se this is a so&rce of ?nancin=,not a part of operations6


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:et peratin= ;or#in=Capital 7: ;C8

: ;C 1 J 7.4,202 L .3"2,13 L .1,204,"3 8

7."2+, L .20+,-3 8

J .1,"14,0+26: ;C - J .4-",0 6

J peratin=

CA

peratin=

C: ;C


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7also called operatin=capital8

peratin= CapitalJ : ;C L :et?xed assets6

peratin= Capital 2 1J .1,"14,0+2 L .-"-,4-J .2,2/4,3"26

peratin= Capital 2 - J.1,1"0,3 6


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Free Cash Flow 7FCF8 for2 1

FCF J : !AT :et in'estment in

operatin= capital J .1 ,+3+ 7.2,2/4,3"2

.1,1"0,3 8

J .1 ,+3+ .1,11-, "2 J .1,1 0,/306

>ow do *o& s&ppose in'estors reacted<


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ses of FCF

After tax interest pa*ment J .1 /,3ed&ction 7increase8 in de%t J K

.1,1-3,/30!a*ment of di'idends J .11,

ep&rchase 7Iss&e8 stoc# J .

!&rch6 7Sale8 of STin'estments J K.20,3 Total &ses of FCF J K

.1,1 0,/30


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et&rn on In'ested Capital7 IC8

IC J : !AT ( operatin= capital

IC 1 J .1 ,+3+ ( .2,2/4,3"2 J6/96

IC - J 116 96


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e rm s cos o cap a s1 96 5id the =rowth add'al&e<

:o6 The IC of 6/9 is less than the;ACC of 1 96 In'estors did not =et the

ret&rn the* re)&ire6:ote@ >i=h =rowth &s&all* ca&sesne=ati'e FCF 7d&e to in'estment incapital8, %&t that$s o# if IC N ;ACC6For example, in 2 0 O&alcomm hadhi=h =rowth, ne=ati'e FCF, %&t a hi=h

IC6


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conomic Val&e Added7 VA8

;ACC is wei=hted a'era=e cost ofcapital

VA J : !AT 7;ACC87Capital8


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7;ACC J 1 9 for %oth*ears8

VA J : !AT 7;ACC87Capital8

VA1 J .1 ,+3+ 7 6187.2,2/4,3"28J .1 ,+3+ .22/,43"J .21/,2--6

VA - J .12/,+3 7 61 87.1,1"0,3 8

J .12/,+3 .11",03

J .11,3 6


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Stoc# !rice and ther 5ata2 - 2 1

Stoc# price .06/ .36P of shares 1 , 1 ,

!S . 600 . 6-/5!S . 622 . 611


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Mar#et Val&e Added 7MVA8

MVA J Mar#et Val&e of the Firm Boo# Val&e of the FirmMar#et Val&e J 7P shares of stoc#87price per share8 L Val&e of de%tBoo# Val&e J Total common e)&it*L Val&e of de%t

(More…)


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MVA 7Contin&ed8

If the mar#et 'al&e of de%t is closeto the %oo# 'al&e of de%t, thenMVA is@

MVA J Mar#et 'al&e of e)&it* Q%oo# 'al&e of e)&it*

ss&me mar e


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ss&me mar e'al&e of de%t J %oo# 'al&e ofde%t68

Mar#et Val&e of )&it* 2 1 @71 , 87.36 8 J .3 , 6

Boo# Val&e of )&it* 2 1 @.//4,3"26

MVA1 J .3 , .//4,3"2 J.+2,"306MVA - J .0/ , .33",430 J.103,2"26


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Re* Feat&res of the TaxCode

Corporate TaxesIndi'id&al Taxes


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2 - Corporate Tax ates Taxa%le Income Tax on

Baseate on amo&nt

a%o'e %ase / , 1/9

/ , 4/, 4,/ 2/94/, 1 , 1",4/ "+91 , ""/, 22,2/ "-9

""/, 1 M 11",- "+91 M 1/M ",+ , "/91/M 106"M /,1/ , "09106"M and &p 3,+13,334 "/9


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Feat&res of Corporate Taxation

!ro=ressi'e rate &p &ntil .106"million taxa%le income6

Below .106" million, the mar=inal rateis not e)&al to the a'era=e rate6A%o'e .106" million, the mar=inal

rate and the a'era=e rate are "/96


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Feat&res of Corporate Taxes 7Cont68

A corporation can@ded&ct its interest expenses %&t not its

di'idend pa*mentscarr* %ac# losses for two *ears, carr*forward losses for 2 *ears6excl&de 4 9 of di'idend income if it ownsless than 2 9 of the compan*$s stoc#

osses in 2 1 and 2 2 can %e carried %ac# for ?'e*ears6


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xample

Ass&me a corporation has.1 , of taxa%le income from

operations, ./, of interestincome, and .1 , of di'idendincome6

;hat is its tax lia%ilit*<


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peratin= income .1 ,Interest income /,

Taxa%le di'idend

income

", Taxa%le income .1 0,

5i'idends xcl&sion

J .1 , 647.1 , 8 J .", 6

xample 7Contin&ed8


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Taxa%le Income J .1 0, Tax on %ase J .22,2/Amo&nt o'er %ase J .1 0, .1 ,

J .0, Tax J .22,2/ L 6"- 7.0, 8

J .2/,"4 6

xample 7Contin&ed8


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Re* Feat&res of Indi'id&al Taxation

Indi'id&als face pro=ressi'e tax rates,from 1 9 to "/96

The rate on lon= term 7i6e6, more thanone *ear8 capital =ains is 1/96 B&tcapital =ains are onl* taxed if *o& sellthe asset65i'idends are taxed at the same rate as

capital =ains6Interest on m&nicipal 7i6e6, state andlocal =o'ernment8 %onds is not s&% ectto Federal taxation6


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Taxa%le 'ers&s Tax xemptBonds

State and local =o'ernment %onds7m&nicipals, or Gm&nisH8 are

=enerall* exempt from federaltaxes6

xxon o on s a


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xxon o on s a'ers&s California m&ni %ondsat 49

T J Tax rate J 2/6 96After tax interest income@

xxonMo%il J 61 7./, 8 61 7./, 87 62/8xxonMo%il J 61 7./, 87 64/8

J ."4/6CA J 6 47./, 8 J ."/ 6


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Brea#e'en Tax ate

At what tax rate wo&ld *o& %eindiDerent %etween the m&ni and

the corporate %onds<Sol'e for T in this e)&ation@

M&ni *ield J Corp Uield71 T846 9 J 1 6 971 T8

T J " 6 96


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Implications

If T N " 9, %&* tax exempt m&nis6If T " 9, %&* corporate %onds6

nl* hi=h income, and hence hi=htax %rac#et, indi'id&als sho&ld %&*m&nis6

Ch02 Show.pptx

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