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The annual report is a report issued annually by a corporation to its stockholders. Net sales are shown at the top of each statement, after which various costs, including income taxes, are subtracted to obtain the net income available to common stockholders. The bottom of the statement reports earnings and dividends per share. Note that retained earnings represents a claim against assets, not assets per se. Firms retain earnings primarily to expand the business, not to accumulate cash in a bank account.
Depreciation is a non-cash charge against tangible assets, such as buildings or machines. Amortization is a non-cash charge against intangible assets, such as goodwill.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Operating current assets are the current assets used to support operations, such as cash, accounts receivable, and inventory. It does not include short-term investments. It does not include notes payable or any other short-term debt that charges interest.
Net operating working capital is operating current assets minus operating current liabilities. Total net operating capital is sum of net operating working capital and operating long-term assets, such as net plant and equipment. Operating capital also is equal to the net amount of capital raised from investors. This is the amount of interest-bearing debt plus preferred stock plus common equity minus short-term investments. Net cash flow, as opposed to accounting net income, is the sum of net income plus noncash adjustments.
NOPAT, net operating profit after taxes, is the amount of profit a company would generate if it had no debt and no financial assets. Free cash flow is the cash flow actually available for distribution to investors after the company has made all investments in fixed assets and working capital necessary to sustain ongoing operations.
Market value added is the difference between the market value of the firm i. If the book values of debt and preferred stock are equal to their market values, then MVA is also equal to the difference between the market value of equity and the amount of equity capital that investors supplied.
Economic value added represents the residual income that remains after the cost of all capital, including equity capital, has been deducted. Taxable income is defined as gross income less a set of exemptions and deductions which are spelled out in the instructions to the tax forms individuals must file. Marginal tax rate is defined as the tax rate on the last unit of income. Average tax rate is calculated by taking the total amount of tax paid divided by taxable income.
Capital gain loss is the profit loss from the sale of a capital asset for more less than its purchase price. Ordinary corporate operating losses can be carried backward for 2 years or forward for 20 years to offset taxable income in a given year. Improper accumulation is the retention of earnings by a business for the purpose of enabling stockholders to avoid personal income taxes on dividends.
An S corporation is a small corporation which, under Subchapter S of the Internal Revenue Code, elects to be taxed as a proprietorship or a partnership yet retains limited liability and other benefits of the corporate form of organization. The retained earnings figure represents cumulative amount of net income that the firm has not paid out as dividends during its entire history. Without this capital a firm cannot exist, as there is no source of funds with which to finance operations.
NOPAT is the amount of net income a company would generate if it had no debt and held no financial assets. Free cash flow is the cash flow actually available for distribution to investors after the company has made all the investments in fixed assets and working capital necessary to sustain ongoing operations. It is the most important measure of cash flows because it shows the exact amount available to all investors. If the business were organized as a partnership or a proprietorship, its income could be taken out by the owners without being subject to double taxation.
Also, if you expected to have losses for a few years while the company was getting started, if you were not incorporated, and if you had outside income, the business losses could be used to offset your other income and reduce your total tax bill. These factors would lead you to not incorporate the business. An alternative would be to organize as an S Corporation, if requirements are met. Need to set up an income statement and work from the bottom up. If depreciation doubled, taxable income would fall to zero and taxes would be zero.
You should prefer to have higher depreciation charges and higher cash flows. Net cash flows are the funds that are available to the owners to withdraw from the firm and, therefore, cash flows should be more important to them than net income. Total check from U. Donna Jamison, a recent graduate of the University of Tennessee with four years of banking experience, was recently brought in as assistant to the chairman of the board of Computron Industries, a manufacturer of electronic calculators.
The company doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Its board of directors, which consisted of its president and vice-president plus its major stockholders who were all local business people , was most upset when directors learned how the expansion was going.
Suppliers were being paid late and were unhappy, and the bank was complaining about the deteriorating situation and threatening to cut off credit. Jamison began by gathering financial statements and other data. Balance Sheets Assets Cash Short-term investments. Accounts receivable Inventories total current assets Gross fixed assets Less: accumulated depreciation net fixed assets Total assets Liabilities and equity Accounts payable Notes payable Accruals total current liabilities Long-term debt Common stock , shares Retained earnings total equity Total liabilities and equity.
Statement of Cash Flows Operating activities Net income Adjustments: noncash adjustments: depreciation changes in working capital: change in accounts receivable change in inventories change in accounts payable change in accruals Net cash provided by operating activities.
Investing activities Cash used to acquire fixed assets Cash due to change in short term investments Net cash provided by operating activities. Financing activities change in notes payable change in long-term debt change in common stock payment of cash dividends Net cash provided by financing activities. What effect did the expansion have on sales and net income? What effect did the expansion have on the asset side of the balance sheet? What effect did it have on liabilities and equity?
Assets almost doubled. The firm borrowed heavily and sold some short-term investments to meet its cash requirements. Answer: 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.
Pay interest on debt. Pay back principal on debt. Pay dividends. Buy back stock. Buy nonoperating assets e. What are operating current assets? What are operating current liabilities? How much net operating working capital and total net operating capital does Computron have?
Operating current assets are the CA needed to support operations. OP CA include: cash, inventory, receivables. OP CA exclude: short-term investments, because these are not a part of operations. Operating current liabilities are the CL resulting as a normal part of operations.
OP CL include: accounts payable and accruals. OP CA exclude: notes payable, because this is a source of financing, not a part of operations. The ROIC of 0. Investors did not get the return they require. Jamison also has asked you to estimate Computron's EVA. She estimates that the after-tax cost of capital was 10 percent in both years. If the market value of debt is close to the book value of debt, then MVA is market value of equity minus book value of equity.
Assume market value of debt equals book value of debt. You have narrowed your investment choices down to California bonds with a yield of 7 percent or equally risky ExxonMobil bonds with a yield of 10 percent. Which one should you choose and why? At what marginal tax rate would you be indifferent to the choice between California and ExxonMobil bonds? A-T yieldCalif.
At what marginal tax rate would you be indifferent? Solve for t. See More. Answers and Solutions: 2 - 1 This sample only, Download all chapters at: alibabadownload. Answers and Solutions: 2 - 2 j. Answers and Solutions: 2 - 6 a. Answers and Solutions: 2 - 7 b. Answers and Solutions: 2 - 8 f. Answers and Solutions: 2 - 11 MINI CASE Donna Jamison, a recent graduate of the University of Tennessee with four years of banking experience, was recently brought in as assistant to the chairman of the board of Computron Industries, a manufacturer of electronic calculators.
Mini Case: 2 - 15 b. What do you conclude from the statement of cash flows? Mini Case: 2 - 16 c. What is free cash flow? Why is it important? What are the five uses of FCF? Mini Case: 2 - 17 d.