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2 - 1 Copyright © 1999 by The Dryden Press All rights reserved. Balance sheet Income statement Statement of cash flows Accounting income versus cash flow MVA and EVA Corporate tax CHAPTER 2 Financial Statements, Cash Flow, and Taxes

Balance sheet Income statement Statement of cash flows Accounting income versus cash flow

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CHAPTER 2 Financial Statements, Cash Flow, and Taxes. Balance sheet Income statement Statement of cash flows Accounting income versus cash flow MVA and EVA Corporate tax. Balance Sheets: Assets. 1998 1997 Cash7,2829,000 Short-term inv.048,600 AR632,160351,200 - PowerPoint PPT Presentation

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Page 1: Balance sheet Income statement Statement of cash flows Accounting income versus cash flow

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Copyright © 1999 by The Dryden Press All rights reserved.

Balance sheetIncome statementStatement of cash flowsAccounting income versus cash flowMVA and EVACorporate tax

CHAPTER 2Financial Statements,Cash Flow, and Taxes

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1998 1997 Cash 7,282 9,000Short-term inv. 0 48,600AR 632,160 351,200Inventories 1,287,360 715,200 Total CA 1,926,802 1,124,000Gross FA 1,202,950 491,000Less: Depr. 263,160 146,200 Net FA 939,790 344,800Total assets 2,866,592 1,468,800

Balance Sheets: Assets

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1,733,760

Liabilities and Equity

1998 1997Accts payable 524,160 145,600Notes payable 720,000 200,000Accruals 489,600 136,000 Total CL 481,600Long-term debt 1,000,000 323,432Common stock 460,000 460,000Retained earnings (327,168) 203,768 Total equity 132,832 663,768Total L&E 2,866,592 1,468,800

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(519,936)

Income Statement

Sales 5,834,400 3,432,000COGS 5,728,000 2,864,000Other expenses 680,000 340,000Deprec. 116,960 18,900 Tot. op. costs 6,524,960 3,222,900 EBIT (690,560) 209,100Interest exp. 176,000 62,500 EBT (866,560) 146,600Taxes (40%) (346,624) 58,640Net income 87,960

1998 1997

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Other Data

No. of shares 100,000 100,000

EPS ($5.199) $0.88

DPS $0.110 $0.22

Stock price $2.25 $8.50

Lease pmts $40,000 $40,000

1998 1997

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Statement of Retained Earnings (1998)

Balance of retained

earnings, 12/31/97 $203,768

Add: Net income, 1998 (519,936)

Less: Dividends paid (11,000)

Balance of retained

earnings, 12/31/98 ($327,168)

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Statement of Cash Flows: 1998

OPERATING ACTIVITIESNet Income (519,936)Adjustments: Depreciation 116,960 Change in AR (280,960) Change in inventories (572,160) Change in AP 378,560 Change in accruals 353,600 Net cash provided by ops. (523,936)

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L-T INVESTING ACTIVITIESInvestments in fixed assets (711,950)FINANCING ACTIVITIES Change in s-t investments 48,600 Change in notes payable 520,000 Change in long-term debt 676,568 Payment of cash dividends (11,000)Net cash from financing 1,234,168 Sum: net change in cash (1,718)Plus: cash at beginning of year 9,000 Cash at end of year 7,282

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Net cash from operations = -$523,936, mainly because of negative net income.

The firm borrowed $1,185,568 and sold $48,600 in short-term investments to meet its cash requirements.

Even after borrowing, the cash account fell by $1,718.

What can you conclude about the company’s financial condition from its

statement of cash flows?

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What effect did the expansion have on net operating working capital (NOWC)?

NOWC98 = ($7,282 + $632,160 + $1,287,360)

- ($524,160 + $489,600)= $913,042.

NOWC97 = $793,800.

= -Non-interestbearing CA

Non-interestbearing CL

NOWC

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What effect did the expansion have on capital used in operations?

= NOWC + Net fixed assets.

= $913,042 + $939,790

= $1,852,832.

= $1,138,600.

Operatingcapital98

Operatingcapital97

Operatingcapital

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Did the expansion create additional net operating profit after taxes (NOPAT)?

NOPAT = EBIT(1 - Tax rate)

NOPAT98 = -$690,560(1 - 0.4)

= -$690,560(0.6)= -$414,336.

NOPAT97 = $125,460.

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What is your initial assessment of the expansion’s effect on operations?

1998 1997

Sales $5,834,400 $3,432,000

NOPAT ($414,336) $125,460

NOWC $913,042 $793,800

Operating capital $1,852,832 $1,138,600

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What effect did the company’s expansion have on its net cash flow

and operating cash flow?

NCF98 = NI + DEP = -$519,936 + $116,960= -$402,976.

NCF97 = $87,960 + $18,900 = $106,860.

OCF98 = NOPAT + DEP= -$414,336 + $116,960= -$297,376.

OCF97 = $125,460 + $18,900= $144,360.

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What was the free cash flow (FCF)for 1998?

FCF = NOPAT - Net capital investment

= NOPAT - (OC98 - OC97)

= -$414,336 - ($1,852,832 - $1,138,600)

= -$414,336 - $714,232

= -$1,128,568.

How do you suppose investors reacted?

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What is the company’s EVA?Assume the firm’s after-tax cost of

capital (COC) was 11% in 1997and 13% in 1998.

EVA98 = NOPAT- (COC)(Capital)= -$414,336 - (0.13)($1,852,832)= -$414,336 - $240,868= -$655,204.

EVA97 = $125,460 - (0.11)($1,138,600)= $125,460 - $125,246= $214.

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Would you concludethat the expansion increased or

decreased MVA?

MVA = - .

During the last year stock price has decreased 73%, so market value of equity has declined. Consequently, MVA has declined.

Equity capitalsupplied

Market valueof equity