RWJ FCF11e Chap 02
RWJ FCF11e Chap 02
RWJ FCF11e Chap 02
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved.
KEY CONCEPTS AND SKILLS
• Know the difference between book
value and market value
• Taxes
• Cash Flow
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-3
BALANCE SHEET
• The balance sheet is a snapshot of
the firm’s assets and liabilities at a
given point in time
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-4
THE BALANCE SHEET
FIGURE 2.1
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-5
NET WORKING CAPITAL
AND LIQUIDITY
• Net Working Capital
= Current Assets – Current Liabilities
Positive when the cash that will be received over the next 12
months exceeds the cash that will be paid out
Usually positive in a healthy firm
• Liquidity
Ability to convert to cash quickly without
a significant loss in value
Liquid firms are less likely to experience financial distress
But liquid assets typically earn a lower return
Trade-off to find balance between liquid and illiquid assets
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-6
U.S. CORPORATION BALANCE
SHEET TABLE 2.1
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-7
MARKET VALUE VS. BOOK VALUE
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-9
INCOME STATEMENT
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-11
WORK THE WEB EXAMPLE
• Other taxes
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-13
EXAMPLE: MARGINAL VS.
AVERAGE RATES
• Suppose your firm earns $4 million in
taxable income.
What is the firm’s tax liability?
What is the average tax rate?
What is the marginal tax rate?
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-14
THE CONCEPT OF CASH FLOW
• Cash flow is one of the most important
pieces of information that a financial
manager can derive from financial
statements
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-15
CASH FLOW FROM ASSETS
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-16
EXAMPLE: U.S. CORPORATION –
PART I
• OCF (I/S) = EBIT + depreciation –
taxes = $547
• NCS (B/S and I/S) = ending net fixed
assets – beginning net fixed assets +
depreciation = $130
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-17
EXAMPLE: U.S. CORPORATION –
PART II
• CF to Creditors (B/S and I/S) =
interest paid – net new borrowing
= $24
• CFFA = 24 + 63 = $87
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-18
CASH FLOW SUMMARY - TABLE 2.6
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-19
EXAMPLE: BALANCE SHEET AND
INCOME STATEMENT INFO
• Current Accounts
2015: CA = 3625; CL = 1787
2014: CA = 3596; CL = 2140
• Income Statement
EBIT = 1014; Taxes = 368
Interest Expense = 93; Dividends = 285
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-20
EXAMPLE: CASH FLOWS
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-21
QUICK QUIZ
• What is the difference between book value
and market value? Which should we use
for decision-making purposes?
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-23
COMPREHENSIVE PROBLEM
• Current Accounts
2015: CA = 4,400; CL = 1,500
2014: CA = 3,500; CL = 1,200
• Income Statement
EBIT = 2,000; Taxes = 300
Interest Expense = 350; Dividends = 500
Copyright © 2016 by McGrawHill Global Education LLC. All rights reserved. 2-25