Fundamentals of Corporate Finance: Second Edition
Fundamentals of Corporate Finance: Second Edition
Fundamentals of Corporate Finance: Second Edition
of Corporate
FINANCE
SECOND EDITION
Stephen A. Ross
Randolph W. Westerfield
Bradford D. Jordan
Joseph Lim
Ruth Tan
• Taxes
• Cash Flow
2-4
Copyright © 2016 by McGraw-Hill Education. All rights reserved
BALANCE SHEET
• The balance sheet is a snapshot of the firm’s
assets and liabilities at a given point in time
2-5
Copyright © 2016 by McGraw-Hill Education. All rights reserved
THE BALANCE SHEET
FIGURE 2.1
2-6
Copyright © 2016 by McGraw-Hill Education. All rights reserved
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
2-7
Copyright © 2016 by McGraw-Hill Education. All rights reserved
ASIA-PACIFIC CORPORATION
BALANCE SHEET TABLE 2.1
2-8
Copyright © 2016 by McGraw-Hill Education. All rights reserved
MARKET VALUE VS. BOOK VALUE
2-9
Copyright © 2016 by McGraw-Hill Education. All rights reserved
EXAMPLE 2.2
KL CORPORATION
2-10
Copyright © 2016 by McGraw-Hill Education. All rights reserved
INCOME STATEMENT
2-11
Copyright © 2016 by McGraw-Hill Education. All rights reserved
ASIA-PACIFIC CORPORATION
INCOME STATEMENT – TABLE 2.2
2-12
Copyright © 2016 by McGraw-Hill Education. All rights reserved
WORK THE WEB EXAMPLE
2-13
Copyright © 2016 by McGraw-Hill Education. All rights reserved
TAXES
• The one thing we can rely on with taxes is that
they are always changing
• Other taxes
2-14
Copyright © 2016 by McGraw-Hill Education. All rights reserved
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?
2-15
Copyright © 2016 by McGraw-Hill Education. All rights reserved
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
2-16
Copyright © 2016 by McGraw-Hill Education. All rights reserved
CASH FLOW FROM ASSETS
2-17
Copyright © 2016 by McGraw-Hill Education. All rights reserved
EXAMPLE: ASIA-PACIFIC
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
2-18
Copyright © 2016 by McGraw-Hill Education. All rights reserved
EXAMPLE: ASIA-PACIFIC
CORPORATION – PART II
• CF to Creditors (B/S and I/S) = interest
paid – net new borrowing = $24
• CFFA = 24 + 63 = $87
2-19
Copyright © 2016 by McGraw-Hill Education. All rights reserved
CASH FLOW SUMMARY - TABLE 2.6
2-20
Copyright © 2016 by McGraw-Hill Education. All rights reserved
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
2-21
Copyright © 2016 by McGraw-Hill Education. All rights reserved
EXAMPLE: CASH FLOWS
2-22
Copyright © 2016 by McGraw-Hill Education. All rights reserved
QUICK QUIZ
• What is the difference between book value and
market value? Which should we use for decision-
making purposes?
2-23
Copyright © 2016 by McGraw-Hill Education. All rights reserved
ETHICS ISSUES
2-24
Copyright © 2016 by McGraw-Hill Education. All rights reserved
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
2-26
Copyright © 2016 by McGraw-Hill Education. All rights reserved