Chapter No. 2B Slides

CHAPTER 2B
Financial Statements, Cash Flows, and Taxes
 Balance sheet
 Income statement
 Statement of cash flows
 Accounting income vs. cash flow
 MVA and EVA
 Personal taxes
 Corporate taxes
Did the expansion create additional net
operating profit after taxes (NOPAT)? (If
company have no debt and financial assets)
NOPAT = EBIT(1 – Tax rate) if no debt

NOPAT = EBT (1 – Tax rate) After paying Int.
NOPAT10 = 283.8(1 – 0.4)
= 283.8(0.6)
= $170.3 million
NOPAT09 = Calculate it
Types of Capitals
1. Net Operating Working Capital, NWOC
2. Operating Long-term Capital/assets
NOWC = Operating Current assets – Non interest-bearing current

liabilities (operating current liabilities)
NOWC10 = (cash + A/R+ Invt.) – ( A/P + Accruals)

NOWC10 = (10+375+615) – (60+140)
NOWC10 = 1000 – 200 = $800 million
NOWC09 = Calculate it
What effect did the expansion have on
net operating working capital (NOWC)?
NOWC = Operating Current assets – Non interest-bearing current

liabilities (operating current liabilities)
NOWC10 = (cash + A/R+ Invt.) – ( A/P + Accruals)

NOWC10 = (10+375+615) – (60+140)
NOWC10 = 1000 – 200 = $800 million
NOWC09 = Calculate it
What effect did the expansion have on capital used
in operations?
Operating capital = NOWC + Net fixed assets

Operating capital10 = $800 + $1,000
= $1,800
Operating capital09= Calculate it

What is your initial assessment of the expansion’s
effect on operations?
2010 2009
Sales $3,000
NOPAT $170.3
NOWC $800
Operating capital $1,800
Net Income $113.5
What was the free cash flow (FCF) for
2010?
FCF = OCF – Gross capital investment.

-OR-
FCF = NOPAT – Net investment in operating
capital (or change in operating capital)
= $170.3 – ($1,800 – $1,455)
= -$170.3 – $345
= $174.7
Economic Value Added (EVA)
Economic Value Added, EVA is an estimate of

a business’s true economic profit for the year
(As per book Values)
Operating Income After-Tax
EVA = After Tax –
Capital Costs
= Funds Available – Cost of

to Investors Capital Used
= NOPAT – After-Tax
Cost of Capital
= Operating Caital x (ROIC –WACC)
What is the company’s EVA?
Assume the firm’s after-tax
percentage cost of capital was
10% in 2000 and 13% in 2020.
EVA10 = NOPAT – (WACC cost of capital)(Total

Capital)
= $173.8 – (0.11)($1,800)
= $173.8 – $198.0
= -$27.7.
EVA09 = Calculate
EVA Concepts
 In order to generate positive EVA, a

firm has to more than just cover
operating costs. It must also provide
a return to those who have provided
the firm with capital.
 EVA takes into account the total cost
of capital, which includes the cost of
equity.
Market Value Added, MVA
Market value added (MVA) is the amount of wealth that a

company is able to create for its stakeholders since its
foundation.
In simple terms, it's the difference between the current market

value of the company's stock and the initial capital that was
invested in the company by both bondholders and
stockholders.
MVA = Market value of equity - Equity capital supplied

Market Value Added, MVA
MVA = Market value of equity - Equity capital supplied

MVA = Market Value of Stock – Book Value of Stock
MVA = (Share outstanding x Stock Price in Market) - (Total
Common Equity)
MVA10 = (50 x 20) - $896

= $1000 - $896
= $104 million
Leading Creators of Wealth in the U.S.
Market Value Added
Company Market Value Added

General Electric $502,307 million
Microsoft $388,922 million
Cisco Systems $377,883 million
Intel $281,832 million
Pfizer $260,984 million
Merck $193,348 million
EMC $191,904 million
Oracle $180,885 million
American Int’l Group $177,982 million
Wal-Mart Stores $177,450 million
INCOME TAXES
Year 2020 Single Individual Tax Rates
Q1. FIND THE TAX LIABILITY ON THE
SALARY OF RS. 1,473,500.
Q2. WHAT IS THE SALARY OF A PERSON
WHO HAS GIVEN THE TAX OF RS.
110,000.
 Tax Liability:
TL = 30,000 + 273,500 x 10%= 30,000 + 27, 350= RS. 57,350

Marginal Tax Rate = 10%.
 Tax Paid = Rs. 110,000.

 Tax Paid = 90,000 + 20,000
 If Taxable income = 1,800,000 then Tax liability = 90,000.
 So 20,000 = 15%
 1% = 20,000/15 =1,333.333
 100% = (20,000/15) x 100 = 1333.333 x 100 = 133,333.333
 1,800,000.000 + 133,333.333 = Rs. 1,933,333.333

Chapter No. 2B Slides

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Chapter No. 2B Slides

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CHAPTER 2B

Financial Statements, Cash Flows, and Taxes

NOPAT = EBIT(1 – Tax rate) if no debt

NOWC = Operating Current assets – Non interest-bearing current

NOWC10 = (cash + A/R+ Invt.) – ( A/P + Accruals)

NOWC = Operating Current assets – Non interest-bearing current

NOWC10 = (cash + A/R+ Invt.) – ( A/P + Accruals)

Operating capital = NOWC + Net fixed assets

Operating capital09= Calculate it

FCF = OCF – Gross capital investment.

Economic Value Added, EVA is an estimate of

= Funds Available – Cost of

EVA10 = NOPAT – (WACC cost of capital)(Total

 In order to generate positive EVA, a

Market value added (MVA) is the amount of wealth that a

In simple terms, it's the difference between the current market

MVA = Market value of equity - Equity capital supplied

MVA = Market value of equity - Equity capital supplied

MVA10 = (50 x 20) - $896

Company Market Value Added

TL = 30,000 + 273,500 x 10%= 30,000 + 27, 350= RS. 57,350

 Tax Paid = Rs. 110,000.

 1,800,000.000 + 133,333.333 = Rs. 1,933,333.333

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