Ch 3: Financial Statements, Cash Flow, and Taxes

What is the order of current assets?

Cash
Marketable Securities
AR
Inventories

What is the order of current liabilites?

AP
NP
Accruals

What is the order of the income statement?

Net sales
(Costs)
= EBITDA
(Dep/amort)
= EBIT
(Interest)
= EBT
(taxes)
= NI
(common divs)
= Addition to RE

What does EPS stand for?

Earnings Per Share

What does DPS stand for?

Dividends Per Share

What does BVPS stand for?

Book Value Per Share

What are the SOURCES of Cash?

decrease in asset account
increase in a liability or equity account

What are the USES of Cash

increase in asset account
decrease in a liability or equity

Accounting Profit =

NI

Net Cash Flow (NCF) =

NI + Dep

NCF (expanded equation) =

EBT (1-T) + Dep

Operating Cash Flow (OCF)

(EBIT) (1- T) + Dep

the cash flow actually available for distribution to all investors (stockholders and debtholders) after the company has made all the investments in fixed assets, new products, and working capital necessary to sustain ongoing operations

Free Cash Flow (FCF)

FCF=

EBIT(1-T) + D - (change in net FA + D) - (Change in CA) + (Change in AP + Accr)

What are considered spontaneous liabilities

AP and Accr

difference between the market value of the firms equity and the amount off equity capital supplied by investors

Market Value Added (MVA)

focuses on a firms managerial effectiveness in a specific year

Economic Value Added (EVA)

EVA (theoretically)=

after tax operating profit - after tax cost of capital

EVA (equation) =

EBIT (1-T) - (total capital - AP - Accr) x WACC

How is EVA useful

good measure of addition to shareholder value
can be used for divisions as well as for entire company
provides useful basis for determining managerial compensation
VERY STRONG CORRELATION BETWEEN EVA AND FIRM STOCK PRICE

If EVA is positive, it means

ROE exceeds cost of equity

What is the corporate tax rate after the 2018 Tax Cuts and Jobs Act?

21% flat

What is the rate for healthcare tax?

3.8 if > $250 K taxable income (married/joint)

interest income is not taxed by a rate but is

taxed as ordinary income (combined with salary)

individuals must calculate their tax two ways and pay the higher amount, brackets have been indexed in 2018

Alternative Minimum Tax (AMT)

aka munis

municipal bonds

What is special about munis

not subject to federal income tax

equivalent yield on muni =

(BTY on taxable bond) (1- T)

made when a capital asset is sold for more than its purchase price

capital gain

made when a capital asset is sold for less than its purchase price

capital loss

sold within one year, taxed as ordinary income

short term capital gain/loss

held for one year or longer, tax rate capped at 15% (except 0% capital gains tax for individuals in the 10% or 15% brackets and 20% for the 39.6% bracket)

long term gains/losses

has same caps as capital gains

dividend income

can offset up to $3000 of other income (meaning $3000 of salary is not taxed)

excess capital loss

inherited assets follow the

stepped up basis

in order to not pay taxes when an executor dies and you inherit the assets, you must

sell immediately

deductible on up to $750,000 of principal, not deductible on home equity loans any more

mortgage interest

What does REIT stand for?

Real Estate Investment Trust

what are the deductions for taxation on dividend income

50% (70) on ownership of <20%
65% (80) on ownership 20<x<80 %
100% on ownership >80%

prior to 1987, many large corps paid no income tax but cancelled in 2018 for corps but not individuals

AMT

interest expense is tax deductible on up to:

30% of EBITDA

Dividends Paid are:

not tax deductible

How to determine how much it cost to pay $1 in divs

$1 / (1-T)

Repatriation Tax Holiday allows

15.5% tax if before April 17,2018

taxed as ordinary income and has NO TAX CAPS

Corporate capital gains

Consolidated Corporate Tax returns are made when a corp

owns >80% of another corp

taxed as a sole proprietorship/partnership but has limited liability, may deduct 20% of qualified business income from taxation

S corp

cannot carry back losses and may only offset 80% of a future years EBT from being taxed (can carry forward indefinitely)

Loss Carry Back/Forward 2018 rule

ordinary corporate operating losses may be carried back 2 years and forward 20 years in order to offset taxable income

Loss carry back/forward PRIOR to 2018