Financial Statements, Taxes, and Cash Flows

Vocabulary flashcards focusing on corporate and individual tax structures, Operating Cash Flow, Free Cash Flow, Market Value Added, and Economic Value Added based on the lecture material.

Individual Tax Structure (U.S.)

A U.S. tax structure that is progressive in nature, where higher earnings lead to higher tax rates, starting at 12% and topping out at 39.6%.

Corporate Tax Rate (U.S.)

A flat federal tax rate of 21% established in 2017, frequently cited as 25% in textbooks to incorporate an average state business income tax of around 4%.

Marginal Tax Rate

The tax rate applied to the next dollar of revenue or the next dollar earned on a new investment.

Operating Cash Flow (OCF)

A metric evaluating cash generated by core business operations, defined mathematically as $\text{OCF} = \text{EBIT} + \text{Depreciation} - \text{Taxes}$ or $\text{OCF} = \text{EBIT} \times (1 - \text{Tax Rate}) + \text{Depreciation}$.

Free Cash Flow (FCF)

The amount of cash that can be withdrawn from a business without impairing its ability to produce future cash flows, calculated by subtracting capital expenditures and changes in net operating working capital from operating cash flow.

Net Operating Working Capital (NOWC)

A measure of operational liquidity calculated as current assets minus current liabilities, excluding short-term interest-bearing debt such as notes payable.

Market Value Added (MVA)

The difference between the total market value of a firm's common stock and its book value, expressed as $\text{MVA} = (P_0 \times \text{Number of Shares}) - \text{Book Value}$.

Economic Value Added (EVA)

An estimate of a firm's true economic profit, calculated as $\text{EVA} = \text{EBIT} \times (1 - \text{Tax Rate}) - (\text{Total Invested Capital} \times \text{Cost of Capital})$.

Global Crossing (March 2004)

An Internet service provider that posted a quarterly net income of $24.88 billion on only $719 million in sales by utilizing GAAP rules regarding noncash items related to bankruptcy emergence.