Chapter Two Slides

What three concerns should a financial manager be aware of

Liquidity, Debt vs. Equity, and Value vs. Cost

What do liquid assets mean for the firm

An increase in the firm’s liquid assets means a decrease in problems meeting short-term obligations

What is the most liquid

the firm’s current assets

What receives the first claim on the firm’s cash flow

Liabilities 

What is book value

Cost of carrying an asset on a company’s balance sheet

What is market value

The price at which the assets, liabilities, and equity could actually be bought and sold for

What are the three things to keep in mind when analyzing the income statement

1) Generally Accepted Accounting Principles (GAAP)

2) Noncash items (net income, depreciation, and deferred taxes)

3) Time and costs (no distinction between costs in the long or short term) 

What is the average tax rate

tax bill / taxable income

Marginal Tax Rate

The rate you would pay if you owed one more dollar

Net working capital

The difference between current assets and current liabilities

What is important about the fact that firms can invest in net working capital

The firm has the short-term resources that will enable it to raise money for an investment opportunity or pay debt. 

What is the equation for change in net working capital

NWCx2 - NWCx1

How do you calculate the firm’s value

cash flow today - cash flow in the future

What is the equation for cash flow of the firm

Cash flow of assets = Cash flow to creditors + Cash flow to equity investors

What is the equation for operating cash flows 

EBIT + Depreciation/Amortization - Current Taxes 

What is the equation for capital spending 

(Ending net fixed assets - beginning net fixed assets) + depreciation of that year

What is the equation for change in net working capital

(Current Assets t - Current Assets t-1) - (Current liabilities t - Current liabilities t-1)

Equation for total cash flow of the firm

Operating cash flow - capital spending - additions to net working capital 

Who do cash flow payments go to

creditors and shareholders

Equation for cash flows paid to creditors

Interest paid - (ending long-term debt - beginning long-term debt)

Equation for cash flows paid to shareholders

Dividends paid - (Common stock + capital surplus) - Treasury stock

What is another way to say total cash flow of the firm

Free cash flows

Equation for cash flow from operating activities 

= Net Income + non-cash expenses + change in current assets + change in current liabilities 

What is the difference between the interest expense when using the accounting approach or the finance approach 

Accounting approach: Interest expense is included in operating activities 

Finance approach: Interest expense is included when cash flow is distributed to creditors