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Copyright © 1999 by The Dryden Press All rights reserved.
Balance sheetIncome statementStatement of cash flowsAccounting income versus cash flowMVA and EVACorporate tax
CHAPTER 2Financial Statements,Cash Flow, and Taxes
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Copyright © 1999 by The Dryden Press All rights reserved.
1998 1997 Cash 7,282 9,000Short-term inv. 0 48,600AR 632,160 351,200Inventories 1,287,360 715,200 Total CA 1,926,802 1,124,000Gross FA 1,202,950 491,000Less: Depr. 263,160 146,200 Net FA 939,790 344,800Total assets 2,866,592 1,468,800
Balance Sheets: Assets
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Copyright © 1999 by The Dryden Press All rights reserved.
1,733,760
Liabilities and Equity
1998 1997Accts payable 524,160 145,600Notes payable 720,000 200,000Accruals 489,600 136,000 Total CL 481,600Long-term debt 1,000,000 323,432Common stock 460,000 460,000Retained earnings (327,168) 203,768 Total equity 132,832 663,768Total L&E 2,866,592 1,468,800
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(519,936)
Income Statement
Sales 5,834,400 3,432,000COGS 5,728,000 2,864,000Other expenses 680,000 340,000Deprec. 116,960 18,900 Tot. op. costs 6,524,960 3,222,900 EBIT (690,560) 209,100Interest exp. 176,000 62,500 EBT (866,560) 146,600Taxes (40%) (346,624) 58,640Net income 87,960
1998 1997
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Copyright © 1999 by The Dryden Press All rights reserved.
Other Data
No. of shares 100,000 100,000
EPS ($5.199) $0.88
DPS $0.110 $0.22
Stock price $2.25 $8.50
Lease pmts $40,000 $40,000
1998 1997
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Copyright © 1999 by The Dryden Press All rights reserved.
Statement of Retained Earnings (1998)
Balance of retained
earnings, 12/31/97 $203,768
Add: Net income, 1998 (519,936)
Less: Dividends paid (11,000)
Balance of retained
earnings, 12/31/98 ($327,168)
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Statement of Cash Flows: 1998
OPERATING ACTIVITIESNet Income (519,936)Adjustments: Depreciation 116,960 Change in AR (280,960) Change in inventories (572,160) Change in AP 378,560 Change in accruals 353,600 Net cash provided by ops. (523,936)
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L-T INVESTING ACTIVITIESInvestments in fixed assets (711,950)FINANCING ACTIVITIES Change in s-t investments 48,600 Change in notes payable 520,000 Change in long-term debt 676,568 Payment of cash dividends (11,000)Net cash from financing 1,234,168 Sum: net change in cash (1,718)Plus: cash at beginning of year 9,000 Cash at end of year 7,282
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Net cash from operations = -$523,936, mainly because of negative net income.
The firm borrowed $1,185,568 and sold $48,600 in short-term investments to meet its cash requirements.
Even after borrowing, the cash account fell by $1,718.
What can you conclude about the company’s financial condition from its
statement of cash flows?
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What effect did the expansion have on net operating working capital (NOWC)?
NOWC98 = ($7,282 + $632,160 + $1,287,360)
- ($524,160 + $489,600)= $913,042.
NOWC97 = $793,800.
= -Non-interestbearing CA
Non-interestbearing CL
NOWC
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What effect did the expansion have on capital used in operations?
= NOWC + Net fixed assets.
= $913,042 + $939,790
= $1,852,832.
= $1,138,600.
Operatingcapital98
Operatingcapital97
Operatingcapital
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Copyright © 1999 by The Dryden Press All rights reserved.
Did the expansion create additional net operating profit after taxes (NOPAT)?
NOPAT = EBIT(1 - Tax rate)
NOPAT98 = -$690,560(1 - 0.4)
= -$690,560(0.6)= -$414,336.
NOPAT97 = $125,460.
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What is your initial assessment of the expansion’s effect on operations?
1998 1997
Sales $5,834,400 $3,432,000
NOPAT ($414,336) $125,460
NOWC $913,042 $793,800
Operating capital $1,852,832 $1,138,600
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What effect did the company’s expansion have on its net cash flow
and operating cash flow?
NCF98 = NI + DEP = -$519,936 + $116,960= -$402,976.
NCF97 = $87,960 + $18,900 = $106,860.
OCF98 = NOPAT + DEP= -$414,336 + $116,960= -$297,376.
OCF97 = $125,460 + $18,900= $144,360.
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What was the free cash flow (FCF)for 1998?
FCF = NOPAT - Net capital investment
= NOPAT - (OC98 - OC97)
= -$414,336 - ($1,852,832 - $1,138,600)
= -$414,336 - $714,232
= -$1,128,568.
How do you suppose investors reacted?
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What is the company’s EVA?Assume the firm’s after-tax cost of
capital (COC) was 11% in 1997and 13% in 1998.
EVA98 = NOPAT- (COC)(Capital)= -$414,336 - (0.13)($1,852,832)= -$414,336 - $240,868= -$655,204.
EVA97 = $125,460 - (0.11)($1,138,600)= $125,460 - $125,246= $214.
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Would you concludethat the expansion increased or
decreased MVA?
MVA = - .
During the last year stock price has decreased 73%, so market value of equity has declined. Consequently, MVA has declined.
Equity capitalsupplied
Market valueof equity