Ross 12e PPT Ch02
Ross 12e PPT Ch02
Ross 12e PPT Ch02
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KEY CONCEPTS AND SKILLS
2-2
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CHAPTER OUTLINE
• Taxes
• Cash Flow
2-3
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BALANCE SHEET
2-5
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NET WORKING CAPITAL
AND LIQUIDITY
• Net Working Capital
▪ = Current Assets - Current Liabilities
▪ Positive when the cash that will be received over the next 12
months exceeds the cash that will be paid out
▪ Usually positive in a healthy firm
• Liquidity
▪ Ability to convert to cash quickly without a significant loss in
value
▪ Liquid firms are less likely to experience financial distress.
▪ But liquid assets typically earn a lower return.
▪ Trade-off to find balance between liquid and illiquid assets
2-6
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U.S. CORPORATION BALANCE
SHEET TABLE 2.1
2-9
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INCOME STATEMENT
2-12
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TAXES
2-13
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EXAMPLE: MARGINAL VS.
AVERAGE RATES
• Suppose your firm earns $4 million in
taxable income.
▪ What is the firm’s tax liability?
▪ What is the average tax rate?
▪ What is the marginal tax rate?
2-14
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THE CONCEPT OF CASH FLOW
2-16
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EXAMPLE: U.S. CORPORATION –
PART I
• OCF (I/S) = EBIT + depreciation -
taxes = $628
2-17
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EXAMPLE: U.S. CORPORATION –
PART II
• CF to Creditors (B/S and I/S) = interest paid -
net new borrowing = $24
• CFFA = 24 + 83 = $107
2-18
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CASH FLOW SUMMARY - TABLE 2.6
2-19
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EXAMPLE: BALANCE SHEET AND
INCOME STATEMENT INFO
• Current Accounts
▪ 2018: CA = 3,625; CL = 1,787
▪ 2017: CA = 3,596; CL = 2,140
• Income Statement
▪ EBIT = 1,014; Taxes = 193
▪ Interest Expense = 93; Dividends = 460
2-20
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EXAMPLE: CASH FLOWS
• Changes in NWC =
(3,625 - 1,787) - (3,596 - 2,140) = 382
• CFFA = 1,321 - 433 - 382 = 506
2-22
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ETHICS ISSUES
2-23
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COMPREHENSIVE PROBLEM
• Current Accounts
▪ 2018: CA = 4,400; CL = 1,500
▪ 2017: CA = 3,500; CL = 1,200
• Income Statement
▪ EBIT = 2,000; Taxes = 300
▪ Interest Expense = 350; Dividends = 500
2-25
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