Slide 1 Understanding Financial Statements, Taxes, and Cash Flows Income Statement Balance Sheet Taxes Free Cash Flow (FCF)

Slide 2 Income Statement SALES –EXPENSES =PROFIT Cost of Goods Sold Operating Expenses (marketing, administrative) Financing Costs Taxes

Slide 3 Income Statement (Continued) SALES – Cost of Goods Sold =GROSS PROFIT – Operating Expenses =OPERATING INCOME (EBIT) – Interest Expense =EARNINGS BEFORE TAXES (EBT) – Income Taxes =EARNINGS AFTER TAXES (EAT) – Preferred Stock Dividends =NET INCOME AVAILABLE TO COMMON STOCKHOLDERS Operating Activities Financing Activities

Slide 4 Balance Sheet Total Assets = Outstanding Debt + Shareholders’ Equity AssetsLiabilities and Shareholders’ Equity Current Assets Cash Marketable Securities Accounts Receivable Inventories Prepaid Expenses Fixed Assets Machinery & Equipment Buildings and Land Other Assets Investments & patents Current Liabilities Accounts Payable Accrued Expenses Short-term notes Long-Term Liabilities Long-term notes Mortgages Equity Preferred Stock Common Stock (Par value) Paid in Capital Retained Earnings

Slide 5 Assets Current Assets: assets that are relatively liquid, and are expected to be converted to cash within a year Cash, marketable securities, accounts receivable, inventories, prepaid expenses. Fixed Assets: machinery and equipment, buildings, and land Other Assets: any asset that is not a current asset or fixed asset Intangible assets such as patents and copyrights

Slide 6 Financing Debt Capital: financing provided by a creditor Short-Term Debt: borrowed money that must be repaid within the next 12 months Accounts payable, other payables such as interest or taxes payable, accrued expenses, short-term notes Long-Term Debt: loans from banks or other sources that lend money for longer than 12 months

Slide 7 Financing (Continued) Equity Capital: shareholders’ investment in the firm Preferred Stockholders: receive fixed dividends, and have higher priority than common stockholders in event of liquidation of the firm Common Stockholders: residual owners of a business. They receive whatever is left after creditors and preferred stockholders are paid

Slide 8 Corporate Tax Rates Taxable Income Corporate Tax Rate $1 - $50,00015% $50,001 - $75,00025% $75,001 - $100,00034% $100,001 - $335,00039% $335,001 - $10,000,00034% $10,000,001 - $15,000,00035% $15,000,001 - $18,333,33338% over $18,333,33335%

Slide 9 Free Cash Flow (FCF) Free Cash Flow: cash flow that is free and available to be distributed to the firm’s investors (both debt and equity investors) Firm’s Operating Free Cash Flow should be equal to Firm’s Financing Free Cash Flow Operating Free Cash Flow: Cash flows generated through the firm’s operations and investments in assets Financing Free Cash Flow: Cash flows paid to – or received by – the firm’s investors (creditors & stockholders)

Slide 10 Operating Free Cash Flow Operating Cash Flow (OCF) = EBIT + Depreciation – Taxes Change in NWC (ΔNWC) = Ending NWC – Beginning NWC NWC = Net Working Capital = Current Assets – Current Liabilities Note that the Current Liabilities exclude interest bearing Current Liabilities Net Capital Spending (NCS) = Ending NFA – Beginning NFA + Depreciation NFA = Net Fixed Assets Note that if you are given gross value of Fixed Assets (FA) then the Net Capital Spending is the difference between Ending FA and Beginning FA Operating Free Cash Flow (OFCF) = OCF – ΔNWC – NCS

Slide 11 Financing Free Cash Flow Cash Flow to Creditors (CFC) = Interest Paid – Net New Borrowing Net New Borrowing = (Ending LTD + Ending Interest Bearing Current Liabilities) – (Beginning LTD + Beginning Interest Bearing Current Liabilities) LTD = Long-Term Debt Cash Flow to Shareholders (CFS) = Dividend Paid – Net New Equity Net New Equity = Ending Common Stock – Beginning Common Stock Common Stock excludes Retained Earnings Addition to Retained Earnings = Net Income – Dividends Paid Financing Free Cash Flow (FFCF) = Cash Flow to Creditors + Cash Flow to Shareholders