2 - 1 Statement of Cash Flows: 1998 OPERATING ACTIVITIES Net Income(519,936) Adjustments: Depreciation116,960 Change in AR(280,960) Change in inventories(572,160) Change in AP378,560 Change in accruals353,600 Net cash provided by ops. (523,936)

2 - 2 L-T INVESTING ACTIVITIES Investments in fixed assets (711,950) FINANCING ACTIVITIES Change in s-t investments48,600 Change in notes payable520,000 Change in long-term debt676,568 Payment of cash dividends (11,000) Net cash from financing1,234,168 Sum: net change in cash(1,718) Plus: cash at beginning of year 9,000 Cash at end of year7,282

2 - 3 What were the major sources and uses of cash? What % of inflows and outflows came from the three areas? What lifecycle stage is the firm in? Is cash being created internally or externally? Is the pattern typical (and sustainable), or not? Analysis of Statement of Cash Flows

2 - 4 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?

2 - 5 Balance Sheet is “Stock” (as of) Other Statements are “Flow” (through time) When analyzing, keep “unusual events” in mind” NOTES

2 - 6 INCOME TAXES

Tax Year Single Individual Tax Rates Taxable IncomeTax on BaseRate* ,650015% 24, ,750 3, % 59, ,65013, % 124, ,05033, % Over 271,05086, % *Plus this percentage on the amount over the bracket base.

2 - 8 Assume your salary is $45,000, and you received $3,000 in dividends. You are single, so your personal exemption is $2,650 and your itemized deductions are $4,550. On the basis of the information above and the 1997 tax year tax rate schedule, what is your tax liability?

2 - 9 Calculation of Taxable Income Salary$45,000 Dividends3,000 Personal exemptions(2,650) Deductions(4,550) Taxable Income$40,800

Tax Liability: TL= $3, ($16,150) = $8, Marginal Tax Rate = 28%. Average Tax Rate: Tax rate = = 20.15%. $40,800 - $24,650 $8,219.5 $40,800

Corporate Tax Rates Taxable IncomeTax on BaseRate* ,000015% 50, ,0007,50025% 75, ,00013,75034% 100, ,00022,25039% Over 18.3M6.4M35% *Plus this percentage on the amount over the bracket base

Assume a corporation has $100,000 of taxable income from operations, $5,000 of interest income, and $10,000 of dividend income. What is its tax liability?

Operating income$100,000 Interest income5,000 Taxable dividend income3,000* Taxable income$108,000 Tax= $22, ($8,000) = $25,370. *Dividends - Exclusion = $10, ($10,000) = $3,000.

State and local government bonds (municipals, or “munis”) are generally exempt from federal taxes. Taxable versus Tax Exempt Bonds

Exxon bonds at 10% versus California muni bonds at 7%. T = Tax rate = 28%. After-tax interest income: Exxon= 0.10($5,000) ($5,000)(0.28) = 0.10($5,000)(0.72) = $360. CAL = 0.07($5,000) - 0 = $350.

Solve for T in this equation: Muni yield= Corp Yield(1-T) 7.00%= 10.0%(1-T) T= 30.0%. At what tax rate would you be indifferent between the muni and the corporate bonds?

If T > 30%, buy tax exempt munis. If T < 30%, buy corporate bonds. Only high income, and hence high tax bracket, individuals should buy munis. Implications

Only Marginal Tax Rates Matter (not average rates) After tax return matters, not pre- tax After tax return = Pre-tax return x (1 - marginal effective tax rate) General Concepts (Taxes)

Got questions? Get answers!! Voic (404) Electronic Bulletin Board: ~wwwfin/finconf/finba862/finba862.html