Fundamentals of corproate finance 3e chapter 02

400 500 Total $1000 $1200 Beg End A/P $100 $150 N/P 200 200 C/L 300 350 NCL $400 $420 Cap 50 60 R/E 250 370 $300 $430 Total $1000 $1200 Copyright  2004 McGraw-Hill Australia Pty Ltd 2-13 Recording of Financial Statement Entries • The realisation principle is to recognise revenue at the time of sale • Costs are recorded according to the matching principle, that is, revenues are identified and costs associated with these revenues are matched and recorded Copyright  2004 McGraw-Hill Australia Pty Ltd 2-14 Differences • The figures on the Statement of Financial Performance may differ from actual cash inflows and outflows during a period due to: – – Revenues and costs being recorded when they are realised, not when they are received or paid The existence of non-cash items such as depreciation Copyright  2004 McGraw-Hill Australia Pty Ltd 2-15 Corporate and Personal Tax Rates Personal rates Taxable income 0–6000 6001–20 000 20 001–50 000 50 001–60 000 60 001 + Company rates Private and public companies Copyright  2004 McGraw-Hill Australia Pty Ltd Marginal Tax rate Nil 17% 30% 42% 47% Tax rate 30% 2-16 Tax Rates • The average tax rate is the total tax bill divided by taxable income, that is, the percentage of income that goes in taxes • The marginal tax rate is the extra tax paid if one more dollar is earned • A flat rate is where there is only one tax rate that is the same for all income levels An example is the tax rate that applies to companies in Australia Copyright  2004 McGraw-Hill Australia Pty Ltd 2-17 Example—Tax Rates • An individual has a taxable income of $28 500 • Total tax liability is $4930 (based on the current tax scales) • The average tax rate is 17.30 per cent • The marginal tax rate is 30 per cent Copyright  2004 McGraw-Hill Australia Pty Ltd 2-18 Cash Flow from Assets • The total cash flow from assets consists of: – operating cash flow—the cash flow that results from dayto-day activities of producing and selling; less – capital spending—the net spending on non-current assets; less – additions to net working capital (NWC)—the amount spent on net working capital Copyright  2004 McGraw-Hill Australia Pty Ltd 2-19 Cash Flow from Assets • Cash flow from assets = cash flow to debtholders + cash flow to shareholders • The cash flow to debtholders includes any interest paid less the net new borrowing • The cash flow to shareholders includes dividends paid out by a firm less net new equity raised Copyright  2004 McGraw-Hill Australia Pty Ltd 2-20 Cash Flow Summary Operating cash flow = Earnings before interest and taxes (EBIT) + Depreciation – Taxes Net capital spending = Ending net fixed assets – Beginning net fixed assets + Depreciation Change in NWC = Ending NWC – Beginning NWC Copyright  2004 McGraw-Hill Australia Pty Ltd 2-21 Statement of Financial Position ('000s) Assets (‘000s) Current assets Cash Accounts receivable Inventory Total Fixed assets Net plant and equipment TOTAL ASSETS 2003 2004 $ 45 260 320 $ 625 $ 50 310 385 $ 745 985 100 $1 610 $1 845 Copyright  2004 McGraw-Hill Australia Pty Ltd 2-22 Statement of Financial Performance ('000s) Net sales Cost of goods sold Depreciation DEBIT Interest Taxable income Tax Net profit Dividends Addition to retained earnings $710.00 480.00 30.00 $200.00 20.00 180.00 53.45 $126.55 26.55 $100.00 Copyright  2004 McGraw-Hill Australia Pty Ltd 2-24 Cash Flow From Assets Operating cash flow: EBIT + Depreciation – Taxes $ 200.00 + 30.00 – 53.45 $176.55 Change in net working capital: Ending net working capital – Beginning net working capital $ 310.00 305.00 $ Net capital spending: Ending net fixed assets – Beginning net fixed assets + Depreciation $ 1,100.00 – 985.00 + 30.00 $145.00 Cash flow from assets: Copyright  2004 McGraw-Hill Australia Pty Ltd 5.00 $ 26.55 2-25 Cash Flows to Debtholders and Shareholders Cash flow to debtholders: Interest paid – Net new borrowing Cash flow to shareholders: Dividends paid – Net new equity raised $ – 20.00 20.00 $ 0.00 $ 26.55 0.00 $26.55 Cash flow to debtholders and shareholders Copyright  2004 McGraw-Hill Australia Pty Ltd $26.55 2-26 ... Australia Pty Ltd 260 175 $ 435 2-23 Statement of Financial Performance ('000s) Net sales Cost of goods sold Depreciation DEBIT Interest Taxable income Tax Net profit Dividends Addition to retained earnings... Flow from Assets • The total cash flow from assets consists of: – operating cash flow—the cash flow that results from dayto-day activities of producing and selling; less – capital spending—the net...Recording of Financial Statement Entries • The realisation principle is to recognise revenue at the time of sale • Costs are recorded according to the matching