Académique Documents
Professionnel Documents
Culture Documents
A +
(
+ = NWC
es expenditur
Capital
on amortizati
and Depr.
T) EBIT(1 FCF
2-9
FCF
08
= EBIT(1 T) ANet investment in operating capital
= ($86,169) ($1,097,925 $1,124,444)
= ($86,169 + 26,519 = ($59,650)
Is negative free cash flow always a bad sign?
What caused Everelites total assets to
increase in 2008?
Everelites note payable and long-term debt
increased to support its increasing inventories
2-10
Does it appear that Everelites sales
price exceeds its cost per unit sold?
NO, the negative after-tax operating income
and decline in cash position shows that
Everelite is spending more on its operations
than it is taking in.
2-11
What if Everelites sales manager decided to
offer 60-day credit terms to customers,
rather than 30-day credit terms?
If competitors match terms, and sales remain
constant...
A/R would .
Cash would .
If competitors dont match, and sales double...
Short-run: Inventory and fixed assets to
meet increased sales. A/R , Cash .
Company may have to seek additional
financing.
Long-run: Collections increase and the
companys cash position would improve.
2-12
How did Everelite finance its
expansion?
Everelite financed its expansion with external
capital.
Everelite issued long-term debt which
reduced its financial strength and flexibility.
2-13
Would Everelite have required external
capital if they had broken even in 2008
(Net income = 0)?
YES, the company would still have to finance
its increase in assets. Looking at the
Statement of Cash Flows, we see that the
firm made an investment of $711,950 in net
fixed assets. Therefore, Everelite would have
raised additional funds.
2-14
What happens if Everelite depreciates fixed
assets over 7 years (as opposed to the
current 10 years)?
2-15
No effect on physical
assets.
Fixed assets on the balance
sheet would decline.
Net income would decline.
Tax payments would
decline.
Cash position would
improve.
Federal Income Tax System
2-16
Corporate and Personal Taxes
Both have a progressive structure (the higher
the income, the higher the marginal tax rate).
Corporations
Rates begin at 15% and rise to 35% for
corporations with income over $10 million,
although corporations with income between
$15 million and $18.33 million pay a
marginal tax rate of 38%.
Also subject to state tax (around 5%).
2-17
2-18
Corporate and Personal Taxes
Individuals
Rates begin at 10% and rise to 35% for
individuals with income over $349,700.
May be subject to state tax.
Tax Treatment of Various Uses and
Sources of Funds
Interest paid tax deductible for corporations
(paid out of pre-tax income), but usually not
for individuals (interest on home loans being
the exception).
Interest earned usually fully taxable (an
exception being interest from a muni).
Dividends paid paid out of after-tax income.
2-19
2-20
Tax Treatment of Various Uses and
Sources of Funds
Dividends received Most investors pay 15%
taxes.
Investors in the 10% or 15% tax bracket
pay 0% on dividends in 2008-2010.
Dividends are paid out of net income which
has already been taxed at the corporate
level, this is a form of double taxation.
A portion of dividends received by
corporations is tax excludable, in order to
avoid triple taxation.
More Tax Issues
Tax Loss Carry-Back and Carry-Forward since
corporate incomes can fluctuate widely, the Tax
Code allows firms to carry losses back to offset
profits in previous years or forward to offset
profits in the future.
Capital gains defined as the profits from the
sale of assets not normally transacted in the
normal course of business, capital gains for
individuals are generally taxed as ordinary
income if held for less than a year, and at the
capital gains rate if held for more than a year.
Corporations face somewhat different rules.
2-21