finance

1. Finance and Accounting
Lecture 2
Fall, 2010
8/31/2022 FINA4330 Corporate Finance 1
Corporate Finance
Ronald F. Singer
FINA 4330

2. Financial Statements
• Generally Finance Professionals get their
information from Financial Statements
prepared by accountants.
• In general, Financial Statements are used to
determine how the firm “is doing,” in
particular, how it has done over some period
of time.
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3. Financial Statements
• Although we are also interested in the financial
health of companies; generally, financial statements
have to be modified in order to focus on our
objective.
• In general, the “focus of our objective” is cash flow
• Most corporations prepare three basic financial
statements:
Income Statement
Balance Sheet
Cash Flow Statements
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4. Focus of Finance
• Cash Flow!!!
• What is Cash Flow?
• It is the amount of cash generated and
available to security holders.
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5. Financial Statements
• Income Statement:
– A Listing of Revenue, Expenses, and Profits over a
period of time
• Balance sheet
– A listing of Assets, Liabilities, and Net Worth at a
single point in time. Generally in terms of Book
Value.
• Cash Flow Statement
– The Flow of Cash over a period of time
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6. Macintosh Enterprises
Balance Sheet
December 31, 2008
(BV $ thousands)
Assets Liabilities and Stockholders Equity
Current Assets Current Liabilities
Cash 1,000 Accounts payable 500
Accounts Receivable 1,000 Notes payable 75
Inventory 450 Accrued expenses 75
Other 50 Total Current Liabilities 650
Total Current Assets $2,500 Long term Liabilities
Fixed Assets Deferred Taxes 1,000
Property, Plant & equip. 4,600 Long term debt 2,000
Less Accumulated Dep. 600 Total long term liability 3,000
Net PP&E 4,000
Intangible & Other assets 1,000 Stockholders’ Equity ???
Total Assets $7,500 Total Liabilities and
Stockholders’ Equity ???
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7. Macintosh Enterprises
Balance Sheet
December 31, 2009
(BV $ thousands)
Assets Liabilities and Stockholders Equity
Current Assets Current Liabilities
Cash 800 Accounts payable 650
Accounts Receivable 1,200 Notes payable 25
Inventory 550 Accrued expenses 75
Other 150 Total Current Liabilities 750
Total Current Assets $2,700 Long term Liabilities
Fixed Assets Deferred Taxes 1,000
Property, Plant & equip. 4,600 Long term debt 2,000
Less Accumulated Dep. 600 Total long term liability 3,000
Net PP&E 4,000
Intangible & Other assets 1,000 Stockholders’ Equity ???
Total Assets $7,500 Total Liabilities and
Stockholders’ Equity ???
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8. Macintosh Enterprises
Pro-Forma Income Statement
(Year ending December 31, 2009)
($ thousand)
Sales $5,000
Less: Operating Expenses (COGS) 2,000
Depreciation & Amortization 600
Selling, general and administrative exp. 300
Operating Income $2,100
Other income 100
Earnings Before Interest and Taxes (EBIT) 2,200
Less: Interest Expense 770
Pretax (Taxable) Income 1,430
Less Tax (@ 40%) 572
Net Income (Earnings after Tax) $858
Addition to retained earnings 58
Dividends 800
Earnings per Share (EPS) = Net Income/Shares = $0.858
Dividends per share (DPS) = $0.80
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9. Transform income statement into Cash
Flow
Now we are ready to transform this income statement
into Cash Flow
Adjustments Necessary:
1. Changes in Fixed Assets: Depreciation and
Amortization is not a cash expense and thus should
not be subtracted from Cash Flow. But, New
Investment is a cash expense (when paid for) and
should be subtracted.
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10. Transform income statement into Cash
Flow
2. Cost of Goods Sold (COGS) is the DIRECT expense
associated with producing the goods that are sold in
the period.
Costs associated with goods that are produced but
will be sold in future periods are not counted.
If the firm pays for goods THAT ARE NOT SOLD, there
is a cash flow out which must be accounted for.
In order to account for this, we include changes in
Inventory in the Cash Flow statement.
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11. Transform income statement into Cash
Flow
• In general: Increases in Working Capital must be
subtracted from Earning to get Cash Flow
• In this case suppose:
Changes in Working Capital (+100)
Change in cash -200
a/c receivable +200 a/c payable +150
Inventory +100 Notes payable -50
Other S.T.A +100
Total change 200 100
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12. Macintosh Enterprises
Pro-Forma Cash Flow Statement
(Year ending December 31, 2006)
($ thousand)
Earnings Before Interest and Taxes (from Income Statement) $2,200
Less: Tax on Operations (@ 40% (Note: tax rate times EBIT not $572) 880
Operating Income after Tax (EBIT(1-t)) 1,320
Plus: Non-Cash Expenses (Depreciation & Amortization) 500 1,820
Increase (decrease) in cash holdings -200
increase (decrease) in accounts receivable 200
increase (decrease) in Inventory 100
increase (decrease) in other Short Term Assets 100
Change in Short Term Assets 200
Less: increase (decrease) in accounts payable 150
increase (decrease) in Short Term Liabilities (50)
Changer in Short Term Liabilities 100
Less: Net Change in Working Capital 300 300
Free Cash Flow from Operations $1,520
Less: “After Tax” interest payments I(1-t) (note: = 770 (1-.40)) 462
Less: Dividends to preferred stockholders 100
Less: Investment (net of capital gains tax) 400
Free Cash Flow to Common Stockholders 558
EBITDA (2,200 + 500) $2,700
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