Financial Management - Financial Statements

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Financial Management – Handout

»Balance Sheet - Statement of financial positions on a specific date * Book value: value on balance sheet (historical cost) * Market value: value of assets depends on riskiness, cash flows * Balance sheet identity: Assets = Liabilites + Shareholders‘ equity * Debt versus equity: Shareholders equity = Assets + Liabilities * Financial leverage: the more debt, the greater its degree of financial leverage

»Income Statement - Performance over some period of time
* Income = Revenues – Expenses
* Matching principle: production costs are matched with revenues * Noncash items: an income item (e.g., depreciation) that does not affect its cash flow * Calculating Earnings and Dividends per Share

* Earnings per share = Net income/Total shares outstanding * Dividends per share = Total dividends/Total shares outstanding »Taxes:
* Average tax rate: total taxes paid divided by total taxable income * Marginal tax rate: amount of tax paid on an additional dollar of income, usually 35%

»Statement of Cash-Flows - Cash, i.e. liquidity flow (not profit), that comes in and goes out over some period of time

I. The cash flow identity
Cash Flow from Assets = Cash flow to creditors (bondholders) + Cash flow to stockholders (owners)
II. Cash flow from assets
Cash Flow from Assets = Operating Cash Flow
- Capital Spending  
- Change in net working capital(NWC)
where:
Operating Cash Flow = Earnings before interest and taxes(EBIT) + Depreciation - Taxes
Capital Spending = Ending Net Fixed Assets  
- Beginning Net Fixed Assets  
+ Depreciation
Change in NWC = Ending NWC - Beginning NWC

III. Cash flow to creditors (bondholders)
Cash flow to creditors = Interest paid – Net new borrowing

IV. Cash flow to stockholders (owners)...
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