Chapter 2 Finance

net operating working capital

(Cash + accounts receivable + inventories) - (accounts payable + accrued expenses)

net cash flow

= net income + depreciation and amortization charges

net operating working capital

Current Assets minus non-interest-bearing current liabilities.

Kaylor Equipment Rental paid $75 in dividends and $511 in interest expense. The addition to retained earnings is $418 and net new equity is $500. The tax rate is 35%. Sales are $15,900 and depreciation is $680. What are the earnings before interest and taxes?

Net income = $75 + $418 + = $493 Taxable income = $493/(1-.35) = $758.46 Earnings before interest and taxes = $758.46 + $511 = $1,269.46

marginal tax rate

The percentage of the next dollar you earn that must be paid in taxes

Non cash items

expenses charged against revenues that do not directly affect cash flow

Debt is a contractual obligation that

requires a repayment of a stated amount and interest over the period. allows the bondholders to sue the firm if it defaults.

Balance sheet

the financial statement that shows the accounting value of a firm's equity as of a particular date