Chapter 2 Financial statements, taxes, and cash flow

liquidity

refers to the speed and ease with which an asset can be converted to cash. liquid firms are less likely to experience financial distress. Liquid assets typically earn a lower return. Trade-off to find balance between liquid and illiquid assets

EPS

NET INCOME/ TOTAL SHARES OUTSTANDING

balance sheet

a snapshot of the firm. organizing and summarizing what a firm owns, what a firm owes, and the difference between the two at a given point in time.

net working capital

difference between a firm's current assets and its current liabilities

income statement

measures performance over some period of time.

taxes

taxes can be one of the largest cash outflows a firm experiences. average tax rate- total taxes paid divided by total taxable income marginal tax rate- the percentage paid on the next dollar earned other taxes include state and local

market value vs. book value

the b/s provides the book value of the assets, liabilities, and equity (historical cost). The market value is the price at which the assets, liabilities, or equity can actually be bought or sold.

cash flows

the difference between the number of dollars that came in and the number that went out.

debt vs. equity

to the extent that a firm borrows money, it usually gives firm claim to the firm's cash flow to creditors. Equity holders are entitled only to the residual value, the portion left after creditors are paid. the use of debt in a firm's capital structure is called financial leverage.

the cash flow identity

cash flow from assets= cash flow to creditors + cash flow to stockholders

DIVIDENDS PER SHARE

TOTAL DIVIDENDS/ TOTAL SHARES OUTSTANDING