Chapter 3: Blueprint Problems - Financial Statements, Cash Flow, and Taxes

Management's goal is to maximize the firm's intrinsic value. The value of any asset, including a share of stock, is based on the _____ the asset is expected to produce. Therefore, managers strive to maximize the _____ available to investors. The statement of cash flows shows how much _____ a firm is generating. It is divided into four parts: (1) Operating activates, (2) Investing activities, (3) Financing activities, and (4) Summary.

Cash flows Cash flows Cash

Corporations earn most of their income from operations; however, they may also receive interest and dividend income. _____ income is taxed as ordinary income; however, _____ income is taxed more favorably. 50% of _____ received is excluded from taxable income, while the remaining 50% is taxed at the ordinary tax rate. For businesses, _____ payments are regarded as an expense so they are tax deductible; however, _____ payments are not tax deductible. Consequently, our tax system encourages _____ financing over _____ financing. Depreciation expense is tax deductible, so the larger the depreciation, the _____ the taxable income, the _____ the taxes, and the _____ the firm's operating cash flow.

Interest dividend dividends interest dividend debt equity lower lower higher

The income statement reports on operations over a period of time. Companies' operating performances can be compared by looking at each firm's EBIT, often referred to as _____. A typical stockholder focuses on the bottom line of the income statement, _____. The income statement is tied to the _____ through the retained earnings account. Net income minus _____ paid is equal to the retained earnings for the year, and this amount is added to the cumulative retained earnings from prior years to obtain the year-end retained earnings balance.

operating income earnings per share (EPS) balance sheet dividends

Changes in stockholders' equity during an accounting period are reported in the statement of stockholders' equity. Changes in stockholders' equity can come from new stock issues, stock repurchases, net income, and _____ paid.

dividends.

Economic Value Added is sometimes called " ______", and it is closely related to MVA. The equation for EVA is: EVA = EBIT (1-T) - (Total invested capital is equal to the sum of notes payable, long-term debt, and total common equity. EVA differs from _____ because EVA has a deduction for the cost of equity. Positive EVA on an annual basis helps ensure that MVA is also positive. _____ can be determined for divisions as well as for the firm as a whole, so it is useful for establishing reasonable compensation for divisional managers as well as top company officers.

economic profit net income EVA

The financial statements reflect historical data, but managers' performance must be evaluated on the basis of _____ values. To provide this information, financial analysts have developed two measures: Market Value Added (MVA) and Economic Value Added (EVA). Market Value Added represents the difference between the money stockholders have invested in the firm versus the cash they could receive if the firm were sold. The equation for MVA is: MVA = (Shares outstanding x Stock price) - Total common equity.

market

Shareholder wealth is maximized when this difference is _____. The _____ a firm's MVA, the better the job management is doing for its shareholders.

maximized higher

The balance sheet shows the firm's assets and claims against those assets. In other words, assets are equal to liabilities and equity. Assets are shown in order of their _____ and claims are listed in the order of when they must be paid. Current assets include cash and their equivalents, accounts _____, and inventory, while long-term assets are those whose useful lives exceed one year. Liabilities are divided into _____ and long-term debt. We differentiate between total debt and total liabilities. A company's total debt includes both its short-term and long-term _____ liabilities. Total liabilities equal _____ plus the company's "free" liabilities. _____ is the difference between current assets and current liabilities, while _____ is equal to operating current assets (calculated as current asset minus excess cash) less the difference between current liabilities and notes payable. _____ is capital supplied by common stockholders and represents ownership.

Liquidity receivable current liabilities interest-bearing total debt Net working capital net operating working capital Net worth

Individuals pay taxes on wages, on investment income, and on the profits of proprietorships and partnerships. Taxable income is defined as gross income less a set of deductions. In 2018, the personal exemption is for taxpayers and their dependents is zero. A capital gain (loss) is the profit (loss) from the sale of a capital asset for more (less) than its purchase price. In 2018, for most taxpayers a ______ capital gain is taxed at a maximum rate of 15%, while a _____ capital gain is taxed as ordinary income [for high-income taxpayers the tax rate on long-term capital gains is 20%]. _____ income consists of dividend and interest income. Interest income (except interest on state and local government debt which is exempt from federal taxes) is taxed as _____, while dividends are taxed at the same rate as long-term _____. Generally, interest payments are not tax deductible for individuals except for interest on _____ within certain limits. Projected 2018 tax rate schedules are shown for single individuals and married couples filing jointly.

Long-term short-term Investment ordinary income capital gains home mortgages

What is Rosnan's 2019 net operating working capital (NOWC)?

NOWC = $770 - (395 -170) NOWC = $545

What is Rosnan's 2019 net working capital (NWC)?

NWC= $770 - $395 NWC= $375