Chapter 2
Market Value vs Book Value
-The balance sheet provides the book value of the assets, liabilities, and equity -Market value is the price at which the assets, liabilities, or equity can actually be bought or sold -book value is what assets are worth at historical cost or "when they were originally bought"
Balance Sheet
A snapshot of the firm's assets and liabilities at a given point in time Assets Liabilities
Average tax rate
Amount of taxes a company makes/ taxable income What you paid in the past
Balance Sheet Identity
Assets = Liabilities + Stockholders' Equity
Need to keep 3 things in mind about income statement
GAAP Cash vs Noncash Items Time and Costs
Income statement identity
Income = revenues - expenses
3 important things to consider when examining a balance sheet
Liquidity Debt vs equity Market value vs book value
Liquidity
Liquidity refers to the ease and quickness with which assets can be converted to cash quickly and without a significant loss in value
If you are considering a project that will increase the firm's taxable income by $1 million, what tax rate should you use in your analysis?
Marginal: you want to know what you're going to pay in the future
Taxes
One of the largest cash outflows a firm experiences The one thing we can rely on with taxes is that they are always changing Marginal vs average tax rates
Marginal tax rate
Rate of tax that a company is going to pay on the next dollar of income
Income Statement
The income statement is more like a video of the firm's operations for a specified period of time
Pros and Cons of Liquidity
The more liquid a firm's assets, the less likely the firm is to experience problems meeting short-term obligations
example of a non cash
depreciation
Liquid assets frequently have... than fixed assets
lower rates of return
Which is more important to the decision-making process, market or book value?
market
Market Cap =
number of shares outstanding * current price of the stock on the market [price it is trading for on an exchange]
