Chapter 4 Cash Flows and
Planning
Why do we have things like
depreciation?
• Why are managers more
interested in Cash flow than
profits?
• What is Operating Cash Flow?
• What is Free Cash Flow?
Planning
• What is the difference between
long-term and short-term
financial plans?
• What is the pro forma process?
What is Depreciation
• What is the depreciable basis?
• I purchased an asset for $75,000. It costs $2,000 to ship the
asset to my facility and $4,000 to install. The IRS has
classified this asset as a 5 year MACRS asset.
• What does the depreciation schedule look like?
• Worksheet: CB Cash Flows Year Depr expense Book Value
1
2
3
4
5
6
New Asset Data
Cost
MACRS Life
Installation Costs
Old Asset Data
Original Basis
MACRS Life
Purchased? (ago)
Current Market Price
Tax Rate
Book Value
$75,000
5
$6,000
$81,000
5
0
$81,000
3 Yr Asset
1
2
3
4
5
6
7
8
0
0
0
0
0
0
0
0
Depreciation of Old
5 Yr Asset
$16,200
$25,920
$15,390
$9,720
$9,720
$4,050
$0
$0
Example
• This year I expect to have taxable income of $750,000. The asset
replaced by the asset above has two years left of $54,000 depreciable
basis. What is the tax that I would expect to pay if I did not buy the new
asset?
Tax  113,000  (750,000  335,000 ) * .34  254,100
NI  750,000  254,100  495,900
• What will be the difference in taxable income with the new asset?
change in depr  16,200  9,180  7,020
new EBT  750,000 - 7,020  742,980
Old Asset Data
Original Basis
MACRS Life
Purchased? (ago)
Current Market Price
Tax Rate
Book Value
$54,000
5
4
4
5
6
7
8
0
0
0
0
0
$6,480
$6,480
$2,700
$0
$0
1
2
3
4
5
6
7
8
0
0
0
0
0
0
0
0
$0
0
0
0
0
6,480
2,700
0
0
$9,180
$9,180
Book Value
Working Capital
Change in CA
Change in CL
Change in Working Capital
• What is the new tax expected next year?
$0
Go To
Tax liability  113,000  (742,980 - 335,000) * .34  251,713
new NI  742,980 - 251,713  491,267
• How do you use the book value information?
Book Value
Determine the free cash flow
Keith Corporation Balance Sheets
Assets
2012
Cash and Mkt Securities
3,300
Accounts Receivable
2,000
Inventory
2,900
Total Current Assets
8,200
Gross Fixed Assets
29,500
Acc. Depreciation
14,700
Net Fixed Assets
14,800
Total Assets
23,000
Liabilities and Equity
Accounts Payable
Notes Payable
Accruals
Total Current Liabilities
Long-term Debt
Total Liabilities
Common Stock
Retained Earnings
Common Equity
Total Liability and Equity
1,600
2,800
200
2011
2,200
1,800
2,800
6,800
28,100
13,100
15,100
21,800
5,000
5,000
10,000
3,400
9,000
10,000
2,800
13,400
23,000
1,600
EBIT
2,700
Interest Expense
367
Dividends Paid
800
Tax Rate
4,000
9,600
Depreciation
NPM
1,500
2,200
300
4,600
Keith Corporation Income Information
12,800
21,800
Use Worksheet: Free Cash Flow Calculation
1,400
40%
Year
Net Income
Non-Cash Expenses
Taxes ($) (not deferred)
2012
1399.80
$1,600
CFAT
2999.80
$933
EBIT
$2,700
OCF
3366.80
CA (beg)
$6,800
NCAI
1400.00
CA (end) (change)
$8,200
NFAI
1300.00
FCF
666.80
CF Firm
666.80
CF Creditors
367.00
CF Shareholders
299.80
A/P and Accruals (beg)
$1,800
A/P and Accruals (end) (change)
$1,800
Fixed Assets (beg)
$15,100
Fixed Assets (end) change
$14,800
OCF (if given)
Total Equity (beg)
$12,800
Total Equity (end) change
$13,400
Dividends
$800
Total LT Debt and N/P (beg)
$5,000
Total LT Debt and N/P (end) change
$5,000
Interest Expense
$367
DO Not Include N/P as a Current Liability!
Assume it is long term.
Lawrence Byerly PhD © 2013
Chapter 4 Web exercise (50 points)
•
In Yahoo finance; Go to Competitors (10)
Who are the company’s primary competitors
(name and ticker)
1)
2)
3)
• How does your company compare to the competitors and
the industry?
–
–
–
–
revenues
gross margin
PE
EPS
Go to Analyst opinion (3)
• How do analysts rate the companies?
• How do the analyst’s feel about this
company?
• Upgrades vs Downgrades?
• What is the target price? Where is
your company?
Go to Analyst Estimates (10)
• What are the next year’s estimates
for
–Revenue
–EPS
–PE (under growth estimates) How
does the company stack up against
the industry and the sector?
• What does this relationship show?
Go to Basic chart
• Click the S&P index box and type in the
ticker symbol for one of your
company’s competitors above. Choose
the big chart and the 1 year chart.
• Copy and paste chart into this word
document. (5)
• How has your company’s prices moved
relative to the index and the
competitor? (5)
Got to Basic Chart
• Now go back and switch the
chart to the 5yr chart.
• Now compare to the index and
competitor. (5)
Calculate CF numbers (2 years)
• Use worksheet Free CF
Calculation
• Copy and paste special the
worksheet below your
explanation. Type in the answers.
(10)
OCF
FCF
CFAT
Year before
Last year
Can you explain the differences?
Exercise problems
15 points
• The Laramie Company is considering the purchase of two new
machines for their production line. Create the depreciation
tables for the two assets. Use the CB Cash Flow worksheet. (5
points)
– Drill Press is a 7 year MACRS asset with a cost of 25,000. It will take $10,000 to
install the drill press.
– Depreciable basis =
– Insert table from worksheet
– The fork lift is a 5 year MACRS asset, which has an installed cost of $44,000.
– Insert table.
• The Zombie Express Company has an estimated pre-tax
income of $750,000. They are considering purchasing a new
piece of 5 year MACRS machinery that has an installed cost of
$900,000. (Use the Cash Flow Calc spreadsheet) (5 points)
Questions
• What is the current tax liability prior to the
purchase?
• What is the depreciation expense for year one
for the purchase?
• What is the new pre-tax income after the
purchase?
• What is the new tax liability?
• What is the net income pre-purchase?
• What is the net income post-purchase?
FCF Calculation
• Use the financial Statements on
page 115 of the textbook to solve
for
a) Calculate the OCF
b) Calculate the FCF
c) Calculate the CFAT.
• Explain the differences between the
answers in a and b.