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Chapter 4 Cash Flows and Planning

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 C ash F low? What is Free Cash Flow?. Planning. What is the difference between long-term and short-term financial plans?

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Chapter 4 Cash Flows and Planning

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  1. Chapter 4 Cash Flows and Planning

  2. 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?

  3. Planning • What is the difference between long-term and short-term financial plans? • What is the pro forma process?

  4. 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

  5. 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? • What will be the difference in taxable income with the new asset? • What is the new tax expected next year? • How do you use the book value information?

  6. Determine the free cash flow Use Worksheet: Free Cash Flow Calculation

  7. 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

  8. 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?

  9. 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?

  10.  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)

  11.  Got to Basic Chart • Now go back and switch the chart to the 5yr chart. • Now compare to the index and competitor. (5)

  12.  Calculate CF numbers (2 years) • Use worksheet Free CF Calculation • Copy and paste special the worksheet below your explanation. Type in the answers. (10)

  13. Can you explain the differences?

  14. 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)

  15. 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?

  16. FCF Calculation • Use the financial Statements on page 115 of the textbook to solve for • Calculate the OCF • Calculate the FCF • Calculate the CFAT. • Explain the differences between the answers in a and b.

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