Session 15 Cash Flow Identity PDF

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Cash Flow Identity...

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07/05/2019 Session 15 Assets = Liabilities + Owner’s equity The owner of the firm should acquire the cash flow.

Cash flow Identity Cash flow from Assets = Cash flow to creditors + Cash flow to stock hold

In income statement, Depreciation and Deferred are non-cash items. Depreciation is when expenditure in the following years, from the accounting perspective it makes sense but from corporate finance perspective, we only care about cash flow incurred in that year. A company is going to use that asset but deprecation doesn’t represent the actual cash outflow from the corporate finance perspective. We will ignore the deferred value and we will only consider depreciation.

Cash Flow from Assets (CFFA) CFFA =OCF − NCS −∆ NWC 1. OCF: Operating Cash Flow (Income Statement) a. OCF = EBIT + DEP – TAX i. TAX here refers to current tax that stands for the real cash

2. NCS: Net Capital Spending (Balance Sheet and income statement a. Fixed Assets Purchase – Fixed Assets Sales = Fixed Assets t – Fixed Assets t-1 + Depreciation

3.

∆ NWC : Change in Net Working Capital (Balance Sheet) a. Let CA = Current Assets b. Let CL = Current Liabilities c. NWCt = CAt – CLt d.

∆ NWC

t-1,t

= NWCt – NWCt-1 = (CAt – CLt) – (CAt-1 – CLt-1)

i. = (CAt – CAt-1) – ( CLt – CLt-1)

When a company tries to buy fixed assets then it represents cash outflow. We need account for depreciation. If a company sells a computer to its customer. If the customer says that they signed the contract and want the computer and they will pay the next year. From the company’s perspective, the transaction

07/05/2019 Session 15 has been processed but they didn’t receive the actual money, they booked the transaction as EBIT but the money didn’t come in and the deferred revenue is recorded in the current asset. It will be booked in Current Asset. If the company had deferred revenue…..

Cash Flows to creditors and stockholders 

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Cash Flow to Creditors o CFto creditors = Interest Paid + Debt Retired – New Debt o = Interest Paid – ( Long term Debt t – Long Term Debtt-1) Cash Flow to Stockholders o CFtoStockholders = Dividends – Net New Equity o = Dividends – (New Issues – Repurchases)

The Cash Flows of a Project Why do we want to know about the cash flow of a project? Our major go is to learn how to evaluate a project, we have a bunch of decision rules in Chapter 5 assuming future cashflows and discount rates are given. However, in reality it is not given.

Firms vs Projects CFFA = Operating CF (OCF) –Net Capital Spending (NCS) –∆Net Working Capital (∆NWC)

Project Cash Flow = OCF –NCS –∆NWC

From a project perspective, Starting from this lecture, we would only consider the firms that has not debt financing. 1. OCFTopDown = Sales – COGS – SGA – TAXES 2. OCFBottomUp = NI + DEP 3. OCFTaxShield = (SALES – COGS – SGA)*(1-te) + DEP *te =

(SALES – COGS – SGA)*(1-te) = OCF of firms without Depreciation

Net Capital Spending  

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Capital Expenditure typically occurs at the beginning of a project Note the depreciation schemes: Straight line, accelerated depreciation o The choice of the scheme can affect cash flows, though depreciation is a non-cash item. Why? Salvage value; the book value of fixed assets at the end of their useful life

07/05/2019 Session 15 

Note: if the fixed assets are sold to market at a price higher than net book value, the price difference will be taxed....