Corporate Finance Bereket Desalegn Abebe F17401107

Quiz 2

1. What is the difference between book value and the market value? Which should we use
for the decision-making process?
Book value is the worth of the business according to the books (accounts) that are reflected through its
financial statements. Book value, in theory, represents the total amount a company is worth if all the
assets were sold off and all the liabilities were paid back.

Book value is calculated by the differences in the total asset from total liabilities.

Market value is the representation of the company's worth according to the stock market. It represents
the price an asset possesses in the market place and its ability to capitalize on the market. Market Value
is used by the newspapers and investors to refer to the company's worth of a company.

Market value is calculated by multiplying the outstanding shares with the current market value.

In the decision-making process, both methods of valuation are important but book value just makes
more financial sense. It is the actual accounts and value of the company according to their financial
statements. Even as an investor one can feel insured by the use of book value because they can be
assured that if all fails their initial investment is insures.

2. What is the difference between accounting income and cash flow? Which do we need to
use when making a decision?
Accounting income is the revenue that a company gets which is collected within a specified
time and is the difference between the cost of goods and services that went into making the
revenue. Accounting income additionally takes into consideration all indirect expenses (non-
cash items) such as deferred taxes and depreciation by treating them as deductibles in
accounting and even recognizes revenue even though they have not collected payment from
their customers on certain items.
Cash flow simply refers to the cash that a company has paid out or received. In other words, it
is any revenue, gain, expense or payment the company has actually realized that has had a
direct impact on their bank accounting. Unlike accounting income, the cash flow statement
does not consider non-cash items but focuses on the transfer of cash of the company.
In most cases, accounting income reports expenses and revenues which bolsters the status of
the company even when the transfer of cash has not taken place. This means the decision-
making parties cannot rely on accounting income statements because they might not reflect
the actual situation of the company. But for cash flow statements revenue is reported for the
day-to-day cost and revenues which is capable of indicating where the company in terms of its
finances.
3. What is the difference between average and the marginal tax rates? Which should we
use when making financial decisions?
The Marginal tax rates is the taxation system that applies tax by putting people who earn a
certain amount of money in brackets and taxing them by percentage. The marginal tax rate, in
essence, is the tax percentage taken from your next dollar of taxable income.
Average tax rates is the tax rate you pay when you add all sources of taxable income and divide
that number into the amount of taxes that are owed. In other words, it is the total amount of
the tax divided by the total income.
The main difference between the two tax rate system is what they intend to tackle. Average tax
rates is the measure of the tax burden, whereas, marginal tax rates measure the impact on
incentives to earn, save, gain or spend. The marginal tax system affects businesses and
taxpayers directly and in a more pronounced manner. It is the actual measure of the taxable
income hence is believed to be more vital to the taxpayers.
4. How do we determine a firm’s cash flows? What are the equations, and where do we
find the information?
 When looking at cash flow there are 3 major ways to determine cash flow. This are the Cash flow from
operating, investing and financial activities.

I, A. Cash flow from operating activities is the measure of the amount of money of business
has made from its operations. This classification is the amount of cash received from sales
minus cash paid to suppliers and employees as well as payment of tax and debt.
B. Cash flow from investing activities is the cash flow that involves the purchase or sale of long-
term assets such as plants, property or equipment. It is essentially money that is spent to
strengthen and grow the business and enlarge the firm. 
C. Cash flow from financial activities is the cash flow that has been raised from the issuing of
bonds, insurance, or other forms of debt. When taking in these debts it is considered positive
and negative when payment is made.
II, A. Cash flow from operating activities.- 
Operating cash flow= operating income + depreciation - taxes + Change in working capital
 B. Cash flow from investing activities -
Investment cash flow= sales of assets - loans/ sales of stock or bonds
C. Cash flow from financial activities -
Financial cash flow= cash inflow from issuing equity/ debt - cash paid as dividend + repurchase
of debt and equity 
III, The information on cash flow resembles the structure of income or balance statement is a
mandatory part of a company's financial report. This source records from the bank records and
financial statements held with the company. This information is gained from the statement
made called a cash flow statement that summaries the amount of cash and cash equipment
and leaving the company