Earnings, corporation

Frame PSM in terms of their interests. People pay more attention to information that is relevant to them, than to items of general or academic interest. For example, "PSM provides a cost-effective means of improving our company s safety performance" addresses two senior executive concerns corporate earnings and exposure to liability. The discussion is framed in terms of the listener s interest it also focuses on results. 

The key to the discounted cash flow methods is the determination of a proper interest rate. For this, two factors must be known. One is how much does it cost to obtain money The second is what is a reasonable amount of profit to expect from a plant The first depends on the source of money. This can be corporation earnings, the sale of stock, the issuance of bonds, the selling of assets, or borrowing from some outside source. The second depends on economic conditions. 

The corporation earnings that are left after the dividends have been distributed to the stockholders can be used for capital improvements. This money costs nothing to the corporation. It usually amounts to about 5% of net sales. Capital expenditures for the large chemical companies generally are between 8 and 20% of the net sales. It is obvious that money from other sources is usually required. While undistributed profits cost nothing, they should not be thought of as valueless. Unless they can produce an increase of stock value and/or future dividends greater than the immediate cash value to the stockholder, these funds should be distributed as dividends. The profits can be considered to have the same value as stock. 

The financial scandals of WorldCom, Enron, and others challenged investors confidence in corporate America. In an effort to restore some semblance of confidence in corporate earnings statements, two Wall Street powers attempted to evaluate the quality and character of earnings. On May 14, 2002, Standard Poors (S P) released its Core Earnings Test, a method that would separate a company s earnings into core and non-core classifications. 

The value of a profit-sharing plan to employees depends upon sustained corporate earnings. In turn, these profits require distant patent expirations of profitable drugs and a wide, full pipeline of medicines flowing rapidly to the marketplace. 

Figure 5 Corporate Earnings and Stock Prices Follow Economic Growth Cycles.

Review these business processes for their actual relevancy to your earnings and customers. You will soon discover that only a few business processes actually determine your corporate earnings. 

Stocks do not always outperform bonds. Stock and bond returns were roughly equal from about 1870 to 1940. It is only since World War II that stocks have widely outpaced bonds in terms of total return. With bankruptcies rising and weak corporate earnings, stocks may not enjoy their double-digit returns for awhile. 

Interest. The iaterest block on Eigure 1 represents the iaterest expense associated with the debt capital. It is an allowed corporate pretax expense for federal income tax purposes and is actually paid out to the debt holders as their earnings. 

Although numerous cases have been documented where petroleum refineries have simultaneously reduced pollution outputs and operating costs through pollution prevention techniques, there are often barriers to their im-plementation. The primary barrier to most pollution prevention projects is cost. Many pollution prevention options simply do not pay for themselves, or the economics often appear marginal. Corporate investments typically must earn an adequate return on invested capital for the shareholders and some pollution prevention options at some facilities may not meet the requirements set by company policies. 

This is a tax on a person s or company s income. It is often graduated. That is, the rate of the taxation depends on the amount earned. Federal income taxes are based on profits. Before figuring this tax all expenses legtimately incurred may be deducted. Most large corporations in the United States pay around a 48% federal income tax. This means 48% of their profits are taken in taxes by the federal government. Nearly all states and some cities also have income taxes. Some of these are based on total sales, but most are based on profits. Federal income taxes may or may not be considered as an expense. 

The return on investment is the expected profit divided by the total capital invested. This is the percentage return that an investor may expect to eventually earn on his money. Since the federal corporate income tax rate is around 48% on all profits, it must be stated whether the profit is the before- or after-tax earnings. 

But earnings are not the only consideration. In 1968 the Union Carbide Corporation, along with many other companies, had a very bad year financially. In order to make its financial picture look better it switched from the double declining balance method of depreciation to the straight-line method. This reduced expenses (deprecitation being considered an expense) and hence increased profits. This is a semipermanent move, however, since a return to the double declining balance method would require approval of the Internal Revenue Service. 

On the other hand, Union Carbide was plagued by all sorts of problems in starting up its chemical complex at Taft, La. It was reported that startup problems reduced corporation after-tax earnings by 30,000,000 and set the time schedule for full production back 18-24 months.12... 

According to the Council on Wage and Price stability "Studies of business innovation suggest that over the long term companies treat their research and development budgets like other investments and adjust R D expenditures so that the return is comparable to that earned on other corporate investments", (2). 

The first major attempt to evaluate the quality of business operating results was the Stern Stewart EVA computation, a proprietary complicated formula that can make up to 160 adjustments to reported earnings of public companies. A component of EVA is to determine a firm s net operating income after tax and while it may accomplish this objective, it has been criticized because it relies on data that, as stated earlier, can be managed (Brewer Chandra, 1999). It was more than a decade before Wall Street analysts accepted EVA, and today its use is widespread in the corporate world, but not as much as in the investment world. 

Corporations pay an income tax based upon gross earnings, as shown in Table 9-19. Most major corporations pay the federal tax rate of 34 percent on their annual gross earnings. In addition, some states have a stepwise corporate income tax rate. State income tax is deductible as an expense item before the calculation of the federal tax. If 7) is the incremental tax rate and Tr is the incremental federal tax, both expressed as decimals, then the combined incremental rate T is... 

Undaunted by his failure to get into an accredited professional art school, Marcel began an apprenticeship in a commercial print shop, L Imprimerie de la Vicomte, and earned the diploma of an ouvrier d art, by which means he was to secure a two-year exemption from the usual obligatory three-year stint of military service. In October 1905, he had enlisted as a reserve infantryman, and in April 1906 was promoted to corporal he was discharged in October of the same year. Years later, Duchamp admitted,... 

Capital market inefficiencies exacerbate the problems caused by adverse selection. Because corporate income is doubly taxed, earnings are retained during good times rather than dispersed to shareholders. When the supply of insurance is tight and profits are high, external capital does not enter the industry in optimal amounts because, once it is in the corporate sector, capital is not easily transferred back to individuals without dividend taxation. Also, external and internal capital are not perfect substitutes because of the asymmetry of information. If investors believe the best financial opportunities are reserved for insiders, any attempt to raise public equity is a signal that few profits are available. 

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