Introduction to Finance

corporate retention rate
is calculated as undistributed profi ts 
divided by profi ts after taxes.
At the aggregate or unit level, corporate profi ts before taxes are usually recorded after 
adjustments for changes in inventory values and for capital consumption. More specifi c-
ally, before-tax profi ts include an inventory valuation adjustment (IVA) and a capital con-
sumption adjustment (CCAdj). Inventory values may increase or decrease in a given year 
and, thus, can aff ect corporate profi ts before taxes. 
Capital consumption adjustment
, also 
called 
depreciation
, is the estimate of the “using up” of plant and equipment assets for 
business purposes.
Since fi nancial institution corporations have only a small impact, or corporate profi tability 
and savings, it is common practice to concentrate on the impact of nonfi nancial corporations 
as a unit when examining corporate savings. 
Table 7.5
shows nonfi nancial corporate profi ts 
and savings in the United States for 2006, 2009, and 2012, and 2015. Profi ts before taxes were 
only $718.1 billion in 2009, which was a substantial decline from the 2006 level. Before-tax 
profi ts rebounded in 2012 and continued to increase in 2015. A similar pattern occurred in 
terms of profi ts after taxes. Dividends were increased over the four time periods, with the 2015 
increase resulting in a slightly lower level of undistributed profi ts in 2015 relative to 2012. The 
retention rate was quite stable over the four time periods. 
Corporate saving for short-term working capital purposes is by far the most important 
reason for accumulating fi nancial assets. Seasonal business changes create an uneven demand 
for corporate operating assets, such as inventories and accounts receivable. Because of these 
seasonal changes, cash infl ow is seldom in just the right amount and at the right time to