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Chapter 2 - Supplemental Practice Problems 1-2-3 _Spring 2008

Chapter 2 - Supplemental Practice Problems 1-2-3 _Spring 2008

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COB300B: Finance Chapter 2 Supplemental Practice Problems 1. The Klaven Corporation has operating income (EBIT) of $750,000. The company’s depreciation expense is $200,000. Klaven is 100 percent equity financed, and it faces a 40 percent tax rate. Assume the firm has no amortization expense. What are its net income, its net cash flow, and its operating cash flow? 2. Which of the following actions will, all else equal, increase the amount of cash on a company’s balance sheet? I. The company issues $2 million in new common stock. II. The company invests $ 3 million in new plant & equipment. III. The company generates negative net income and negative cash flow during the year. IV. The company increases the dividend paid on its common stock. 3. Bailey Corporation recently reported the following income statement: Sales $14,000,000 Operating costs excluding depreciation and amortization
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Unformatted text preview: 7,000,000 Earnings before interest, taxes, depreciation and amort (EBITDA) $ 7,000,000 Depreciation and amortization 3,000,000 Earnings before interest expense and taxes (EBIT) $ 4,000,000 Interest expense 1,500,000 Earnings before income taxes (EBT) $ 2,500,000 Income taxes (40%) 1,000,000 Net income (NI) $ 1,500,000 Bailey’s total operating capital is $20 million and its after-tax cost of capital is 10 percent. Therefore, Bailey’s total after-tax dollar cost of operating capital is $2 million. During the past year, Bailey made a $1.3 million net investment in its operating capital. a. What is Bailey’s Net Operating Profit After Taxes (NOPAT) for the year? b. What is Bailey’s net cash flow (NCF) for the year? c. What is Bailey’s operating cash flow (OCF) for the year? d. What is Bailey’s free cash flow (FCF) for the year?...
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