Homework_2_Solutions_Updated

Homework_2_Solutions_Updated - Homework #2 Solutions FIN340...

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1 Homework #2 Solutions FIN340 – FALL 2006 Professor Gormley, [email protected] Distributed: September 19th, 2006 Due: Tuesday, September 26th, 2006 [in class] Note: Please show all work and circle your final answer to make grading easier. Homework Assignments may be done in groups of up to four students and should be submitted jointly. 1. Consider the following financial statements: Year 0 1 Cash 100 90 Other Current Assets 150 153 Fixed assets At cost 1,000 1,150 Accumulated Deprec. (300) (415) Total ??? ??? Non-debt Current Liabilities 70 75 ??? ??? Stock 400 400 Retained Earnings ??? 163 Total ??? ??? Sales 1,000 1,050 COGS (excluding depreciation) (700) (730) Depreciation (annual expense) (100) (115) Interest (30) (30) Profit before Tax 170 175 Provision for Income Taxes (68) (70) Profit after Tax 102 105 Dividend (40) (42) Retained Earnings 62 63 Year-end balance sheet Assets Liabilities Equity a. What was the firm’s effective tax rate in Year 1? 70/175 = 40%
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2 b. What is the earnings before interest and taxes (EBIT) in Year 1? EBIT = Profit before tax + Interest Expense EBIT = 175 + 30 = 205 c. What were the Retained Earnings at the end of Year 0? 163-63 = 100 d. What was the Debt outstanding at the end of Year 0? Total assets = 100 + 150 + 1000 – 300 = 950 Total equity = 400 + 100 = 500 Total liabilities = Total assets – Total equity = 450 Thus, Debt = 450-70 = 380 e. What was the Debt outstanding at the end of Year 1? Total assets = 90 + 153 + 1150 – 415 = 978 Total equity = 400 + 163 = 563 Total liabilities = Total assets – Total equity = 415 Thus, Debt = 415-75 = 340 f. What was the Free Cash Flow of the firm in Year 1? (Hint: to calculate this, assume that “other current assets” includes items similar to accounts receivable and that “non-debt current liabilities” includes items similar to accounts payable). OCF = EBIT + Depreciation – Tax Rate * EBIT OCF = (205) + (115) – (0.40 * 205) = 238 NCS = End NFA – Start NFA + Depreciation NCS = (1150 – 415) – (1000 – 300) + 115 = 150 Change in Other Current Assets = 3 Chang in Non-debt Current Liabilities = 5 FCF = OCF – NCS – Change in CA + Change in CL FCF = 238 – 150 – 3 + 5 = 90 g. What are the Financial Cash Flows?
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3 Change in Debt (short & long) = -40 After Tax Interest Expense = 30 * (1 – 0.40) = 18 Dividends = 42 Change in common stock = 0 Financial Cash Flows = -(-40) + 18 + 42 = 100 h. Using your answers to parts (e) and (f), can you reconcile the Change in Cash between year 0 and year 1? (Hint: If you can’t, then you’ve made a mistake somewhere above!) Yes, the Change in Cash = -10 Change in Cash = FCF – Financial Cash Flows -10 = 90 – 100 ---- It works! i.
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This note was uploaded on 09/21/2009 for the course B 340 taught by Professor Narg during the Spring '09 term at Washington University in St. Louis.

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Homework_2_Solutions_Updated - Homework #2 Solutions FIN340...

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