# chap 2 - Answers and Solutions 2 1 Ch 2 SOLUTIONS TO...

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Answers and Solutions: 2 - 1

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2-1 NI = \$3,000,000; EBIT = \$6,000,000; T = 40%; Interest = ? Need to set up an income statement and work from the bottom up. EBIT \$6,000,000 Interest 1,000,000 EBT \$5,000,000 EBT = Taxes (40%) 2,000,000 NI \$3,000,000 Interest = EBIT - EBT = \$6,000,000 - \$5,000,000 = \$1,000,000. 2-2 NI = \$3,100,000; DEP = \$500,000; AMORT = 0; NCF = ? NCF = NI + DEP and AMORT = \$3,100,000 + \$500,000 = \$3,600,000. 2-3 EBIT = \$170,000; Operating capital = \$800,000; k A-T = 11.625%; T = 40%; EVA = ? EVA = EBIT(1 - T) - AT dollar cost of capital = \$170,000(1 - 0.4) – (\$800,000 × 0.11625) = \$102,000 - \$93,000 = \$9,000. 2-4 NI = \$50,000,000; R/E Y/E = \$810,000,000; R/E B/Y = \$780,000,000; Dividends = ? R/E B/Y + NI – Div = R/E Y/E \$780,000,000 + \$50,000,000 – Div = \$810,000,000 \$830,000,000 – Div = \$810,000,000 \$20,000,000 = Div. 2-5 EBITDA = \$7,500,000; NI = \$1,800,000; Int = \$2,000,000; T = 40%; DA = ? EBITDA \$7,500,000 DA 2,500,000 EBITDA – DA = EBIT; DA = EBITDA – EBIT EBIT \$5,000,000 EBIT = EBT + Int = \$3,000,000 + \$2,000,000 Int 2,000,000 (Given) EBT \$3,000,000 Taxes (40%) 1,200,000 NI \$1,800,000 (Given) Answers and Solutions: 2 - 2 Ch 2: SOLUTIONS TO END-OF-CHAPTER PROBLEMS 6 . 0 \$3,000,000 T) (1 \$3,000,000 = - 6 . 0 000 , 800 , 1 \$ ) T 1 ( 000 , 800 , 1 \$ = -
Answers and Solutions: 2 - 3

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2-6 EBIT = \$750,000; DEP = \$200,000; AMORT = 0; 100% Equity; T = 40%; NI = ?; NCF = ?; OCF = ? First, determine net income by setting up an income statement: EBIT \$750,000 Interest 0 EBT \$750,000 Taxes (40%) 300,000 NI \$450,000 NCF = NI + DEP and AMORT = \$450,000 + \$200,000 = \$650,000. OCF = EBIT(1 - T) + DEP and AMORT = \$750,000(0.6) + \$200,000 = \$650,000. Note that NCF = OCF because the firm is 100 percent equity financed. 2-7 Statements b, c, and d will all decrease the amount of cash on a company’s balance sheet, while Statement a will increase cash through the sale of common stock. This is a source of cash through financing activities. 2-8 a. NOPAT = EBIT(1 – T) = \$4,000,000,000(0.6) = \$2,400,000,000. b. NCF = NI + DEP and AMORT = \$1,500,000,000 + \$3,000,000,000 = \$4,500,000,000. c. OCF = NOPAT + DEP and AMORT = \$2,400,000,000 + \$3,000,000,000 = \$5,400,000,000. d. FCF = NOPAT – Net Investment in Operating Capital = \$2,400,000,000 - \$1,300,000,000 = \$1,100,000,000. e. EVA = NOPAT – Capital of Cost T - A Capital Operating Supplied - Investor Total = \$2,400,000,000 – [(\$20,000,000,000)(0.10)] = \$400,000,000. 2-9 MVA = (P 0 × Number of common shares) - BV of equity \$130,000,000 = \$60X - \$500,000,000 \$630,000,000 = \$60X X = 10,500,000 common shares. Answers and Solutions: 2 - 4
Answers and Solutions: 2 - 5

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2-10 First, determine the firm’s total operating capital: Total operating capital = Net operating working capital + Net fixed assets = \$5,000,000 + \$37,000,000 = \$42,000,000. Now, you can calculate the firm’s EVA:
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## This note was uploaded on 05/10/2010 for the course FMT 0438310384 taught by Professor Hung during the Spring '10 term at Aarhus Universitet, Aarhus.

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chap 2 - Answers and Solutions 2 1 Ch 2 SOLUTIONS TO...

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