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Unformatted text preview: creditors = Interest – Net new LTD Net new LTD = LTDend – LTDbeg Cash flow to creditors = $402 – ($10,702 – 9,173) Cash flow to creditors = –$1,127 Net new equity = Common stockend – Common stockbeg Common stock + Retained earnings = Total owners’ equity Net new equity = (OE – RE) end – (OE – RE) beg Net new equity = OEend – OEbeg + REbeg – REend REend = REbeg + Additions to RE ∴ Net new equity = OEend – OEbeg + REbeg – (REbeg + Additions to RE) = OEend – OEbeg – Additions to RE Net new equity = $23,041 – 23,203 – 656.62 = –$818.62 Cash flow to stockholders = Dividends – Net new equity Cash flow to stockholders = $701 – (–$818.62) Cash flow to stockholders = $1,519.62 As a check, cash flow from assets is $396.62. Cash flow from assets = Cash flow from creditors + Cash flow to stockholders Cash flow from assets = –$1,127 + 1,519.62 Cash flow from assets = $392.62 Challenge 25. We will begin by calculating the operating cash flow. First, we need the EBIT, which can be calculated as: EBIT = Net income + Current taxes + Deferred taxes + Interest EBIT = $144 + 82 + 16 + 43 EBIT = $380 Now we can calculate the operating cash flow as: Operating cash flow Earnings before interest and taxes Depreciation Current taxes Operating cash flow $285 78 (82) $281 17 The cash flow from assets is found in the investing activities portion of the accounting statement of cash flows, so: Cash flow from assets Acquisition of fixed assets Sale of fixed assets Capital spending $148 (19) $129 The net working capital cash flows are all found in the operations cash flow section of the accounting statement of cash flows. However, instead of calculating the net working capital cash flows as the change in net working capital, we must calculate each item individually. Doing so, we find: Net working capital cash flow Cash Accounts receivable Inventories Accounts payable Accrued expenses Notes payable Other NWC cash flow $42 15 (18) (14) 7 (5) (2) $25 Except for the interest expense and notes payable, the cash flow to creditors is found in the financing activities of the accounting statement of cash flows. The interest expense from the income statement is given, so: Cash flow to creditors Interest Retirement of debt Debt service Proceeds from sale of long-term debt Total $43 135 $178 (97) $81 And we can find the cash flow to stockholders in the financing section of the accounting statement of cash flows. The cash flow to stockholders was: Cash flow to stockholders Dividends Repurchase of stock Cash to stockholders Proceeds from new stock issue Total $ 72 11 $ 83 (37) $ 46 18 26. Net capital spending = NFAend – NFAbeg + Depreciation = (NFAend – NFAbeg) + (Depreciation + ADbeg) – ADbeg = (NFAend – NFAbeg)+ ADend – ADbeg = (NFAend + ADend) – (NFAbeg + ADbeg) = FAend – FAbeg 27. a. b. The tax bubble causes average tax rates to catch up to marginal tax rates, thus eliminating the tax advantage of low marginal rates for high income corporations. Assuming a taxable income of $335,000, the taxes will be: Taxes = 0.15($50K) + 0.25($25K) + 0.34($25K) + 0.39($235K) = $113.9K Average tax rate = $113.9K / $335K = 34% The marginal tax rate on the next dollar of income is 34 percent. For corporate taxable income levels of $335K to $10M, average tax rates are equal to marginal tax rates. Taxes = 0.34($10M) + 0.35($5M) + 0.38($3.333M) = $6,416,667 Average tax rate = $6,416,667 / $18,333,334 = 35% The marginal tax rate on the next dollar of income is 35 percent. For corporate taxable income levels over $18,333,334, average tax rates are again equal to marginal tax rates. c. Taxes X($100K) X X = 0.34($200K) = $68K = 0.15($50K) + 0.25($25K) + 0.34($25K) + X($100K); = $68K – 22.25K = $45.75K = $45.75K / $100K = 45.75% 19 CHAPTER 3 FINANCIAL STATEMENTS ANALYSIS AND LONG-TERM PLANNING
Answers to Concepts Review and Critical Thinking Questions 1. Time trend analysis gives a picture of changes in the company’s financial situation over time. Comparing a firm to itself over time allows the financial manager to evaluate whether some aspects of the firm’s operations, finances, or investment activities have changed. Peer group analysis involves comparing the financial ratios and operating performance of a particular firm to a set of peer group firms in the same industry or line of business. Comparing a firm to its peers allows the financial manager to evaluate whether some aspects of the firm’s operations, finances, or investment activities are out of line with the norm, thereby providing some guidance on appropriate actions to take to adjust these ratios if appropriate. Both allow an investigation into what is different about a company from a financial perspective, but neither method gives an indication of whether the difference is positive or negative. For example, suppose a company’s current ratio is increasing over time. It could mean that the company had been facing liquidity problems in the past and is rectifying those problems, or it coul...
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