Corporate_Finance_9th_edition_Solutions_Manual_FINAL0

And the operating cash flow is ocf ebit depreciation

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Unformatted text preview: ng costs Depreciation EBIT Interest Taxable income Taxes Net income $1,200,000 450,000 225,000 110,000 $415,000 81,000 $334,000 116,900 $217,100 b. And the operating cash flow is: OCF = EBIT + Depreciation – Taxes OCF = $415,000 + 110,000 – 116,900 OCF = $408,100 14. To find the OCF, we first calculate net income. Income Statement Sales $167,000 Costs 91,000 Depreciation 8,000 Other expenses 5,400 EBIT $62,600 Interest 11,000 Taxable income $51,600 Taxes 18,060 Net income $33,540 Dividends Additions to RE a. $9,500 $24,040 OCF = EBIT + Depreciation – Taxes OCF = $62,600 + 8,000 – 18,060 OCF = $52,540 CFC = Interest – Net new LTD CFC = $11,000 – (–$7,100) CFC = $18,100 Note that the net new long-term debt is negative because the company repaid part of its longterm debt. b. c. CFS = Dividends – Net new equity CFS = $9,500 – 7,250 CFS = $2,250 10 d. We know that CFA = CFC + CFS, so: CFA = $18,100 + 2,250 = $20,350 CFA is also equal to OCF – Net capital spending – Change in NWC. We already know OCF. Net capital spending is equal to: Net capital spending = Increase in NFA + Depreciation Net capital spending = $22,400 + 8,000 Net capital spending = $30,400 Now we can use: CFA = OCF – Net capital spending – Change in NWC $20,350 = $52,540 – 30,400 – Change in NWC. Solving for the change in NWC gives $1,790, meaning the company increased its NWC by $1,790. 15. The solution to this question works the income statement backwards. Starting at the bottom: Net income = Dividends + Addition to ret. earnings Net income = $1,530 + 5,300 Net income = $6,830 Now, looking at the income statement: EBT – (EBT × Tax rate) = Net income Recognize that EBT × tax rate is simply the calculation for taxes. Solving this for EBT yields: EBT = NI / (1– Tax rate) EBT = $6,830 / (1 – 0.65) EBT = $10,507.69 Now we can calculate: EBIT = EBT + Interest EBIT = $10,507.69 + 1,900 EBIT = $12,407.69 The last step is to use: EBIT = Sales – Costs – Depreciation $12,407.69 = $43,000 – 27,500 – Depreciation Depreciation = $3,092.31 Solving for depreciation, we find that depreciation = $3,092.31 11 16. The balance sheet for the company looks like this: Cash Accounts receivable Inventory Current assets Tangible net fixed assets Intangible net fixed assets Total assets Balance Sheet $183,000 Accounts payable 138,000 Notes payable 297,000 Current liabilities $618,000 Long-term debt Total liabilities 3,200,000 695,000 Common stock Accumulated ret. earnings $4,513,000 Total liab. & owners’ equity $465,000 145,000 $610,000 1,550,000 $2,160,000 ?? 1,960,000 $4,513,000 Total liabilities and owners’ equity is: TL & OE = Total debt + Common stock + Accumulated retained earnings Solving for this equation for equity gives us: Common stock = $4,513,000 – 1,960,000 – 2,160,000 Common stock = $393,000 17. The market value of shareholders’ equity cannot be negative. A negative market value in this case would imply that the company would pay you to own the stock. The market value of shareholders’ equity can be stated as: Shareholders’ equity = Max [(TA – TL), 0]. So, if TA is $9,700, equity is equal to $800, and if TA is $6,800, equity is equal to $0. We should note here that while the market value of equity cannot be negative, the book value of shareholders’ equity can be negative. 18. a. Taxes Growth = 0.15($50K) + 0.25($25K) + 0.34($3K) = $14,770 Taxes Income = 0.15($50K) + 0.25($25K) + 0.34($25K) + 0.39($235K) + 0.34($7.465M) = $2,652,000 Each firm has a marginal tax rate of 34% on the next $10,000 of taxable income, despite their different average tax rates, so both firms will pay an additional $3,400 in taxes. Income Statement Sales $740,000 COGS 610,000 A&S expenses 100,000 Depreciation 140,000 EBIT ($115,000) Interest 70,000 Taxable income ($185,000) Taxes (35%) 0 Net income ($185,000) b. 19. a. 12 b. OCF = EBIT + Depreciation – Taxes OCF = ($115,000) + 140,000 – 0 OCF = $25,000 c. Net income was negative because of the tax deductibility of depreciation and interest expense. However, the actual cash flow from operations was positive because depreciation is a non-cash expense and interest is a financing expense, not an operating expense. 20. A firm can still pay out dividends if net income is negative; it just has to be sure there is sufficient cash flow to make the dividend payments. Change in NWC = Net capital spending = Net new equity = 0. (Given) Cash flow from assets = OCF – Change in NWC – Net capital spending Cash flow from assets = $25,000 – 0 – 0 = $25,000 Cash flow to stockholders = Dividends – Net new equity Cash flow to stockholders = $30,000 – 0 = $30,000 Cash flow to creditors = Cash flow from assets – Cash flow to stockholders Cash flow to creditors = $25,000 – 30,000 Cash flow to creditors = –$5,000 Cash flow to creditors is also: Cash flow to creditors = Interest – Net new LTD So: Net new LTD = Interest – Cash flow to creditors Net new LTD = $70,000 – (–5,000) Net ne...
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