UGBA 103 _2 Answers

UGBA 103 _2 Answers - UGBA 103 Haas School of Business...

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Unformatted text preview: UGBA 103 Haas School of Business Summer 2010 John Gonzales Assignment #2 Answers 2. 3-3 Do problems 3-3 through 3-6, 3-10, 3-11 and 3-12 on pages 115-117 of the text. NI = $3,000,000; EBIT = $6,000,000; T = 40%; Int erest = ? Need t o set up an income st at ement and work from t he bot t om up . EBIT Int erest EBT T axes (40%) NI $6,000,000 1,000,000 $5,000,000 2,000,000 $3,000,000 EBT = $3,000,000 $3,000,000 = (1 − T) 0.6 Int erest = EBIT – EBT = $6,000,000 – $5,000,000 = $1,000,000. 3-4 EBIT DA = $7,500,000; NI = $1,800,000; Int = $2,000,000; T = 40%; DA = ? EBIT DA DA EBIT EBIT $2,000,000 Int EBT T axes (40%) NI $7,500,000 2,500,000 $5,000,000 2,000,000 $3,000,000 1,200,000 $1,800,000 EBIT DA – DA = EBIT ; DA = EBIT DA – EBIT = EBT + Int = $3,000,000 + (Given) (Given) $1,800,000 $1,800,000 = (1 − T ) 0.6 3-5 NI = $3,100,000; DEP = $500,000; AM ORT = 0; NCF = ? NCF = NI + DEP and AM ORT = $3,100,000 + $500,000 = $3,600,000. NI = $50,000,000; R/EY/E = $810,000,000; R/EB/Y = $780,000,000; Dividends = ? R/EB/Y + NI – Div = R/EY/E $780,000,000 + $50,000,000 – Div = $810,000,000 $830,000,000 – Div = $810,000,000 $20,000,000 = Div. 3-6 3-10 EBIT = $750,000; DEP = $200,000; 100% Equity; T = 40% NI = ?; NCF = ?; OCF = ? First, determine net income by setting up an income statement: EBIT Interest EBT Taxes (40%) NI $750,000 0 $750,000 300,000 $450,000 NCF = NI + DEP = $450,000 + $200,000 = $650,000. 3-11 a. Income Statement Sales revenues $12,000,000 Costs except depreciation 9,000,000 Depreciation 1,500,000 EBT $ 1,500,000 Taxes (40%) 600,000 Net income $ 900,000 Add back depreciation 1,500,000 Net cash flow $ 2,400,000 b. If depreciation doubled, taxable income would fall to zero and taxes would be zero. Thus, net income would decrease to zero, but net cash flow would rise to $3,000,000. Menendez would save $600,000 in taxes, thus increasing its cash flow: ∆CF = T(∆Depreciation) = 0.4($1,500,000) = $600,000. c. If depreciation were halved, taxable income would rise to $2,250,000 and taxes to $900,000. Therefore, net income would rise to $1,350,000, but net cash flow would fall to $2,100,000. d. You should prefer to have higher depreciation charges and higher cash flows. Net cash flows are the funds that are available to the owners to withdraw from the firm and, therefore, cash flows should be more important to them than net income. 3-12 a. NOPAT = EBIT(1 - Tax rate) = $150,000,000(0.6) = $90,000,000. b. NOWC06 = Operating CA – operating CL = $360,000,000 - ($90,000,000 + $60,000,000) = $210,000,000. NOWC07 = $372,000,000 - $180,000,000 = $192,000,000. c. Operating capital06 = Net plant Net operating + and equipment working capital = $250,000,000 + $210,000,000 = $460,000,000. Operating capital07 = $300,000,000 + $192,000,000 = $492,000,000. d. FCF = NOPAT - Net investment in operating capital = $90,000,000 - ($492,000,000 - $460,000,000) = $58,000,000. e. The large increase in dividends can most likely be attributed to a large increase in free cash flow, since FCF represents the amount of cash available to be paid out to stockholders after the company has made all investments in fixed assets and working capital necessary to sustain the business. ...
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This note was uploaded on 07/17/2010 for the course UGBA 18195 taught by Professor Johngonzales during the Summer '10 term at Berkeley.

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