Financial Statements, Cash Flow, and Taxes - Solutions4

# Financial Statements, Cash Flow, and Taxes - Solutions4 - B...

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Old Exam Questions - Financial Statements, Cash Flow, and Taxes - Solutions Page 31 of 73 Pages B. 19.28% * C. 17.09% D. 18.55% E. 17.82% Ordinary Taxable Income = \$50,000 + \$3,500 - \$3,000 - \$7,000 = \$43,500 Ordinary Taxes = \$4,090.00 + (.25)*(43,500.00 - \$29,700.00) = \$7,540.00 Taxes on Dividends (\$5,000)*(.15) = \$750.00 Total Taxes Paid = \$7,540.00 + \$750.00 = \$8,290.00 Total Taxable Income = \$43,500.00 + \$5,000.00 = \$48,500.00 Average Tax Rate = \$8,290.00 / \$48,500.00 = 17.09% 32. Assume that your firm reported net income of \$108 million in 2004, while the firm had sales of \$1,100 million and a cost of goods sold of \$880 million. Also assume that the firm’s corporate tax rate was 40 percent and its interest expense was \$40 million. Now assume that the firm’s goal is to increase its net income by 25 percent in 2005. It predicts that the tax rate and cost of goods sold as a percentage of sales will remain unchanged, while interest expense will increase by 20 percent. Based on this information, determine the level of sales that the firm will have to generate in 2005 in order to meet its net income goal. Income Statement 2005 Sales Cost of Goods Sold EBIT Interest EBT Taxes Net Income A. \$1,293 Million * B. \$1,365 Million C. \$1,257 Million D. \$1,329 Million E. \$1,221 Million New net income = (\$108 million)*(1.25) = \$135 million New Interest Expense = (\$40 million)(1.20) = \$48 million Now, work backwards through the income statement:

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Old Exam Questions - Financial Statements, Cash Flow, and Taxes - Solutions Page 32 of 73 Pages Income Statement 2005 Sales \$1,365 Cost of Goods Sold - \$1,092 EBIT \$ 273 Interest - \$ 48 EBT \$ 225 Taxes - \$ 90 Net Income \$ 135 33. Assume that you are given the income statement and balance sheet (you may assume that these are market values) for your company listed below. Also assume that the firm’s debt is selling at par and that its cost of stock is 14 percent (you may assume that flotation costs are zero). You should now be able to calculate the weighted average cost of capital for the firm (go out to at least 6 decimal places). Given this information, determine the economic value added (EVA) for 2005. Income Statement Year: 2005 Sales \$15,000.00 Operating costs \$12,000.00 Earnings before interest and taxes \$3,000.00 Interest paid on long-term debt \$850.00 Earnings before taxes \$2,150.00 Taxes (40%) \$860.00 Net income \$1,290.00 Balance Sheet Year: 2005 Assets: Cash and marketable securities \$1,500.00 Accounts receivable \$4,500.00 Inventories \$6,000.00 Total current assets \$12,000.00 Property plant and equipment \$7,500.00 Total assets \$19,500.00 Liabilities and equity: Long-term Debt \$8,500.00 Total liabilities \$8,500.00 Common stock (1 million shares) \$7,000.00 Retained earnings \$4,000.00
Old Exam Questions - Financial Statements, Cash Flow, and Taxes - Solutions Page 33 of 73 Pages Total common equity \$11,000.00 Total liabilities and equity \$19,500.00

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Financial Statements, Cash Flow, and Taxes - Solutions4 - B...

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