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Ch2 assign solution - CHAPTER 2 FINANCIAL STATEMENTS TAXES...

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CHAPTER 2 FINANCIAL STATEMENTS, TAXES AND CASH FLOW Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 2. The income statement for the company is: Income Statement Sales $586,000 Costs 247,000 Depreciation 43,000 EBIT $296,000 Interest 32,000 EBT $264,000 Taxes(35%) 92,400 Net income $171,600 3. One equation for net income is: Net income = Dividends + Addition to retained earnings Rearranging, we get: Addition to retained earnings = Net income – Dividends = $171,600 – 73,000 = $98,600 4. EPS = Net income / Shares = $171,600 / 85,000 = $2.02 per share DPS = Dividends / Shares = $73,000 / 85,000 = $0.86 per share 5. To find the book value of current assets, we use: NWC = CA – CL. Rearranging to solve for current assets, we get: CA = NWC + CL = $380,000 + 1,400,000 = $1,480,000 The market value of current assets and fixed assets is given, so: Book value CA = $1,480,000 Market value CA = $1,600,000
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Book value NFA = $3,700,000 Market value NFA = $4,900,000 Book value assets = $5,180,000 Market value assets = $6,500,000 6. Taxes = 0.15($50K) + 0.25($25K) + 0.34($25K) + 0.39($236K – 100K) = $75,290 7. The average tax rate is the total tax paid divided by net income, so: Average tax rate = $75,290 / $236,000 = 31.90% The marginal tax rate is the tax rate on the next $1 of earnings, so the marginal tax rate = 39%. 8. To calculate OCF, we first need the income statement: Income Statement Sales $27,500 Costs 13,280 Depreciation 2,300 EBIT $11,920 Interest 1,105 Taxable income $10,815 Taxes (35%) 3,785 Net income $ 7,030
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