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FIN 380 Exam 1 Notes from HW

# FIN 380 Exam 1 Notes from HW - CHAPTER 2 1 Net capital...

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CHAPTER 2 1. Net capital spending = NFA end – NFA beg + Depreciation Net capital spending = \$3,300,000 – 2,800,000 + 975,000 Net capital spending = \$1,475,000 2. Change in NWC = NWC end – NWC beg Change in NWC = (CA end – CL end ) – (CA beg – CL beg ) Change in NWC = (\$1,680 – 1,160) – (\$1,210 – 860) Change in NWC = \$520 – 350 = 170 3 . Cash flow to creditors = Interest paid – Net new borrowing Cash flow to creditors = Interest paid – (LTD end – LTD beg ) Cash flow to creditors = \$660,000 – (\$3,300,000 – 2,700,000) Cash flow to creditors = \$60,000 4. Cash flow to stockholders = Dividends paid – Net new equity Cash flow to stockholders =Dividends paid – [(Common end + APIS end ) – (Common beg + APIS beg )] Cash flow to stockholders = \$570,000 – [(\$846,450 + 7,600,000) – (\$770,800 + 7,210,000)] Cash flow to stockholders = \$104,350. Note, APIS is the additional paid-in surplus.

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5. Explanation: To find the OCF, we first calculate net income. Income Statement Sales \$126,600 Costs 87,000 Other expenses 4,600 Depreciation 7,000 EBIT \$28,000 Interest 16,000 Taxable income \$12,000 Taxes (33%) 3,960 Net income \$8,040 Dividends \$3,457 Additions to RE \$4,583 a. OCF = EBIT + Depreciation – Taxes = \$28,000 + 7,000 – 3,960 = \$31,040 b. CFC = Interest – Net new LTD = \$16,000 – (–6,100) = \$22,100 c. CFS = Dividends – Net new equity = \$3,457 – 6,300 = \$-2,843 d. We know that CFA = CFC + CFS, so: CFA = \$22,100 + -2,843 = \$19,257 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 = \$4,700 + 7,000 = \$11,700 Now we can use: CFA = OCF – Net capital spending – Change in NWC \$19,257 = \$31,040 – 11,700 – Change in NWC Solving for the change in NWC gives \$83, meaning the company increased its NWC by \$83. 6.
The solution to this question works the income statement backwards. Starting at the bottom: Net income = Dividends + Addition to ret. earnings = \$1,091 + 4,365 = \$5,456 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) = \$5,456 / (1 – .38) = \$8,800 Now you can calculate: EBIT = EBT + Interest = \$8,800 + 1,900 = \$10,700 The last step is to use: EBIT = Sales – Costs – Depreciation \$10,700 = \$30,300 – 14,000 – Depreciation Solving for depreciation, we find that depreciation = \$5,600

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7. Total liabilities and owners' equity is: TL & OE = CL + LTD + Common stock + Retained earnings Solving for this equation for equity gives us: Common stock = \$2,000,000 – 600,000 – 960,000 = \$440,000 Refer to the table below. Corporation Growth has \$79,700 in taxable income, and Corporation Income has \$4,870,000 in taxable income. (Do not include the dollar signs (\$). Round your answers to the nearest
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