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CHAPTER 2 B-9 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) = \$6,600 / (1 – 0.35) = \$10,154 Now you can calculate: EBIT = EBT + Interest = \$10,154 + 4,500 = \$14,654 The last step is to use: EBIT = Sales – Costs – Depreciation \$14,654 = \$41,000 – 19,500 – Depreciation Solving for depreciation, we find that depreciation = \$6,846 16. The balance sheet for the company looks like this: Balance Sheet Cash \$195,000 Accounts payable \$405,000 Accounts receivable 137,000 Notes payable 160,000 Inventory 264,000 Current liabilities \$565,000 Current assets \$596,000 Long-term debt 1,195,300 Total liabilities \$1,760,300 Tangible net fixed assets 2,800,000 Intangible net fixed assets 780,000 Common stock ?? Accumulated ret. earnings 1,934,000 Total assets \$4,176,000 Total liab. & owners’ equity \$4,176,000 Total liabilities and owners’ equity is: TL & OE = CL + LTD + Common stock + Retained earnings Solving for this equation for equity gives us: Common stock = \$4,176,000 – 1,934,000 – 1,760,300 = \$481,700 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 \$8,400, equity is equal to \$1,100, and if TA is \$6,700, equity is equal to \$0. We should note here that the book value of shareholders’ equity can be negative.

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B-10 SOLUTIONS 18. a. Taxes Growth = 0.15(\$50,000) + 0.25(\$25,000) + 0.34(\$13,000) = \$18,170 Taxes Income = 0.15(\$50,000) + 0.25(\$25,000) + 0.34(\$25,000) + 0.39(\$235,000) + 0.34(\$8,465,000)
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