Ch2Problems

# Ch2Problems - Before After law changes Revenues \$100 \$100...

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Questions A company depreciates its fixed assets over 5 years. A new tax law requires depreciation over 10 years instead. What happens to the company's financial statements? 1) Taxes increase 2) Cash flow increases 3) EBIT decreases 20 This kind of problem is sometimes easier to solve by making up numbers and seeing what the relationships are. Assume the firm has \$50 in fixed assets, and assume the following simplified income statement: Before After law changes Revenues \$100 \$100 Costs 70 70 Depreciation -.lQ ~ EBIT 20 25 Taxes (50%) -.lQ 12.5 Net Income 10 12.5 CF = NI + Depreciation 10+10 = 20 12.5+5 = 17.5 Choice 1 is correct. 2.20

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Questions ABC Co. has issued \$300 million of common stock and used this money to reduce debt. Total assets and operating income stay the same. What will occur? 1) Net income will increase 2) Taxable income will decrease 3) The company will pay less in taxes. 21 Make up numbers
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Unformatted text preview: Before After law changes Revenues \$100 \$100 Costs 70 70 Interest 20 10 EBT 10 20 Taxes ~ 10 Net Income 5 10 Choice 1 is correct 2.21 Comprehensive Problem • Current Accounts -2009: CA = 4,400; CL = 1,500 -2008: CA = 3,500; CL = 1,200 • Fixed Assets and Depreciation -2009: NFA = 3,400; 2008: NFA = 3,100 -Depreciation Expense = 400 • Long-term Debt and Equity (R.E. not given) -2009: LTO = 4,000; Common stock & APIC = 400 -2008: LTO = 3,950; Common stock & APIC = 400 • Income Statement -EBIT = 2,000; Taxes = 300 -Interest Expense = 350; Dividends = 500 • Compute the CFFA 24 2-24 OCF = \$2,000 + \$400 - \$300 = \$2,I00 . NCS = \$ 3,400 - \$3,100 + \$400 = \$700 Changes in NWC = (\$4,400 - \$1,500) - (\$3,500 - \$1,200) = \$600 CFFA = \$2,I00 - \$700 - \$600 = \$800 CF to Creditors = \$350 - (\$4,000 - \$3,950) = \$300 CF to Stockholders = \$500 CFFA = \$300 + \$500 = \$800 2.24...
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