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Assignment_SolutionsPart1

# Assignment_SolutionsPart1 - BUSI408 CORPORATE FINANCE...

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BUSI408: CORPORATE FINANCE Assignment 1 - Solutions for PART 1 Instructor: Serdar Aldatmaz ____________________________________________________________________________________ _ Chapter 2 1. To find owner’s equity, we must construct a balance sheet as follows: Balance Sheet CA \$5,100 CL \$4,300 NFA 23,800 LTD 7,400 OE ?? TA \$28,900 TL & OE \$28,900 We know that total liabilities and owner’s equity (TL & OE) must equal total assets of \$28,900. We also know that TL & OE is equal to current liabilities plus long-term debt plus owner’s equity, so owner’s equity is: OE = \$28,900 – 7,400 – 4,300 = \$17,200 NWC = CA – CL = \$5,100 – 4,300 = \$800 1

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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 14. To find the OCF, we first calculate net income. Income Statement Sales \$196,000 Costs 104,000 Other expenses 6,800 Depreciation 9,100 EBIT \$76,100 Interest 14,800 Taxable income \$61,300 Taxes 21,455 Net income \$39,845 Dividends \$10,400 Additions to RE \$29,445 a. OCF = EBIT + Depreciation – Taxes = \$76,100 + 9,100 – 21,455 = \$63,745 b. CFC = Interest – Net new LTD = \$14,800 – (–7,300) = \$22,100 Note that the net new long-term debt is negative because the company repaid part of its long- term debt. c. CFS = Dividends – Net new equity = \$10,400 – 5,700 = \$4,700 d. We know that CFA = CFC + CFS, so: CFA = \$22,100 + 4,700 = \$26,800 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 = \$27,000 + 9,100 = \$36,100 Now we can use: CFA = OCF – Net capital spending – Change in NWC \$26,800 = \$63,745 – 36,100 – Change in NWC 2
Solving for the change in NWC gives \$845, meaning the company increased its NWC by \$845. 22. a. Total assets 2008 = \$653 + 2,691 = \$3,344 Total liabilities 2008 = \$261 + 1,422 = \$1,683 Owners’ equity 2008 = \$3,344 – 1,683 = \$1,661 Total assets 2009 = \$707 + 3,240 = \$3,947 Total liabilities 2009 = \$293 + 1,512 = \$1,805 Owners’ equity 2009 = \$3,947 – 1,805 = \$2,142 b. NWC 2008 = CA08 – CL08 = \$653 – 261 = \$392 NWC 2009 = CA09 – CL09 = \$707 – 293 = \$414 Change in NWC = NWC09 – NWC08 = \$414 – 392 = \$22 3

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c. We can calculate net capital spending as: Net capital spending = Net fixed assets 2009 – Net fixed assets 2008 + Depreciation Net capital spending = \$3,240 – 2,691 + 738 = \$1,287 So, the company had a net capital spending cash flow of \$1,287. We also know that net capital spending is: Net capital spending = Fixed assets bought – Fixed assets sold \$1,287 = \$1,350 – Fixed assets sold Fixed assets sold = \$1,350 – 1,287 = \$63 To calculate the cash flow from assets, we must first calculate the operating cash flow. The income statement is: Income Statement Sales \$ 8,280.00 Costs 3,861.00 Depreciation expense 738 .00 EBIT \$3,681.00 Interest expense 211 .00 EBT \$3,470.00 Taxes (35%) 1,215.50 Net income \$2,256.50 So, the operating cash flow is: OCF = EBIT + Depreciation – Taxes = \$3,681 + 738 – 1,214.50 = \$3,204.50 And the cash flow from assets is: Cash flow from assets = OCF – Change in NWC – Net capital spending. = \$3,204.50 – 22 – 1,287 = \$1,895.50 d. Net new borrowing = LTD09 – LTD08 = \$1,512 – 1,422 = \$90 Cash flow to creditors = Interest – Net new LTD = \$211 – 90 = \$121 Net new borrowing = \$90 = Debt issued – Debt retired Debt retired = \$270 – 90 = \$180 26. OCF = EBIT + Depreciation – Taxes = \$3,543 + 1,085 – 1,007.76 = \$3,620.24 Change in NWC = NWC end – NWC beg = (CA – CL) end – (CA – CL) beg = (\$19,488 – 4,742) – (\$17,740 – 4,716) = \$1,722 Net capital spending = NFA end – NFA beg + Depreciation = \$33,921 – 31,805 + 1,085 = \$3,201 Cash flow from assets = OCF – Change in NWC – Net capital spending 4
= \$3,620.24 – 1,722 – 3,201 = –\$1,302.76 Cash flow to creditors = Interest – Net new LTD

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