InteractionBalIncStud

# InteractionBalIncStud - Balance SheetIncome Statement...

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1 Balance Sheet- Income Statement Interaction The Basic Idea • Debt determines interest • Interest affects net income • Net income restricts retained earnings • Retained earnings affect debt

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2 The Balance Sheet - Income Statement Interaction In Determining Debt Balance (t=1) Income Statement (t=0 to1) Assets Liabilities EBIT A1 L1, L2 - Interest = r D A2 D (Plug) EBT A3 E + RE - Taxes = Τ (EBT) TA TL NI = (EBIT - r D) (1- Τ ) RE = NI - Div From the balance sheet identity, TA = TL, we have: TA = L1 + L2 + D + E + (NI – Div) D = TA – L1 – L2 – E – NI + Div Using the expression for NI in the Income Statement: D = TA-L1-L2-E-(EBIT - r D)(1- Τ ) + Div ) 1 ( 1 ) 1 ( 2 1 T r Div T EBIT E L L TA D + = Balance Sheet- Income Statement Interaction (Algebraic Solution )
3 Balance’&’Income’Statement’Interaction Plug:’Long-Term’Debt Debtrate = 10% Tax rate = 40% Calculated’D/A’=’ Balance Inc ome’S tatement Assets t’=’1 t’=’0’to’1 C urrent Assets 200.0 Sales 340.0 Fixed Assets 50.0 COGS 238.0 TOTAL’ASSETS 250.0

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InteractionBalIncStud - Balance SheetIncome Statement...

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