{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

InteractionBalIncStud

InteractionBalIncStud - Balance SheetIncome Statement...

This preview shows pages 1–4. Sign up to view the full content.

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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
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 S tatement Interaction P lug : L ong -­‐T erm Debt Debt rate = 10% Tax rate = 40% C alc ulated D/A = 40% B alanc e Inc ome S tatement As s ets t = 1 t = 0 to 1 C urrent Assets 200.0 S ales 340.0 F ixed Assets 50.0 C OG S 238.0 T OT AL AS S E T S 250.0 G ros s P rofit 102.0

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 6

InteractionBalIncStud - Balance SheetIncome Statement...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online