Ch 2 Financial Statemetns and Cash Flow_1

12 with the information provided the cash flows from

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12. With the information provided, the cash flows from the firm are the capital spending and the change in net working capital, so: Cash flows from the firm Capital spending \$(3,000) Additions to NWC (1,000) Cash flows from the firm \$(4,000) And the cash flows to the investors of the firm are: Cash flows to investors of the firm Sale of short-term debt \$(7,000) Sale of long-term debt (18,000) Sale of common stock (2,000) Dividends paid 23,000 Cash flows to investors of the firm \$(4,000) 2-6

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13. a. The interest expense for the company is the amount of debt times the interest rate on the debt. So, the income statement for the company is: Income Statement Sales \$1,000,000 Cost of goods sold 300,000 Selling costs 200,000 Depreciation 100,000 EBIT \$400,000 Interest 100,000 Taxable income \$300,000 Taxes (35%) 105,000 Net income \$195,000 b. And the operating cash flow is: OCF = EBIT + Depreciation – Taxes OCF = \$400,000 + 100,000 – 105,000 OCF = \$395,000 14. To find the OCF, we first calculate net income. Income Statement Sales \$145,000 Costs 86,000 Depreciation 7,000 Other expenses 4,900 EBIT \$47,100 Interest 15,000 Taxable income \$32,100 Taxes 12,840 Net income \$19,260 Dividends \$8,700 Additions to RE \$10,560 a. OCF = EBIT + Depreciation – Taxes OCF = \$47,100 + 7,000 – 12,840 OCF = \$41,260 b. CFC = Interest – Net new LTD CFC = \$15,000 – (–\$6,500) CFC = \$21,500 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 CFS = \$8,700 – 6,450 CFS = \$2,250 2-7
d. We know that CFA = CFC + CFS, so: CFA = \$21,500 + 2,250 = \$23,750 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 Net capital spending = \$5,000 + 7,000 Net capital spending = \$12,000 Now we can use: CFA = OCF – Net capital spending – Change in NWC \$23,750 = \$41,260 – 12,000 – Change in NWC. Solving for the change in NWC gives \$5,510, meaning the company increased its NWC by \$5,510. 15. The solution to this question works the income statement backwards. Starting at the bottom: Net income = Dividends + Addition to ret. earnings Net income = \$900 + 4,500 Net income = \$5,400 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) EBT = \$5,400 / 0.65 EBT = \$8,308 Now we can calculate: EBIT = EBT + interest EBIT = \$8,308 + 1,600 EBIT = \$9,908 The last step is to use: EBIT = Sales – Costs – Depreciation EBIT = \$29,000 – 13,000 – Depreciation EBIT = \$9,908 Solving for depreciation, we find that depreciation = \$6,092. 2-8

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16. The balance sheet for the company looks like this: Balance Sheet Cash \$175,000 Accounts payable \$430,000 Accounts receivable 140,000 Notes payable 180,000 Inventory 265,000 Current liabilities \$610,000 Current assets \$580,000 Long-term debt 1,430,000 Total liabilities \$2,040,000 Tangible net fixed assets 2,900,000 Intangible net fixed assets 720,000 Common stock ?? Accumulated ret. earnings 1,240,000 Total assets \$4,200,000 Total liab. & owners’ equity \$4,200,000 Total liabilities and owners’ equity is: TL & OE = CL + LTD + Common stock Solving for this equation for equity gives us: Common stock = \$4,200,000 – 1,240,000 – 2,040,000 Common stock = \$920,000 17. The market value of shareholders’ equity cannot be zero. 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 \$4,300, equity is equal to
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