Ch 2 Financial Statemetns and Cash Flow_1

2 1 8 for example if a company were to become more

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8. For example, if a company were to become more efficient in inventory management, the amount of inventory needed would decline. The same might be true if it becomes better at collecting its receivables. In general, anything that leads to a decline in ending NWC relative to beginning would have this effect. Negative net capital spending would mean more long-lived assets were liquidated than purchased. 9. If a company raises more money from selling stock than it pays in dividends in a particular period, its cash flow to stockholders will be negative. If a company borrows more than it pays in interest and principal, its cash flow to creditors will be negative. 10. The adjustments discussed were purely accounting changes; they had no cash flow or market value consequences unless the new accounting information caused stockholders to revalue the derivatives. Solutions to Questions and Problems NOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. To find owner’s equity, we must construct a balance sheet as follows: Balance Sheet CA $5,000 CL $4,300 NFA 23,000 LTD 13,000 OE ?? TA $28,000 TL & OE $28,000 We know that total liabilities and owner’s equity (TL & OE) must equal total assets of $28,000. 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 = $28,000 – 13,000 – 4,300 = $10,700 NWC = CA – CL = $5,000 – 4,300 = $700 2. The income statement for the company is: Income Statement Sales $527,000 Costs 280,000 Depreciation 38,000 EBIT $209,000 Interest 15,000 EBT $194,000 Taxes (35%) 67,900 Net income $126,100 2-2
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One equation for net income is: Net income = Dividends + Addition to retained earnings Rearranging, we get: Addition to retained earnings = Net income – Dividends Addition to retained earnings = $126,100 – 48,000 Addition to retained earnings = $78,100 3. To find the book value of current assets, we use: NWC = CA – CL. Rearranging to solve for current assets, we get: CA = NWC + CL = $900K + 2.2M = $3.1M The market value of current assets and fixed assets is given, so: Book value CA = $3.1M Market value CA = $2.8M Book value NFA = $4.0M Market value NFA = $3.2M Book value assets = $3.1M + 4.0M = $7.1M Market value assets = $2.8M + 3.2M = $6.0M 4. Taxes = 0.15($50K) + 0.25($25K) + 0.34($25K) + 0.39($273K – 100K) Taxes = $89,720 The average tax rate is the total tax paid divided by net income, so: Average tax rate = $89,720 / $273,000 Average tax rate = 32.86%. The marginal tax rate is the tax rate on the next $1 of earnings, so the marginal tax rate = 39%. 5. To calculate OCF, we first need the income statement: Income Statement Sales $13,500 Costs 5,400 Depreciation 1,200 EBIT $6,900 Interest 680 Taxable income $6,220 Taxes (35%) 2,177 Net income $4,043 OCF = EBIT + Depreciation – Taxes OCF = $6,900 + 1,200 – 2,177 OCF = $5,923 6. Net capital spending = NFA end – NFA beg + Depreciation Net capital spending = $4,700,000 – 4,200,000 + 925,000 Net capital spending = $1,425,000 2-3
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7. The long-term debt account will increase by $8 million, the amount of the new long-term debt issue.
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