Chapter 2
Problems
1- McGwire Factory Inc. has current assets of $3,000, net fixed assets of $8,000,
current liabilities of $1,300, and long-term debt of $5,000. What is the value of
the shareholders’ equity account for this firm? How much is net working capital?
($4,700, $1,700)
2- Klingon Widgets Inc. purchased new machinery three years ago for $4 million.
The machinery can be sold to Romulans today for $3 million. Klingon’s current
balance sheet shows net fixed assets of $850,000, current liabilities of $750,000,
and net working capital of $600,000. If all the current accounts are liquidated
today, the company would receive $1.25 million cash. What is the book value of
Klingon’s assets today? What is the market value? ($2,200,000, $4,250,000)
3- Given the following information for Pitino Pizza Co., calculate the depreciation
expense: sales = $25,000; costs = $18,000; addition to retained earnings = $2,000;
dividends paid = $800; interest expense = $1,050; tax rate = 35%. ($1,642.31)
Use the following information to answer questions 4-10
During year 2004, the Yung.com had sales of $1,000, costs of goods sold = $400,
depreciation = $100, and interest paid = $150. The tax rate is 34% and all taxes are paid
currently.
Assume Yung.com has 100 shares of common stock outstanding at the end of 2004. Total
dividends paid were $120.
At year-end 2003, Yung.com had notes payable of $1,200, accounts payable of $2,400,
long-term debt of $3,000, and equity of $3,300. Corresponding entries for 2004 are
$1,600, $2,000, $2,800, and $5,200. Asset values are below.
Current Assets
Cash
Marketable securities
Accounts receivable
Inventory
Fixed Assets
Net plant & equipment
2003
$ 800
400
900
1800
2004
$ 500
300
800
2000
6000
8000
During the year 2004 Yung.com sold $1789 worth of stock.
4- What is Yung.com’s net income, EPS, and dividends per share for 2004? ($231,
$2.31, $1.2)
5- What is Yung.com’s operating cash flow for 2004? ($481)
6- Compute Yung.com’s net capital spending for 2004. ($2,100)
7- Compute Yung.com’s change in net working capital during 2004. (-$300)
8- What was Yung.com’s cash flow from assets in 2004? (-$1,319)
9- What was Yung.com’s cash flow to long-term creditors in 2004? ($350)
10- What was Yung.com’s cash flow to shareholders in 2004? (-$1,669)
11- Ice Corporation has purchased a Class 10 piece of equipment for a cost of $50,000
with a CCA rate of 30%. Under the half year rule, what is the UCC amount used
to calculate the first year CCA? ($25,000)
12- A firm has recently purchased Class 10 equipment for $100,000 with a CCA rate
of 30%. Under the half-year rule, what is the amount of depreciation that the
firm can claim as a tax-deductible expense in the second year? ($25,500)
Use the following information to answer questions 13-16
Taxable income
$0 –$ 50,000
$50,001 – $ 75,000
$75,001 – $100,000
$100,001 – $335,000
$335,001 – $10,000,000
$10,000,001 – $15,000,000
$15,000,001 – $18,333,333
Tax rate
15%
25%
34%
39%
34%
35%
38%
13- If a company has taxable income = $250,000, what is the average tax rate?
(32.3%)
14- If a firm has taxable income = $74,000, how much will it pay in taxes? ($13,500)
15- If a firm has taxable income of $17.5 million and a total tax bill of $6.1 million.
What is its marginal tax rate? (38%)
16- If a firm has taxable income of $17.5 million and a total tax bill of $6.1 million.
Compute its average tax rate. (34.9%)