Problem solving
Financial statements
and cash flow
Problem 1:
ABC: INCOME STATEMENTS FOR YEAR ENDING DECEMBER 31
(MILLIONS OF DOLLARS)
Sales
Operating costs excluding depreciation
Depreciation
Earnings before interest and taxes
Less interest
Earnings before taxes
Taxes (40%)
Net income available to common stockholders
Common dividends
WACC
2000
$3,600.0
3,060.0
90.0
$ 450.0
65.0
$ 385.0
154.0
$ 231.0
181.5
14%
1999
$3,000.0
2,550.0
75.0
$ 375.0
60.0
$315.0
126.0
$ 189.0
13.2
14%
ABC BALANCE SHEETS FOR YEAR ENDING
DECEMBER 31 (MILLIONS OF DOLLARS)
2000
Assets:
Cash and marketable securities $ 36.0
Accounts receivable
540.0
Inventories
540.0
Total current assets
$1,116.0
Net plant and equipment
900.0
Total assets
$2,016.0
1999
$
30.0
450.0
600.0
$1,080.0
750.0
$1,830.0
ABC BALANCE SHEETS FOR YEAR ENDING
DECEMBER 31 (MILLIONS OF DOLLARS)
2000
Liabilities and equity:
Accounts payable
Notes payable
Accruals
Total current liabilities
Long-term bonds
Total debt
Common stock (50 million shares)
Retained earnings
Common equity
Total liabilities and equity
$ 324.0
201.0
216.0
$ 741.0
450.0
$1,191.0
150.0
675.0
$ 825.0
$2,016.0
1999
$ 270.0
154.5
180.0
$ 604.0
450.0
$1,054.5
150.0
625.0
$ 775.0
$1,830.0
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What is the net operating profit after taxes
(NOPAT) after 2000?
What is the net operating working capital for
2000?
What is the amount of total operating capital
for 2000?
What is the free cash flow for 2000?
What is the 2000 Economic Value Added (EVA)
Problem 2:

ABC company has $20 million in total operating
capital. The company’s WACC is 10 percent. The
company has the following income statement:
Sales
$10.0 million
Operating costs
$6.0 million
Operating income (EBIT)
$4.0 million
Interest expense
2.0 million
Earnings before taxes (EBT)$ 2.0 million
Taxes (40%)
0.8 million
Net income
$ 1.2 million
What is ABC’s EVA?
Problem 3:
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ABC has 2 million shares of stock
outstanding and its stock price is $15 a
share.
On the balance sheet the company has
$40 million worth of common equity.
What is the company’s Market Value
Added (MVA)?
Problem 4:
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ABC has notes payable of $1,546,000,
long-term debt of $13,000,000, and total
interest expense of $1,300,000.
If the firm pays 8 percent interest on its
long-term debt, what rate of interest
does it pay on its notes payable?
Problem 5:
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ABC is expanding its operations throughout the
South Croatia.
ABC anticipates that the expansion will increase
sales by $1,000,000 and increase the costs of
goods sold by $700,000.
Depreciation expenses will rise by $50,000,
interest expense will increase by $150,000,
and the company’s tax rate will remain at 40
percent.

If the company’s forecast is correct, how
much will net income increase or
decrease, as a result of the expansion?
Problem 6:

ABC recently reported the following
information:
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Net income = $600,000.
Tax rate = 40%.
Interest expense = $200,000.
Total capital employed = $9 million.
After-tax cost of capital = 10%.
What is the company’s EVA?