FI 335
Summer II, 2008
Chapter 2 Homework
1.
The balance sheet for the company will look like this:
Current assets
Net fixed assets
Total assets
Balance sheet
$1,850
Current liabilities
8,600
Long-term debt
Owner's equity
$10,450
Total liabilities & Equity
$1,600
6,100
2,750
$10,450
The owner’s equity is a plug variable. We know that total assets must equal total liabilities &
owner’s equity. Total liabilities and equity is the sum of all debt and equity, so if we subtract debt
from total liabilities and owner’s equity, the remainder must be the equity balance, so:
Owner’s equity = Total liabilities & equity – Current liabilities – Long-term debt
Owner’s equity = $10,450 – 1,600 – 6,100
Owner’s equity = $2,750
Net working capital is current assets minus current liabilities, so:
NWC = Current assets – Current liabilities
NWC = $1,850 – 1,600
NWC = $250
2.
The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract
out interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get:
Income Statement
Sales
Costs
Depreciation
EBIT
Interest
Taxable income
Taxes
Net income
5.
$625,000
260,000
79,000
$286,000
43,000
$243,000
85,050
$157,950
To find the book value of assets, we first need to find the book value of current assets. We are given
the NWC. NWC is the difference between current assets and current liabilities, so we can use this
relationship to find the book value of current assets. Doing so, we find:
NWC = Current assets – Current liabilities
Current assets = $100,000 + 780,000 = $880,000
Now we can construct the book value of assets. Doing so, we get:
Book value of assets
Current assets
$ 880,000
Fixed assets
4,800,000
Total assets
$5,680,000
All of the information necessary to calculate the market value of assets is given, so:
Market value of assets
Current assets
$ 805,000
Fixed assets
5,600,000
Total assets
$6,405,000
11. The cash flow to creditors is the interest paid, minus any new borrowing, so:
Cash flow to creditors = Interest paid – Net new borrowing
Cash flow to creditors = Interest paid – (LTDend – LTDbeg)
Cash flow to creditors = $49,000 – ($1,800,000 – 1,650,000)
Cash flow to creditors = –$101,000
14. a. To calculate the OCF, we first need to construct an income statement. The income statement
starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get
taxable income, and then subtract taxes to arrive at net income. Doing so, we get:
Income Statement
Sales
$138,000
Costs
71,500
Other Expenses
4,100
Depreciation
10,100
EBIT
$52,300
Interest
7,900
Taxable income
$44,400
Taxes
17,760
Net income
$26,640
Dividends
Addition to retained earnings
$5,400
21,240
Dividends paid plus addition to retained earnings must equal net income, so:
Net income = Dividends + Addition to retained earnings
Addition to retained earnings = $26,640 – 5,400
Addition to retained earnings = $21,240
So, the operating cash flow is:
OCF = EBIT + Depreciation – Taxes
OCF = $52,300 + 10,100 – 17,760
OCF = $44,640
b. The cash flow to creditors is the interest paid, minus any new borrowing. Since the company
redeemed long-term debt, the new borrowing is negative. So, the cash flow to creditors is:
Cash flow to creditors = Interest paid – Net new borrowing
Cash flow to creditors = $7,900 – (–$3,800)
Cash flow to creditors = $11,700