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
?
$10,450
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.
Income Statement
Sales
Costs
Depreciation
79,000
EBIT
Interest
Taxable income
$243,000
Taxes
Net income
$157,950
$625,000
260,000
$286,000
43,000
85,050
3.
Net income = Dividends + Addition to retained earnings
Addition to retained earnings = $157,950 – 60,000
Addition to retained earnings = $97,950
4.
EPS = Net income / Shares outstanding
EPS = $157,950 / 40,000
EPS = $3.95 per share
DPS = Dividends / Shares outstanding
DPS = $60,000 / 40,000
DPS = $1.50 per share
6.
Taxes = 0.15($50,000) + 0.25($25,000) + 0.34($25,000) + 0.39($315,000 – 100,000)
Taxes = $106,100
7.
Average tax rate = Total tax / Net income
Average tax rate = $106,100 / $315,000
Average tax rate = .3368 or 33.68%
The marginal tax rate is 39 percent.
9.
Net capital spending = NFAend – NFAbeg + Depreciation
Net capital spending = $2,120,000 – 1,875,000 + 220,000
Net capital spending = $465,000
10.
Change in NWC = NWCend – NWCbeg
Change in NWC = (CAend – CLend) – (CAbeg – CLbeg)
Change in NWC = ($910 – 335) – (840 – 320)
Change in NWC = $55
11.
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
12.
Cash flow to stockholders = Dividends paid – Net new equity
Cash flow to stockholders = Dividends paid – (Commonend + APISend) – (Commonbeg + APISbeg)
Cash flow to stockholders = $70,000 – [($160,000 + 3,200,000) – ($150,000 + 2,900,000)]
Cash flow to stockholders = –$240,000
13.
Cash flow from assets = Cash flow to creditors + Cash flow to stockholders
Cash flow from assets = –$101,000 – 240,000
Cash flow from assets = –$341,000
Cash flow from assets = OCF – Change in NWC – Net capital spending
–$341,000 = OCF – (–$135,000) – (760,000)
OCF = –$341,000 – 135,000 + 760,000
OCF = $284,000
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
?
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
c. The cash flow to stockholders is the dividends paid minus any new equity. So, the cash
flow to stockholders is:
Cash flow to stockholders = Dividends paid – Net new equity
Cash flow to stockholders = $5,400 – 2,500
Cash flow to stockholders = $2,900
d. In this case, to find the addition to NWC, we need to find the cash flow from assets. We
can then use the cash flow from assets equation to find the change in NWC. We know
that cash flow from assets is equal to cash flow to creditors plus cash flow to
stockholders. So, cash flow from assets is:
Cash flow from assets = Cash flow to creditors + Cash flow to stockholders
Cash flow from assets = $11,700 + 2,900
Cash flow from assets = $14,600
Net capital spending is equal to depreciation plus the increase in fixed assets, so:
Net capital spending = Depreciation + Increase in fixed assets
Net capital spending = $10,100 + 17,400
Net capital spending = $27,500
Now we can use the cash flow from assets equation to find the change in NWC. Doing
so, we find:
Cash flow from assets = OCF – Change in NWC – Net capital spending
$14,600 = $44,640 – Change in NWC – $27,500
Change in NWC = $2,540