Tutorial One/Two
1.
From the following balance sheet accounts: a. construct a balance sheet for 2010 and 2011 b. list all the working capital accounts c. find the net working capital for the years ending 2010 and 2011 d. calculate the change in net working capital for the year 2011
Balance Sheet Accounts of Athens Corporation
Account
Accumulated Depreciation
Accounts Payable
Accounts Receivable
Balance 12/31/2010
$4,234
$2,900
$3,160
Balance 12/31/2011
$4,866
$3,210
$3,644
Cash
Common Stock
Inventory
$1,210
$4,347
$1,490
$4,778
$5,166
$7,278
Long-Term Debt
Plant, Property & Equipment
Retained Earnings
$3,600
$8,675
$1,880
$2,430
$9,840
$2,356
ANSWER a. The Balance Sheets for the two years are:
Assets:
Current Assets
Cash
Accounts Receivable
Inventory
Total Current Assets
Long-Term Assets
Plant, Prop. & Equip
Minus Acc. Depreciation
Net P P & E
TOTAL Assets
Liabilities
Current Liabilities
Accounts Payable
Long-Term Liabilities
Long-term Debt
Total Liabilities
Owner’s Equity
Common Stock
Retained Earnings
Total Owner’s Equity
TOTAL Liab. & O.E.
2010
$1,210
$3,160
$4,347
$8,717
$8,675
($4,234)
$4,441
$13,158
$2,900
$3,600
$6,500
$4,778
$1,880
$6,658
$13,158 b. The Working Capital Accounts are:
2011
$1,490
$3,644
$5,166
$10,300
$9,840
($4,866)
$4,974
$15,274
$3,210
$2,430
$5,640
$7,278
$2,356
$9,634
$15,274
Cash, Accounts Receivable, Inventory, and Accounts Payable

c. The Net Working Capital for 2010 and 2011:
Net Working Capital = Cash + Accounts Rec. + Inventory – Accounts Pay.
2010 Net Working Capital = $1,210 + $3,160 + $4,347 - $2,900 = $5,817
2011 Net Working Capital = $ $1,490+ $3,644 + $5,166 - $3,210 = $7,090 d. The Change in Net Working Capital for 2011 is, $7,090 - $5,817 = $1,273 or an increase in Net Working Capital of $1,273.
2.
From the following income statement accounts a. produce the income statement for the year b. produce the operating cash flow for the year
Income Statement Accounts for the Year Ending 2011
Cost of Goods Sold
Interest Expense
Taxes
$1,419,000
$ 288,000
$ 318,000
Revenue
SG&A Expenses
Depreciation
$2,984,000
$ 454,000
$ 258,000
ANSWER a. Income Statement
Revenue
Cost of Goods Sold
SG&A Expenses
Depreciation
EBIT
Interest Expense
Taxable Income
Taxes
Net Income
$2,984,000
$1,419,000
$ 454,000
$ 258,000
$ 853,000
$ 288,000
$ 565,000
$ 318,000
$ 247,000 b. Operating Cash Flow
OCF = EBIT – Taxes + Depreciation
OCF = $853,000 - $318,000 + $258,000 = $793,000
3.
Find the operating cash flow for the year for Shore Brothers Inc. if it had sales revenue of
$440,000,000, cost of goods sold of $215,000,000, sales and administrative costs of
$65,000,000, depreciation expense of $45,000,000, and a tax rate of 40%.
ANSWER
Using the income statement format, we have
Revenue $440,000,000

COGS
SG&A Expenses
Depreciation
EBIT
$215,000,000
$65,000,000
$45,000,000
$115,000,000
Taxes (@ 40%)
Net Income
$46,000,000
$69,000,000
Operating Cash Flow

EBIT

Depreciation

Taxes
Operating Cash Flow

$115,000,000

$45,000,000

$46,000,000

$114,000,000
4.
Find the operating cash flow for the year for Stewart and Sons if it had sales revenue of $100,000,000, cost of goods sold of $40,000,000, sales and administrative costs of
$7,200,000, depreciation expense of $8,300,000, and a tax rate of 30%.
ANSWER
Using the income statement format, we have
Revenue $100,000,000
COGS
S & A Costs
Depreciation
EBIT
$40,000,000
$7,200,000
$8,300,000
$44,500,000
Taxes (@ 30%) $13,350,000
Net Income $31,150,000
Operating Cash Flow

EBIT

Depreciation – Taxes
Operating Cash Flow = $44,500,000

$8,300,000

$13,350,000

$39,450,000
Tutorial Three/Four
ANSWER
Holding Property Four Years:
FV

$320,000 X

(1.05)
4 
$320,000 X

1.2155

$388,962
Holding Property Eight Years:
FV

$320,000 X

(1.05)
8 
$320,000 X

1.4775

$472,785.74

ANSWER
FV

$550 X

(1.045)
4 
$550 X

1.1925186

$655.89
ANSWER
FV

$22,500 X

(1.05)
5 
$22,500 X

1.27628

$28,716.34
ANSWER
Future Value
$900.00
Interest Rate
5.0%
Number of Periods Present Value
5 $705.17
$80,000.00
$350,000.00
$26,981.75
6.0%
10%
16%
30
20
15
$13,928.81
$52,025.27
$2,912.06
a. With TVM formula (rounding to second decimal only for final answer)
PV = $900.00 × 1/(1.05) 5 = $400.00 × 0.7835 = $705.17
PV = $80,000.00 × 1/(1.06)
30
= $80,000.00 × 0.1741 = $13,928.81
PV = $350,000.00 × 1/(1.10)
20
= $350,000.00 × 0.1486 = $52,025.27
PV = $26,981.75 × 1/(1.16) 15 = $26,981.75 × 0.1079 = $2,912.06 b. Time Value of Money Keys or Spreadsheet
Input 5 5.0 0
Variable
Compute
N I/Y PV
-900
PMT FV
705.17
Input
Variable
Compute
Input
Variable
Compute
Input
Variable
Compute
30
N
20
N
15
N
6.0
I/Y
10.0
I/Y
16.0
I/Y
0
PV
0
PV
-80,000
PMT FV
13,928.81
-350,000
PMT FV
52,025.27
0 -26,981.75
PV PMT FV
2,912.06
5.
Future value: You are a new employee with the Metropolis Daily Planet . The Planet offers three different retirement plans for you to choose from. Plan 1 starts the first day of work and puts $1,000 away in your retirement account at the end of every year for forty years. Plan 2 starts after ten years and puts away $2,000 every year for thirty years. Plan 3

starts after twenty years and puts away $4,000 every year for the last twenty years of employment. All three plans guarantee an annual growth rate of 8%. a. Which plan should you choose if you plan to work at the Planet for forty years? b. Which plan should you choose if you only plan to work at the Planet for the next thirty years? c. Which plan should you choose if you only plan to work at the Planet for the next twenty years? d. Which plan should you choose if you only plan to work at the Planet for the next ten years? e. What do the answers in parts (a) through (d) imply about savings?
ANSWER
Part a: Plan One FV = $1,000 × (1.08
40
-1)/0.08 = $1,000 × 259.0565 = $259,056.51
Part a: Plan Two FV = $2,000 × (1.08
30 -1)/0.08 = $2,000 × 113.2832 = $226,566.42
Part a: Plan Three FV = $4,000 × (1.08
20
-1)/0.08 = $4,000 × 45.7620 = $183,047.86
Chose Plan One
Part b: Plan One FV = $1,000 × (1.08
30 -1)/0.08 = $1,000 × 113.2832 = $113,283.21
Part b: Plan Two FV = $2,000 × (1.08
20
-1)/0.08 = $2,000 × 45.7620 = $91,523.93
Part b: Plan Three FV = $4,000 × (1.08
10
-1)/0.08 = $4,000 × 14.4866 = $57,946.25
Chose Plan One
Part c: Plan One FV = $1,000 × (1.08
20
-1)/0.08 = $1,000 × 45.7620 = $45,761.96
Part c: Plan Two FV = $2,000 × (1.08
10
-1)/0.08 = $2,000 × 14.4866 = $28,973.12
Part c: Plan Three FV = $4,000 × (1.08
0
-1)/0.08 = $4,000 × 0.0000 = $0.00
Chose Plan One
Part d: Plan One FV = $1,000 × (1.08
10
-1)/0.08 = $1,000 × 14.4866 = $14,486.56
Part d: Plan Two FV = $2,000 × (1.08
0
-1)/0.08 = $2,000 × 0.0000 = $0.00
Part d: Plan Three FV = $4,000 × (1.08
0
-1)/0.08 = $4,000 × 0.0000 = $0.00
Chose Plan One
Part e: The sooner you begin to save the better and that increasing the amount of savings in later years may not be sufficient to catch up to an early savings program.
1.
Challenge question II . Tyler wants to buy a beach house as part of his investment portfolio. After searching the coast for a nice home, he finds a house with a great view and a hefty price of $4,500,000. Tyler will need to borrow from the bank to pay for this house. Mortgage rates are based on the length of the loan, and a local bank is advertising fifteen-year loans with monthly payments at 7.125%, twenty-year loans with monthly payments at 7.25%, and thirty-year loans with monthly payments at 7.375%. What is the monthly payment of principal and interest for each loan? Tyler believes the property will be worth $5,500,000 in five years. Ignoring taxes and real estate commissions, if Tyler

sells the house after five years, what will be the difference in the selling price and the remaining principal on the loan for each of the three loans?
ANSWER
Monthly Payments for the 15 year loan:
Payment = PV / (1 – 1/(1+r) n
) / r
Payment = $4,500,000 / (1 – 1/(1+0.07125/12) 15 x 12 ) / (0.07125/12)
Payment = $4,500,000 / 110.3958 = $40,762.40
OR
TVM Keys: Mode P/Y = 12 and C/Y = 12
INPUT 180 7.125 -450,000
KEYS N
OUTPUT
I/Y PV
?
PMT
40,762.40
Amortization P1 = 60 and P2 = 60, Balance = $3,491,314.54
Monthly Payments for the 20 year loan:
Payment = PV / (1 – 1/(1+r) n
) / r
Payment = $4,500,000 / (1 – 1/(1+0.0725/12) 20 x 12 ) / (0.0725/12)
Payment = $4,500,000 / 126.5221 = $35,566.92
OR
0
FV
TVM Keys: Mode P/Y = 12 and C/Y = 12
INPUT 240 7.25 -450,000
KEYS N
OUTPUT
I/Y PV
?
PMT
35,566.92
Amortization P1 = 60 and P2 = 60, Balance = $3,896,195.15
0
FV
Monthly Payments for the 30 year loan:
Payment = PV / (1 – 1/(1+r) n
) / r
Payment = $4,500,000 / (1 – 1/(1+0.07375/12)
15 x 12
) / (0.07375/12)
Payment = $4,500,000 / 144.7859 = $31,080.38
OR
TVM Keys: Mode P/Y = 12 and C/Y = 12
INPUT 360 7.375 -450,000
KEYS N
OUTPUT
I/Y PV
?
PMT
31,080.38
Amortization P1 = 60 and P2 = 60, Balance = $4,252,462.31
0
FV
Difference between selling price and principal remaining on the loan is:
15 Year Loan: $5,500,000 – $3,491,314.54 = $2,008.685.46
20 Year Loan: $5,500,000 – $3,896,195.15 = $1,603,804.85
30 Year Loan: $5,500,000 – $4,252,462.31 = $1,247,537.69