Questions and Problems Chapters 2,3 pp45-47
1. Building a balance sheet. Penguin Pucks, Inc., has current assets of $3,000, net fixed assets $6,000, current liabilities of $900, 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?
Financial statement
current assets: $3,000 current liabilities: $900 fixed assets: $6,000 long-term debt: $5,000
equity: 9,000 - 5,000 - 900 = 3,100
Total: 3,000+6,000 = 9,000 Total: 9,000
NWC = current assets - current liabilities = 2,100
2. Building income statements: Papa Roach Exterminators, Inc., has sales of $432,000, costs of $210,000, depreciation expense of $25,000, interest expense of $8,000, and tax rate of 35%. What is the net income for this firm? Income statement sales 432,000 costs 210,000 depreciation 25,000 EBIT 197, 000 tax 197, 000 × 0.35 = 68, 950 net income 128,050
3. Dividends and retained earnings. Suppose that the firm in the previ-ous problem paid out $65,000 in cash dividends. What is the addition to retained earnings?
4. Suppose that the firm in the previous problem has 30,000 shares of com-mon stock outstanding. Find earnings per share (EPS) and dividends per share.
EP S = #of sharesnetincome = 128,05030,000 = $4.27; #of sharesdividends = 65,00030,000 = $2.16
5. Market vs. book values. Klingon widgets, Inc., purchased new cloak-ing machinery three years ago for $5mln. Klcloak-ington current balance sheet shows net fixed asset of 1,600,000, current liabilities of 1,800,000, and NWC of 900,000. If all the current assets were liquidated today the company would receive 2,9mln cash. What is the book value of Klington today? What is the market value?
Financial statement
current assets: $1.8 +0.9 = 2.7mln (2.9mln) current liabilities: $1.8mln
fixed assets: $1.6mln (1.5mln) long-term debt: ?
equity: ?
Total: $2.7 + 1.6 = 3.3mln (2.9+1.5 = 3.4mln) Total: $3.3mln (3.4mln)
market values are in the brackets.
6. Net Capital spending Andretti Driving school Dec 31, 2002 balance sheet showed net fixed asset 3.1mln and the Dec 31, 2003 balance sheet showed 3.5mln. The company’s 2003 income statement showed a de-preciation expense of 850,000. What is Andretti’s net capital spending in 2003?
Net Capital spending = fixed assets (2003) - fixed assets (2002) + depreciation = 3.5 - 3.1 + 0.85 = 1.25
7. Residual claims Clapper’s Clippers, Inc., is obligated to pay its cred-itors $2,900.
a. What is the market value of the shareholders equity if assets have a market value of $3,600?
The equity value is equal to total assets minus total obligations or zero if the value is smaller then zero. In case a. the difference is 3,600 - 2,900 = 700 and in case b. the difference 2,300 - 2,900 = -600 is negative and therefore the equity is zero
The following problems uses the financial data below
PHILIPPE CORPORATION Balance Sheet 2002 2003 Assets Current Assets Cash $ 210 $ 215 Accounts receivable 355 310 Inventory 507 328 Total $1, 072 $853 Fixed Assets
Net plant and equipment $6,085 $6,527
Total Assets $7, 157 $7, 380
Liabilities and owners’ equity Current Liabilities Accounts payable $ 207 $ 298 Notes payable 1,715 1,427 Total $1, 922 $1, 725 Long-term Debt $1,987 $2,308 Owner’s Equity Common stock $1,000 $1,000 Retained earnings 2,248 2,347 Total $3, 248 $3, 347
Total liabilities and owners’
equity $7, 157 $7, 380
PHILIPPE CORPORATION 2003 Income Statement
Sales $4,053
Cost of goods sold 2,780
Depreciation 550 EBIT $723 Interest paid 502 Taxable income $221 Taxes (34%) 75 Net income $146 Dividends $47
8. Construct the statement of cash flows.
PHILIPPE CORPORATION Statement of cash Flows Operating activities
Net income $
Plus:
depreciation
increase in accounts payable Less:
increase in accounts receivable increase in inventory
net cash from operating activity Investment activities
fixed assets acquisition $ net cash from investment activity Financing activities
decrease in uses payable $ decrease in long-term debt
dividends paid
increase in common stocks Net cash from financing activities
Net increase in cash $
9. Using the tables, find the operating cash flow, cash flow to creditors and shareholders.
Operating cash flow = EBIT + depreciation - tax = 723 + 550 - 75 = 1,198. Net capital spending = fixed assets (2003) - fixed assets (2002) + depreciation = 6,527 - 6,085 + 550 = 992. Addition to NWC = NWC (2003) NWC (2002) = (1,072 1,922) (853 1,725) = 850 (872) = 22. Cash flow = Operating cash flow Net capital spending -Addition to NWC = 1,198 - 992 - 22 = 184.
Cash flow to creditors = interest new borrowing = 502 (2,308 -1,987) = 502 - 321 = 181. Cash flow to shareholders = dividends - new common stocks = 47 - (1,000 - 1,000) = 47
Chapter 4 pp103-105
1. Pro forma statements. Consider the following simplified financial state-ments for the Lafferty Ranch Corporation
Income Statement Balance Sheet
Sales $15,000 Assets 4,300 Debt $2,800
Costs 11,000 Equity 1,500
Net income $ 4,000 Total 4,300 Total $ 4,300
Lafferty Ranch has predicted increase in sales by 10%. Costs and sales vary proportionally with sales, debt and equity don’t. Half of the in-come is paid out as dividends. Prepare the proforma statement and determine the external financing needed.
2. Calculate internal and sustainable growth rate in the previous problem.
3. Assuming the following ratios are constant, what is the sustainable growth rate?
profit margin = 9.2%
capital intensity ratio (= total assets over sales) = 0.60
debt-equity ratio = 0.50
net income = $23,000
dividends = $14,000
4. A firm wishes to maintain 1 growth rate of 11.5% and a dividend payout ratio of 50%. The ratio of total assets to sales is constant at 0.8, and profit margin is 9%. If the firm wishes also to maintain a constant debt-equity ratio, what must it be?
