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1 Questions and Problems Chapters 2,3 pp 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, = 3,100 Total: 3,000+6,000 = 9,000 Total: 9,000 NWC = current assets - current liabilities = 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, = 68, 950 net income 128, Dividends and retained earnings. Suppose that the firm in the previous problem paid out $65,000 in cash dividends. What is the addition to retained earnings? Retained earnings = net income - dividends = 128,050-65,000 = 63,050 1

2 4. Suppose that the firm in the previous problem has 30,000 shares of common stock outstanding. Find earnings per share (EPS) and dividends per share. EP S = netincome #ofshares = 128,050 30,000 = $4.27; dividends #ofshares = 65,000 30,000 = $ Market vs. book values. Klingon widgets, Inc., purchased new cloaking machinery three years ago for $5mln. Klington 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: $ = 2.7mln (2.9mln) current liabilities: $1.8mln fixed assets: $1.6mln (1.5mln) long-term debt:? equity:? Total: $ = 3.3mln ( = 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 depreciation expense of 850,000. What is Andretti s net capital spending in 2003? Net Capital spending = fixed assets (2003) - fixed assets (2002) + depreciation = = Residual claims Clapper s Clippers, Inc., is obligated to pay its creditors $2,900. a. What is the market value of the shareholders equity if assets have a market value of $3,600? b. What if assets equal $2,300? 2

3 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 Balance Sheet Assets Current Assets Cash $ 210 $ 215 Accounts receivable Inventory 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, 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 Addition to retained earnings 99 3

4 8. Construct the statement of cash flows. 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 = = 1,198. Net capital spending = fixed assets (2003) - fixed assets (2002) + depreciation = 6,527-6, = 992. Addition to NWC = NWC (2003) - NWC (2002) = (1,072-1,922) - (853-1,725) = (-872) = 22. Cash flow = Operating cash flow - Net capital spending - Addition to NWC = 1, = 184. Cash flow to creditors = interest - new borrowing = (2,308-1,987) = = 181. Cash flow to shareholders = dividends - new common stocks = 47 - (1,000-1,000) = 47 4

5 Chapter 4 pp Pro forma statements. Consider the following simplified financial statements 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 income 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, 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? 5

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