Finance Exercices Сhapter 2 with Solutions

5. Calculating OCF [LO4]: Pompeii, Inc., has sales of $46,200, costs of $23,100, depreciation expense of $2,200, and interest expense of $1,700. If the tax rate is 22 percent, what is the operating cash flow, or OCF? To calculate OCF, we first need the income statement: Income Statement Sales $46,200 Costs 23,100 Depreciation EBIT Interest Taxable income (EBT) Taxes (22%) Net income 2,200 $20,900 1,700 $19,200 4,224 $14,976 OCF = EBIT + Depreciation – Taxes = $20,900 + 2,200 – 4,224 = $18,876 6. Calculating Net Capital Spending [LO4]: Logano Driving School’s 2017 balance sheet showed net fixed assets of $2.4 million, and the 2018 balance sheet showed net fixed assets of $3.3 million. The company’s 2018 income statement showed a depreciation expense of $319,000. What was net capital spending for 2018? Net capital spending = NFAend – NFA beg + Depreciation Net capital spending = $3,300,000 – 2,400,000 + 319,000 Net capital spending = $1,219,000 8. Cash Flow to Creditors [LO4] The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed long-term debt of $1.87 million, and the 2018 balance sheet showed long-term debt of $2.21 million. The 2018 income statement showed an interest expense of $255,000. What was the firm’s cash flow to creditors during 2018? Cash flow to creditors = Interest paid – Net new borrowing Cash flow to creditors = Interest paid – (LTDend – LTDbeg) Cash flow to creditors = $255,000 – ($2,210,000 – 1,870,000) Cash flow to creditors = –$85,000 9. Cash Flow to Stockholders [LO4] The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed $650,000 in the common stock account and $3.98 million in the additional paid-in surplus account. The 2018 balance sheet showed $805,000 and $4.2 million in the same two accounts, respectively. If the company paid out $545,000 in cash dividends during 2018, what was the cash flow to stockholders for the year? Cash flow to stockholders = Dividends paid – Net new equity Cash flow to stockholders = Dividends paid – [(Common end + APISend) – (Commonbeg + APISbeg)] Cash flow to stockholders = $545,000 – [($805,000 + 4,200,000) – ($650,000 + 3,980,000)] Cash flow to stockholders = $170,000 Note, APIS is the additional paid-in surplus. 10.Calculating Total Cash Flows [LO4: ] Given the information for Kerber’s Tennis Shop, Inc., in Problems 8 and 9, suppose you also know that the firm’s net capital spending for 2018 was $1,250,000 and that the firm reduced its net working capital investment by $45,000. What was the firm’s 2018 operating cash flow, or OCF? Cash flow from assets = Cash flow to creditors + Cash flow to stockholders = –$85,000 + 170,000 = $85,000 Or Cash flow from assets = OCF – Change in NWC – Net capital spending Cash flow from assets = $85,000 = OCF – Change in NWC – Net capital spending $85,000 = OCF – (-$45,000) – 1,250,000 $85,000 = OCF +45 000 – 1,250,000 $85,000 – 45 000 + 1,250,000 = OCF $1,290,000 = OCF * 19. Calculating Cash Flows [LO4] Consider the following abbreviated financial statements for Parrothead Enterprises: PARROTHEAD ENTERPRISES 2017 and 2018 Partial Balance Sheets Liabilities and Owners’ Equity Assets Current assets Net fixed assets 201 7 201 8 $1,206 $1,307 4,973 5,988 Current liabilities Long-term debt 201 7 201 8 $ 482 $ 541 2,628 2,795 PARROTHEAD ENTERPRISES 2018 Income Statement Sales $15,301 Costs 7,135 Depreciation 1,363 Interest paid 388 a. b. c. What is owners’ equity for 2017 and 2018? What is the change in net working capital for 2018? In 2018, Parrothead Enterprises purchased $2,496 in new fixed assets. How much in fixed assets did Parrothead Enterprises sell? What is the cash flow from assets for the year? The tax rate is 21 percent. d. During 2018, Parrothead Enterprises raised $504 in new long-term debt. How much long-term debt must Parrothead Enterprises have paid off during the year? What is the cash flow to creditors? a. Total assets2017 = $1,206 + 4,973 = $6,179 Total liabilities2017 = $482 + 2,628 = $3,110 Owners’ equity2017 = Total assets – total liabilities = $6,179 – 3,110 = $3,069 Total assets2018 = $1,307 + 5,988 = $7,295 Total liabilities2018 = $541 + 2,795 = $3,336 Owners’ equity2018 = $7,295 – 3,336 = $3,959 b. NWC2017 = CA2017 – CL2017 = $1,206 – 482 = $724 NWC2018 = CA2018 – CL2018 = $1,307 – 541 = $766 Change in NWC = NWC2018 – NWC2017 = $766 – 724 = $42 c. We can calculate net capital spending as: Net capital spending = Net fixed assets2018 – Net fixed assets2017 + Depreciation Net capital spending = $5,988 – 4,973 + 1,363 = $2,378 So, the company had a net capital spending cash flow of $2,378. We also know that net capital spending is: Net capital spending = Fixed assets bought – Fixed assets sold $2,378 = $2,496 – Fixed assets sold Fixed assets sold = $2,496 – 2,378 = $118 To calculate the cash flow from assets = OCF – Change in NWC – Net capital spending. , we must first calculate the operating cash flow. The income statement is: Income Statement Sales $15,301 Costs 7,135 Depreciation expense 1,363 EBIT $ 6,803 Interest expense 388 EBT $ 6,415 Taxes (21%) 1,347 Net income $ 5,068 So, the operating cash flow is: OCF = EBIT + Depreciation – Taxes = $6,803 + 1,363 – 1,347 = $6,819 And the cash flow from assets is: Cash flow from assets = OCF – Change in NWC – Net capital spending. = $6,819 – 42 – 2,378 = $4,399 d. Net new borrowing Net new borrowing Debt retired Cash flow to creditors = LTD18 – LTD17 = $2,795 – 2,628 = $167 = $167 = Debt issued (raised) – Debt retired ( paid off) = $504 – 167 = $337 = Interest – Net new borrowing = $388 – 167 = $221 Use the following information for Taco Swell, Inc., for Problems 21 and 22 (assume the tax rate is 21 percent): Sales 2017 2018 $16,549 $18,498 Depreciation 2,376 2,484 Cost of goods sold 5,690 6,731 Other expenses 1,353 1,178 Interest 1,110 1,325 Cash 8,676 9,247 Accounts receivable Short-term notes payable Long-term debt Net fixed assets Accounts payable Inventory Dividends 11,488 1,674 29,060 13,482 1,641 35,229 72,770 77,610 6,269 6,640 20,424 21,862 1,979 2,314 21. Financial Statements [LO1] Draw up an income statement and balance sheet for this company for 2017 and 2018. 22. Calculating Cash Flow [LO4] For 2018, calculate the cash flow from assets, cash flow to creditors, and cash flow to stockholders. 21. Balance sheet as of Dec. 31, 2017 Cash $8,676 Accounts payable $6,269 Accounts receivable 11,488 Notes payable 1,674 Inventory 20,424 Current liabilities $7,943 Current assets $40,588 Long-term debt Net fixed assets Total assets $72,770 $113,358 $29,060 Owners' equity $76,355 Total liab. & equity $113,358 Owner’s equity = total assets – total liabilities = $113,358 - ($7,943 + $29,060) = 76,355 Balance sheet as of Dec. 31, 2018 Cash $9,247 Accounts payable Accounts receivable 13,482 Notes payable Inventory 21,862 Current liabilities Current assets $44,591 $6,640 1,641 $8,281 Long-term debt Net fixed assets Total assets $77,610 $122,201 $35,229 Owners' equity $78,691 Total liab. & equity $122,201 2017 Income Statement Sales COGS $16,549.00 5,690.00 2018 Income Statement Sales Other expenses 1,353.00 Other expenses Depreciation 2,376.00 Depreciation EBIT $7,130.00 Interest 1,110.00 EBT $6,020.00 Taxes (21%) 1,264.20 1,178.00 2,484.00 $8,105.00 1,325.00 EBT $6,780.00 Taxes (21%) $4,755.80 Net income Dividends $1,979.00 Dividends 2,776.80 6,731.00 EBIT Interest Net income Additions to RE $18,498.00 COGS 1,423.80 $5,356.20 $2,314.00 Additions to RE Net income = dividends + additions to RE Additions to RE = Net income – dividends = 4,755.80 - $1,979.00 = 2,776.80 22. OCF = EBIT + Depreciation – Taxes = $8,105 + 2,484 – 1,424 = $9,165 Change in NWC = NWCend – NWCbeg = (CA – CL) end – (CA – CL) beg = ($44,591 – 8,281) – ($40,588 – 7,943) = $3,665 Net capital spending = NFA end – NFAbeg + Depreciation = $77,610 – 72,770 + 2,484 = $7,324 3,042.20 Cash flow from assets = OCF – Change in NWC – Net capital spending = $9,165 – 3,665 – 7,324 = –$1,824 Cash flow to creditors CFC = Interest – Net new LTD (borrowing) Net new LTD = LTD end – LTDbeg Cash flow to creditors = $1,325 – ($35,229 – 29,060) = –$4,844 Cash flows to stockholders CFS= Dividends – Net new equity With Net new equity = Common stock end – Common stockbeg , in this exercise we had owners’ equity. Common stock + Retained earnings = Total owners’ equity Common stock = Total owners’ equity - Retained earnings CS = OE - RE Net new equity = CS end – CS begin = (OE – RE)end – (OE – RE)beg = OE end – RE end – OE beg + RE beg = OEend – OEbeg + REbeg – REend REend = REbeg + Additions to RE18 Net new equity = OEend – OEbeg + RE beg – (REbeg + Additions to RE18) = OEend – OEbeg – Additions to RE Net new equity = $78,691 – 76,355 – 3,042 = –$706 CFS = Dividends – Net new equity CFS = $2,314 – (–706) = $3,020 As a check, cash flow from assets is –$1,824. CFA = Cash to from creditors + Cash flow to stockholders CFA = –$4,844 + 3,020 = –$1,824