Essentials Of Corporate Finance 9th Edition Pdf

essentials of corporate finance 9th edition pdf download

Test Bank For Essentials Of Corporate Finance 9th Edition Ross. Finance 8th Edition Test Bank by Ross Westerfield Jordan free download sample pdf. Essentials of Corporate Finance, 9th Edition by Stephen Ross and Randolph Corporate Finance Ross 9th Edition Pdf.pdf - search pdf books free download. Essentials of Corporate Finance Essentials of Investments 9th ed. p. cm. -- (The McGraw-Hill/Irwin series in finance, insurance and real estate) Cash Flow Identity Download the annual balance sheets and income.

9 01 03

1. management (modifying the firm’s credit collection policy with its customers). 2.

The treasurer’s office and the controller’s office are the two primary organizational groups that report directly to the chief financial officer. The controller’s office handles cost and financial accounting, tax management, and management information systems. The treasurer’s office i the study of corporate finance is concentrated within the functions of the treasurer’s office.

equity of the firm (whether it’s publicly

6. elect the directors of the corporation, who in turn appoint the firm’s management. This separat exist. Management may act in its own or someone else’s best interests, rather than those of the

7. 8.

–2

10.

stion that illustrates this debate: “A firm has s. What should the firm do?” 11.

12.

13.

institutions’ deeper resources and experiences with their own

14.

3– 15. The biggest reason that a company would “go dark” is because of the increased audit costs

1. in value. It’s desirable for firms to have high returns by investing in illiquid, productive assets. It’s up to the firm’s financial management staff to

2. associated with producing those revenues, to be “booked” when the revenue process is essentially necessarily correct; it’s the way accountants have chosen to do it. 3.

4. it’s a financing cost, not an operating cost. 5.

–

It’s probably not a good sign for an established company, but it would be fairly ordinary for a start

5– 9.

10.

$2,030 9,780

$1,640 4,490 5,680

Owners’ equity $11,810

Total liabilities and owners’ equity

$11,810

owners’ equity is a plug variable. We know that total assets must equal total liabilities and owners’ equity. Total liabilities and owners’ equity is the sum of all debt and equity, so if we subtract debt from total liabilities and owners’ equity, the rem Owners’ equity = Total liabilities and owners’ equity – Owners’ equity = $11,810 – 1,640 – 4,490 Owners’ equity = $5,680

– 2,030 – 1,640 390

–

2–6 2.

$634,000 328,000 73,000 $233,000 38,000 $195,000 68,250 $126,750 3. 126,750 – 43,000 83,750 4. 126,750 35,000 2

35,000

5. $143 .

78,020 6. 78,020 211 $243

43,000 2.11

43,000 – 100,000)

7– 7.

$38,530 12,750 2,550 $23,230 1,850 $21,380 7,483 $13.897

3,230 8,297

– 50 – 7,483

8. – 2,134,000 – 1,975 484,000

25,000

9. – – – 685 – 1,305 – 20

– 530 – 1,270

10. – – 102,800 – –$38,200

– 551,000 – 1,410,00

11. in surplus.)

Cash flow

148,500 – –$155,500

– – 48

618

–

– 3

332

2–8 12.

Cash flow

–$38,200 – 155,500 –$193,700

– –$193,700 – –$11 –$193,700 – 11 96,300

–

– 705 705,000

–

13.

Book value NFA

$1,050,000 $4,800,000 $5,850,000

$3,300,000 $4,370,000

14. a.

$173,000 91,400 5,100 12,100 $64,400 8,900 $55,500 21,090 $34,410 $9,700 24,710

9–

410 – 9,700 710

4,40 5,410

– 2,100 – 21,090

b. – 900 – –$4,000) 900

– 2,900

–

9 700

2,1 5,240

– $19,7

5,410 – 470

– – $35,240

2 – 10 15.

2,170 5,670

3,500

– –

– 5,670 9,450

9,450 11,430

$11,430

–

980

– – 67,000 – 49,200 – 6,370

16. Cash

$197,000 265,000 563,000 $1,025,000

sets

$288,000 194,000 $482,000 1,490,000 $2,072,000

$5,150,000 863,000 $7,038,000

Total liabilities and owners’ equity is:

Total liabilities & owners’ equity

4,586,000 $7,038,000

11 –

$7,038,000 – 4,586,000 – 2,072,000 $380,000 17. Owners’ equity is the maximum of total assets minus total liabilities, or zero. Although the book value of owners’ equity can be negative, the market value of owners’ equity cannot be negative, so: Owners’ equity = Max [(TA – a. If total assets are $9,300, the owners’ equity is: Owners’ equity = Max[($9,300 – 8,4 Owners’ equity = $900 b.

tal assets are $6,900, the owners’ equity is: Owners’ equity = Max[($6,900 – 8,4 Owners’ equity = $0

18. a. 1,5

. . 315 601,000

1,5

4,260

315

2 – 12 19. a.

$2,350,000 1,925,000 530,000 420,000 $ 105,000 245,000 –$140,000 0 –$140,000

b. 105 525,000

– 420,000 – 0

20.

– 525,000 – 0 – 0 525,000

– 395,000 – 0 395,000

$525

395,000 130,000

–

13 –

– –

$130

115,000 21. a.

$28,476 20,136 3,408 $ 4,932 497 $ 4,435 1,774 $ 2,661

b. 932 6,566

– 3,408 – 1,774

– – – 4,234 – 2,981 – 835

– 3,528 – 3,110

– 22,608 – 19,872 6,144

3,408

– 6,566 – 835 – 6,144 –$413

$413

–

2 – 14 d. – 497 – 0 497

–$413

497 –$910

– –$910

739 – 649 835

6,144

413 649

739 413 was left to just meet the firm’s

22. a. To calculate owners’ equity, we first need total liabilities and owners’ equity. From the balance

Total assets = Current assets + Fixed assets = Total liabilities and owners’ equity 5 2,718 15,320

2,602 ers’ equity as:

Total liabilities and owners’ equity = Current liabilities + Long term debt + Owners’ equity $15,320 174 6,873 + Owners’ equity Owners’ equity = $7,273 6 2,881 13,175 16,056

15 – Now we can solve for owners’ equity as: Total liabilities and owners’ equity = Current liabilities + Long term debt + Owners’ equity $16,056 1,726 8,019 + Owners’ equity Owners’ equity = $6,311 b. – – – 2,881 – 1,726 – –$389

– 2,718 – 1,174

– 13,175 – 12,602 007

3,434

– $4,007

7,160 – 153

$40,664 20,393 3,434 $16,837 638 $16,199 6,480 $ 9,719

6,837 3,791

– 3,434 – 6,480

– – 3,791 – –$389 – 4,007 0,173

2 – 16 d.

– 8,019 – 6,873 146

– 638 – 1,146 –$508

– $1,146

155 – 009

23. –

103,562 144,897

–

– 69,038 – 27,703 , – – – 73,571 – 34,127 – 11,471

– 58,325 – 30,352

– 513,980 – 435,670 147,348

69,038

– – 144,897 – 11,471 – 147,348 –$13,922

17 –

The company’s assets generated an outflow of $13,922 $144,897 11,471

24,410 – 5,210

– – 192,300 – 173,100

– 361,124 – 290,543 – 35,249 35,332

147,348

–

70,581

35,249

– 16,200 – 35,332 –$19,132 5,210

–$13,922

24.

19,132

–$19,132

5,210

– – –

– –

– 25. a.

–

2 – 18 b.

At the end of the “tax bubble”, the marginal tax rate on the next dollar should equal the average

–

Chapter 02 – Financial Statements, Taxes, and Cash Flow

Chapter 2 FINANCIAL STATEMENTS, TAXES, AND CASH FLOW Financial Statements, Taxes, and Cash Flows

Chapter Organization Introduction

2.1

2.2

The Balance Sheet Assets: The Left-Hand Side Liabilities and Owner's Equity: The RightHand Side Balance Sheet Identity

2.2 2.3

Key Concepts and Skills Chapter Outline

2.4

The Balance Sheet

2.5

The Balance Sheet: Figure 2.1

2.6

The Balance Sheet

Market Value versus Book Value

2.7 2.8 2.9

U.S. Corporation Balance Sheet: Table 2.1 Market Value versus Book Value Klingon Corporation: Example 2.2

2.10 2.11

Income Statement U.S Corporation Income Statement: Table 2.2

2.12

Financial Statements

2.13

Financial Statements

2.14

Example: W ork the W eb

2.15 2.16 2.17 2.18 2.19

Taxes Corporate Tax Rates: Table 2.3 Example: Marginal versus Average Rates Tax on $4 Million Average Tax Rates: Tables 2.4 & 2.5

2.20

The Concept of Cash Flow

2.21

Cash Flow from Assets

2.22 2.23 2.24 2.25 2.26 2.27 2.28 2.29 2.30 2.31 2.32 2.33

Example: U.S. Corporation Example: U.S. Corporation Formula Summary: Table 2.6 Quick Quiz Quick Quiz Comprehensive Problem—Dole Comprehensive Problem—Dole Comprehensive Problem—Dole Comprehensive Problem—Dole Comprehensive Problem—Dole Comprehensive Problem—Dole Comprehensive Problem—Dole

The Income Statement

Taxes Corporate Tax Rates Average versus Marginal Tax Rates

2.4

Slide Title

Net W orking Capital Liquidity Debt versus Equity

GAAP and the Income Statement Noncash Items Time and Costs Earnings Management 2.3

Slide Number

Cash Flow Cash Flow from Assets Cash Flow to Creditors and Stockholders

Conclusion

Cola Cola Cola Cola Cola Cola Cola

I/S OCF NCS & ΔNW C CFFA CFFA Option 2 Cash Flows CF to Creditors

2-1

Chapter 02 – Financial Statements, Taxes, and Cash Flow

CHAPTER WEBSITES Websites may be referenced more than once in a chapter. This table just includes the section for the first reference. Chapter Section 2.1

Web Address finance.yahoo.com money.cnn.com www.thewaltdisneycompany.com www.sec.gov www.fasb.org www.ifrs.org 2.3 www.irs.gov What’s On the Web? www.alcoa.com www.coca-cola.com www.dukeenergy.com www.coopertires.com Lecture Notes: Chapters 2 and 3 are primarily accounting review. This chapter covers the balance sheet and income statement, which should be very familiar to students. The approach to calculating cash flow from assets may be a new concept as they have probably been introduced to the standard accounting statement of cash flows.

ANNOTATED CHAPTER OUTLINE

Slide 2.2

Key Concepts and Skills

Slide 2.3

Chapter Outline

Slide 2.4

The Balance Sheet

Current Assets are listed first on the right-hand side because they are the most liquid. Fixed assets can include both tangible and intangible assets and generally are not very liquid. Liabilities and equity (or ownership) components of the firm are listed on the righthand side and indicate how the assets are paid for. The Balance Sheet Identity: Assets = Liabilities + Shareholders’ equity

Slide 2.5

The Balance Sheet - Figure 2.1

All finance decisions are either investment decisions or financing decisions. Investment decisions involve the purchase and sale of any assets (not just financial assets) and show up on the left-hand side of the balance sheet.

2-2

Chapter 02 â€“ Financial Statements, Taxes, and Cash Flow

Financing decisions involve the choice of whether to borrow money to buy the assets or to issue new ownership shares and show up on the right-hand side of the balance sheet.

2-3

Chapter 02 – Financial Statements, Taxes, and Cash Flow

Shareholders’ equity consists of the common stock account, paid in surplus, retained earnings and treasury stock. The firm’s net income belongs to the owners. It can either be paid out in dividends or reinvested in the firm. When it is reinvested in the firm, it becomes additional equity investment and shows up in the retained earnings account.

Slide 2.6

The Balance Sheet

Net Working Capital = Current assets – Current liabilities Liquidity has two components: how long it takes to convert to cash and the value that must be relinquished to convert to cash quickly. Any asset can be converted to cash quickly if you are willing to lower the price enough. Liquid assets provide lower returns so too much liquidity can be just as detrimental to shareholder wealth maximization as too little liquidity. Debt versus Equity Interest and principal payments on debt have to be paid before cash may be paid to stockholders. The company’s gains and losses are magnified as the company increases the amount of debt in the capital structure, which is why the use of debt is called financial “leverage.”

Slide 2.7

U.S. Corporation Balance Sheet (Table 2.1)

This is an example of a simplified balance sheet. If possible, bring in some annual reports and let the students see the differences between the simplified statements they see in textbooks and the real thing or use “Work the Web” (Slide 2.14) to show real financial statements.

Slide 2.8

Market versus Book Value

Current assets and current liabilities generally have book values and market values that are very close. Assets are listed at historical cost less accumulated depreciation. “Total Assets” on the balance sheet is generally not a very good estimate of what the assets of the firm are actually worth. Liabilities are listed at face value. When interest rates or the risk of the firm changes, the value of those liabilities change as well, especially longer-term liabilities. Equity is the ownership interest in the firm. The market value of equity (stock price times number of shares) depends on the future growth prospects of the firm and on the market’s estimation of the current value of ALL of the assets of the firm. The best estimate of the market value of the firm’s assets is market value of Liabilities + Market value of equity. Copyright (c) 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2-4

Chapter 02 â€“ Financial Statements, Taxes, and Cash Flow

2-5

Chapter 02 – Financial Statements, Taxes, and Cash Flow

Accounting, or historical costs, are not very important to financial managers, while market values, which represent the cash price people are willing and able to pay, are very important.

Slide 2.9

Klingon Corporation (Example 2.2)

Shareholders benefit from increases in the market value of a firm’s assets and they also bear the losses of a decrease in market value. GAAP does provide for some assets to be marked-to-market, primarily those assets for which current market values are readily available due to trading in liquid markets. However, it does not generally apply to long-term assets, where market values and book values are likely to differ the most. Thus, it is unlikely that the aggregate balance sheet values provided by the firm will accurately reflect market values.

Slide 2.10

Income Statement

Earnings before interest and taxes (EBIT) is often called “operating income.” COGS would include both the fixed costs and the variable costs needed to generate the revenues. The Income Statement Equation: Net Income = Revenue – Expenses Analysts often look at EBITDA (earnings before interest, taxes, depreciation, and amortization) as a measure of the operating cash flow of the firm. It is not true in the strictest sense because taxes are an operating cash flow as well, but it does provide a reasonable estimate for analysis purposes.

Slide 2.11

U.S. Corporation Income Statement (Table 2.2)

Previously, it was noted that investment decisions are reflected on the left-hand side of the balance sheet and financing decisions are reflected on the right-hand side. The income statement reflects investment decisions in the “top half,” from sales to EBIT. Financing decisions are reflected in the “bottom half,” from EBIT to net income and earnings per share.

Slide 2.12

Financial Statements

GAAP Matching Principle GAAP require that revenue be recognized when it is earned, not when the cash is received, and costs are matched to revenues. This introduces noncash deductions such as depreciation and amortization. Consequently, net income is NOT the same as cash flow. Noncash Items The largest noncash deduction for most firms is depreciation. It reduces a firm’s taxes and its net income. Noncash deductions are part of the reason that net income Copyright (c) 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2-6

Chapter 02 – Financial Statements, Taxes, and Cash Flow

is not equivalent to cash flow.

Slide 2.13

Financial Statements

(Web link)

www: Click on the Web Surfer icon to go to the IFRS website for information on GAAP versus international accounting standards. Time and Costs In the short run, some costs are fixed regardless of output, and other costs are variable, meaning they vary with the level of output. In the long run, all costs are variable. GAAP allows sufficient management discretion that firms routinely “manage earnings” to present the best results to stockholders and analysts.

Slide 2.14

Example: Work the Web

(Web link)

www: Click on the Web Surfer icon to go to the SEC “Search the EDGAR Database” website. An excellent opportunity to show the actual financial statements of a selected company using the SEC EDGAR website or Yahoo! Finance.

Slide 2.15

Taxes

www: Click on the Web Surfer icon to go to the IRS website for the most up-to-date tax information. For purposes of computing a company’s total tax liability, the average tax rate is the correct rate to apply to before-tax profits. In evaluating the cash flows expected from a new investment, the marginal tax rate is the appropriate rate to use, because the new investment will generate cash flows that will be taxed in addition to the company’s existing profit.

Slide 2.16

Corporate Tax Rates (Table 2.3)

It is helpful for students to explain how income is segmented into the tax brackets.

Slide 2.17 Slide 2.18

Example: Marginal versus Average Rates Example: Marginal versus Average Rates (Excel link)

Tax liability: .15(50,000) + .25(75,000 – 50,000) + .34(100,000 – 75,000) + .39(335,000 – 100,000) + .34(4,000,000 – 335,000) = $1,360,000 Average rate: $1,360,000 / $4,000,000 = .34 or 34% The marginal tax rate comes from the table. It is 34%.

2-7

Chapter 02 – Financial Statements, Taxes, and Cash Flow

Slide 2.19

Average Tax Rates (Tables 2.4 and 2.5)

Table 2.4 is useful for comparing actual marginal rates with average rates. Table 2.5 compares average tax rates across various industries.

Slide 2.20

The Concept of Cash Flow

This is NOT the standard accounting Statement of Cash Flows.

Slide 2.21

Cash Flow from Assets

The first equation shows the cash flow that the firm receives from its assets. CFFA = Operating cash flow – Net capital spending – Δ in net working capital Operating cash flow = EBIT + depreciation – taxes Net capital spending = ending fixed assets – beginning fixed assets + depreciation Changes in NWC = ending NWC – beginning NWC The second equation shows how the cash flow from the firm is divided among the investors who financed the assets. Cash flow from assets = Cash flow to creditors + Cash flow to stockholders Cash flow to creditors = interest paid – net new borrowing = interest paid – (ending long-term debt – beginning longterm debt) Cash flow to stockholders = dividends paid – net new equity raised = dividends paid – (ending common stock, APIC, & Treasury stock – beginning common stock, APIC, & Treasury stock) Where APIC = additional paid in capital or paid in surplus

Slide 2.22 •

CFFA OCF NCS ΔNWC

•

CFFA

Slide 2.23 •

CFFA CF/CR CF/SH

•

CFFA

Example; U.S. Corporation

= OCF – NCS – ΔNWC = EBIT + depreciation – taxes = $694 + 65 – 212 = $547 = ending net FA – beginning net FA + depreciation = $1709 – 1644 + 65 = $130 = ending NWC – beginning NWC = ($1403 – 389) – ($1112 – 428) = $330 = 547 – 130 – 330 = $87

Example: U.S. Corporation = CF/CR + CF/SH = interest paid – net new borrowing = $70 – ($454 – 408) = $24 = dividends paid – net new equity = $103 – ($640 – 600) = $63 = $24 + $63 = $87

2-8

Chapter 02 – Financial Statements, Taxes, and Cash Flow

Slide 2.24

Table 2.6

Slide 2.25

Quick Quiz—Part I

Slide 2.26

Quick Quiz—Part II

2-9

Chapter 02 – Financial Statements, Taxes, and Cash Flow

Comprehensive Problem— Dole Cola This problem covers calculating CFFA using both formulas given on slide 2.21.

Slide 2.27

Dole Cola Income Statement

Slide 2.28

Dole Cola Operating Cash Flow

Slide 2.29

Dole Cola Net Capital Spending and Change in NWC

Slide 2.30

Dole Cola Cash Flow from Assets (Option 1) (Excel link)

Slide 2.31

Dole Cola CFFA (Option 2)

OCF = EBIT + Depreciation – Taxes

NCS = Ending NFA – Beginning NFA + Depreciation ΔNWC = [2010(CA – CL)] – [2009(CA – CL)]

CFFA = OCF – NCS – ΔNWC

From Slide 2-26: CFFA = ($181)

Slide 2.32

Dole Cola Cash Flow from Stockholders and Creditors

Slide 2.33

Dole Cola Cash Flow to Creditors

CF to Stockholders (CF/SH) = Dividends – New equity CF to creditors (CF/CR) can be derived from the CF to stockholders and CFFA CF/CR = CFFA – CF/SH

(Excel link)

Net new borrowing = CF/CR – Interest paid

2-10

Chapter 2 Financial Statements, Taxes and Cash Flow Copyright (c) 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2-1

Key Concepts and Skills Know: – The difference between book value and market value – The difference between accounting income and cash flow – The difference between average and marginal tax rates – How to determine a firm’s cash flow from its financial statements Copyright (c) 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2-2

Chapter Outline 2.1 2.2 2.3 2.4

The Balance Sheet The Income Statement Taxes Cash Flow

2-3

The Balance Sheet • A snapshot of the firm’s assets and liabilities at a given point in time (“as of …”) • Assets − Left-hand side (or upper portion) − In order of decreasing liquidity

• Liabilities and Owners’ Equity – Right-hand side (or lower portion) – In ascending order of when due to be paid

• Balance Sheet Identity Assets = Liabilities + Stockholders’ Equity Copyright (c) 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2-4

The Balance Sheet Figure 2.1

Total Value of Assets

Current Assets

Total Value of Liabilities and Shareholders' Equity Net Working Capital

Current Liabilities

Long Term Debt Fixed Assets 1. Tangible 2. Intangible

Shareholder Equity

2-5

The Balance Sheet • Net working capital – Current Assets minus Current Liabilities – Usually positive for a healthy firm

• Liquidity − Speed and ease of conversion to cash without significant loss of value − Valuable in avoiding financial distress

• Debt versus Equity − Shareholders’ equity = Assets - Liabilities Copyright (c) 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2-6

U.S. Corporation Balance Sheet Table 2.1

2-7

Market vs. Book Value • Book value = the balance sheet value of the assets, liabilities, and equity. • Market value = true value; the price at which the assets, liabilities, or equity can actually be bought or sold. – Market value and book value are often very different. Why? – Which is more important to the decisionReturn to making process? Quick Quiz Copyright (c) 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2-8

Klingon Corporation Example 2.2

2-9

Income Statement • The income statement measures performance over a specified period of time (period, quarter, year). • Report revenues first and then deduct any expenses for the period • End result = Net Income = “Bottom Line” – Dividends paid to shareholders – Addition to retained earnings

• Income Statement Equation: • Net Income = Revenue - Expenses Copyright (c) 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2-10

U.S. Corporation Income Statement Table 2.2

2-11

Financial Statements • GAAP Matching Principle: – Recognize revenue when it is fully earned – Match expenses required to generate revenue to the period of recognition

• Noncash Items – Expenses charged against revenue that do not affect cash flow – Depreciation = most important Return to Quick Quiz Copyright (c) 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2-12

Financial Statements • Time and Costs – Fixed or variable costs – Not obvious on income statement

• Earnings Management – Smoothing earnings – GAAP leaves “wiggle room” – Global standardization of accounting • GAAP versus IFRS Copyright (c) 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2-13

Example: Work the Web • Publicly traded companies must file regular reports with the Securities and Exchange Commission • These reports are usually filed electronically and can be searched at the SEC public site called EDGAR • Click on the web surfer, pick a company, and see what you can find!

2-14

Taxes • Marginal vs. Average tax rates – Marginal – % tax paid on the next dollar earned – Average – total tax bill / taxable income – If considering a project that will increase taxable income by $1 million, which tax rate should you use in your analysis? Return to Quick Quiz Copyright (c) 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2-15

Corporate Tax Rates

2-16

Example: Marginal vs. Average Rates • Suppose your firm earns $4 million in taxable income. – What is the firm’s tax liability? – What is the average tax rate? – What is the marginal tax rate?

2-17

Tax on $4 million T ax Liability on $4,000,000 Corporate Tax Rates Taxable Income Levels

Tax Rate

Taxable

Tax

Income

Liability

50,000

15%

50,000

7,500

50,001

75,000

25%

25,000

6,250

75,001

100,000

34%

25,000

8,500

100,001

335,000

39%

235,000

91,650

335,001

10,000,000

34%

$ 3,665,000

$ 1,246,100

10,000,001

15,000,000

35%

15,000,001

18,333,333

38%

18,333,334

$ 4,000,000

$ 1,360,000

Average Rate =

34%

Marginal Rate =

34%

35%

2-18

Average Tax Rates

2-19

The Concept of Cash Flow • Cash flow = one of the most important pieces of information that can be derived from financial statements • The accounting Statement of Cash Flows does not provide the same information that we are interested in here • Our focus: how cash is generated from utilizing assets and how it is paid to those who finance the asset purchase. Copyright (c) 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2-20

Cash Flow From Assets • Cash Flow From Assets (CFFA) = Operating Cash Flow (OCF) – Net Capital Spending (NCS) – Changes in NWC (ΔNWC) Return to Quick Quiz

• Cash Flow From Assets (CFFA) = Cash Flow to Creditors (CF/CR) + Cash Flow to Stockholders (CF/SH) Copyright (c) 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2-21

Example: U.S. Corporation Balance Sheet Assets

Liabiities & Ow ners' Equity 2009

Current Assets Cash Accounts Receivable Inventory Total Fixed Assets Net Fixed assets

Total assets

2010

$104 455 553 $1,112

$160 688 555 $1,403

$1,644

$1,709

$2,756

$3,112

Current Liabilities Accounts Payable Notes Payable Total

Long-term debt Ow ners' equity Common stock and paid-in surplus Retained earnings Total Total Liabilties & Ow ners Equity

2009

2010

$232 196 $428

$266 123 $389

$408

$454

600 1,320 $1,920

640 1,629 $2,269

$2,756

$3,112

U.S. Corporation Income Statement Net sales Cost of goods sold Depreciation Earnings before interest and taxes Interest Paid Taxable income Taxes Net Income Dividends Addition to retained earnings

$1,509 750 65 $694 70 $624 212 $412 $103 $309

• CFFA = OCF – NCS - ΔNWC OCF = EBIT + depreciation – taxes = $694 + 65 – 212 = $547 NCS = ending net FA– beginning net FA + depreciation = $1709 – 1644 + 65 = $130 ΔNWC = ending NWC – beginning NWC = ($1403 – 389) – ($1112 – 428) = $330 • CFFA = 547 – 130 – 330 = $87 Copyright (c) 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2-22

Example: U.S. Corporation U.S. Corporation

U.S. Corporation Income Statement

Balance Sheet Assets Current Assets Cash Accounts Receivable Inventory Total Fixed Assets Net Fixed assets

Total assets

• CFFA CF/CR CF/SH • CFFA

Liabiities & Owners' Equity 2009

2010

$104 455 553 $1,112

$160 688 555 $1,403

$1,644

$1,709

$2,756

$3,112

Current Liabilities Accounts Payable Notes Payable Total

Long-term debt Owners' equity Common stock and paid-in surplus Retained earnings Total Total Liabilties & Owners Equity

2009

2010

$232 196 $428

$266 123 $389

$408

$454

600 1,320 $1,920

640 1,629 $2,269

$2,756

$3,112

Net sales Cost of goods sold Depreciation Earnings before interest and taxes Interest Paid Taxable income Taxes Net Income Dividends Addition to retained earnings

$1,509 750 65 $694 70 $624 212 $412 $103 $309

= CF/CR + CF/SH = interest paid – net new borrowing = $70 – ($454 – 408) = $24 = dividends paid – net new equity = $103 – ($640 – 600) = $63 = $24 + $63 = $87

2-23

Table 2.6

2-24

Quick Quiz • What is the difference between book value and market value? (Slide 2.8) – Which should we use for decision making purposes?

• What is the difference between accounting income and cash flow? – Which do we need to use when making decisions? (Slide 2.12) Copyright (c) 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2-25

Quick Quiz • What is the difference between average and marginal tax rates? – Which should we use when making financial decisions? (Slide 2.15)

• How do we determine a firm’s cash flows? – What are the equations and where do we find the information? (Slide 2.21)

2-26

Dole Cola Example DOLE COLA 2016 Income Statement Net sales Cost of goods sold Depreciation EBIT Interest paid Taxable income Taxes Net income Dividends Addtion to retained earnings

$ $ $ $ $ $ $ $ $ $

600 300 150 150 30 120 41 79

30 49

2-27

Dole Cola Operating Cash Flow 2016 Operating Cash Flow EBIT + Depreciation - Taxes

DOLE COLA 2016 Net Capital Spending Ending Net Fixed Assets - Beginning Net Fixed Assets + Depreciation

$ $ $ $

150 150 41 259

$ $ $ $

750 500 150 400

DOLE COLA 2016 Change in Net Working Capital 2010 Current Assets $2,260.0 2010 Current Liabilities $1,710.0 2010 Net Working Capital $ 2009 Current Assets $2,130.0 2009 Current Liabilities $1,620.0

550

2-28

Dole Cola Net Capital Spending & Change in Net Working Capital DOLE COLA 2016 Income Statement Net sales Cost of goods sold Depreciation EBIT Interest paid Taxable income Taxes Net income

$ $ $ $ $ $ $ $

Dividends Addtion to retained earnings

$ $

600 300 150 150 30 120 41 79

30 49

DOLE COLA

2-29

Dole Cola Cash Flow from Assets DOLE COLA 2016 Cash Flow from Assets Operating Cash Flow - Net Capital Spending - Change in Net Working Capital

$ $ $ $

259 400 40 (181)

2-30

Dole Cola CFFA â€“ Option 2 - Beginning Net Fixed Assets + Depreciation

DOLE COLA 2016 Change in Net Working Capital 2016 Current Assets $ 2,260.0 2016 Current Liabilities $ 1,710.0 2016 Net Working Capital 2015 Current Assets $ 2,130.0 2015 Current Liabilities $ 1,620.0 2015 Net Working Capital Change in Net Working Capital DOLE COLA 2016 Cash Flow from Assets Operating Cash Flow - Net Capital Spending - Change in Net Working Capital

$ $ $

500 150 400

550

$ $

510 40

$ $ $ $

259 400 40 (181)

2-31

Dole Cola Cash Flow to Stockholders & Creditors DOLE COLA 2016 Income Statement Net sales Cost of goods sold Depreciation EBIT Interest paid Taxable income Taxes Net income

$ $ $ $ $ $ $ $

600 300 150 150 30 120 41 79

2-32

Dole Cola Cash Flow to Creditors DOLE COLA 2016 Cash Flow to Creditors Interest Paid - Net New Borrowing

???

$ $ $

30 (241) (211)

2-33

Chapter 2 Problems 1-25 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-in" be installed in Excel. To install these, click on "Tools|Add-Ins" and select "Analysis ToolPak and "Solver Add-In."

Chapter 2 Question 1 Input area: Current assets Net fixed assets Current liabilities Long-term debt

$ $

2,030 9,780 1,640 4,490

Output area:

Current assets Net fixed assets

Balance sheet $ 2,030 Current liabilities 9,780 Long-term debt Owner's equity Total liabilities $ 11,810 and equity

1,640 4,490 5,680

11,810

Owner's equity

5,680

Net working capital

390

Total assets

Chapter 2 Questions 2-4 Input area: Sales Costs Depreciation expense Interest expense Tax rate Cash dividends

$ 634,000 328,000 73,000 38,000 35% $ 43,000

Common stock (shares)

35,000

Output area: Income Statement Sales $ 634,000 Costs 328,000 Depreciation expense 73,000 EBIT $ 233,000 Interest expense 38,000 EBT $ 195,000 Taxes 68,250 Net income $ 126,750

Addition to retained earnings

83,750

Earnings per share

3.62

Dividends per share

1.23

Chapter 2 Questions 5, 6 Input area: Taxable income

Taxable income 0 - 50,000 50,001 - 75,000 75,001 - 100,000 100,001 - 335,000 335,001 - 10,000,000 10,000,001 - 15,000,000 15,000,001 - 18,333,333 18,333,334 +

243,000

15% 25% 34% 39% 34% 35% 38% 35%

Output area: Taxes: 15% 25% 34% 39% 34% 35% 38% 35% Average tax rate:

$ $

The marginal tax rate is 39%.

50,000 25,000 25,000 143,000 0 0 0 0 78,020 78,020 = 243,000

32.11%

Chapter 2 Question 7 Input area: Sales Costs Depreciation expense Interest expense Tax rate

$ $ $ $

38,530 12,750 2,550 1,850 35%

Output area: Income Statement Sales $ 38,530.00 Costs 12,750.00 Depreciation 2,550.00 EBIT $ 23,230.00 Interest 1,850.00 EBT $ 21,380.00 Taxes 7,483.00 Net Income $ 13,897.00

Operating cash flow

$ 18,297.00

Chapter 2 Question 8 Input area:

Dec. 31, 2015 net fixed assets Dec. 31, 2016 net fixed assets

$ 1,975,000 2,134,000

Depreciation expense

325,000

484,000

Output area:

Net capital spending

Chapter 2 Question 9 Input area:

Dec. 31, 2015 Current assets Dec. 31, 2015 Current liabilities

1,530 1,270

Dec. 31, 2016 Current assets Dec. 31, 2016 Current liabilities

1,685 1,305

120

Output area:

Change in net working capital

Chapter 2 Question 10 Input area:

Dec. 31, 2015 Long-term debt

$ 1,410,000

Dec. 31, 2016 Long-term debt

$ 1,551,000

Interest expense

102,800

Output area: Cash flow to creditors

(38,200)

Chapter 2 Question 11 Input area:

Dec. 31, 2015 Common stock Dec. 31, 2015 Additional paid-in surplus

130,000 2,332,000

Dec. 31, 2016 Common stock Dec. 31, 2016 Additional paid-in surplus

148,000 2,618,000

Cash dividends

148,500

(155,500)

Output area: Cash flow to stockholders

Chapter 2 Question 12 Input area:

From problems 11,12: Cash flow to creditors Cash flow to stockholders

(38,200) (155,500)

New information: Net capital spending Change in net working capital

705,000 (115,000)

Cash flow from assets

(193,700)

Operating cash flow

396,300

Output area:

Chapter 2 Question 13 Input area:

Market value of net fixed assets Book value of net fixed assets Book value of current liabilities Net working capital Market value of current assets

$ $ $ $ $

4,800,000 3,300,000 850,000 220,000 1,050,000

Book value of current assets Book value of net fixed assets Book value of assets

1,070,000 3,300,000 4,370,000

NWC Market value of net fixed assets Total

Output area:

1,050,000 4,800,000 5,850,000

Chapter 2 Question 14 Input area:

Sales Costs Other expenses Depreciation expense Interest expense Taxes Dividends

$ 173,000 91,400 5,100 12,100 8,900 21,090 9,700

New equity Net new long-term debt Increase in fixed assets

2,900 (4,000) 23,140

Output area:

Income Statement Sales $ 173,000 Costs 91,400 Other expenses 5,100 Depreciation expense 12,100 EBIT $ 64,400 Interest expense 8,900 EBT $ 55,500 Taxes 21,090 Net income $ 34,410 Dividends Addition to retained earnings

a. Operating cash flow

9,700 24,710

$ 55,410

b. Cash flow to creditors $ 12,900 c. Cash flow to stockholders $

6,800

d. Cash flow from assets

$ 19,700

Net capital spending

$ 35,240

Change in NWC

470

Chapter 2 Question 15 Input area: Sales Costs Addition to retained earnings Dividends paid Interest expense Tax rate

$ $ $ $ $

67,000 49,200 3,500 2,170 1,980 40%

Output area:

Income Statement $

Sales Costs Depreciation expense EBIT Interest expense EBT Taxes Net income

Dividends Addition to retained earnings

$ $ $ $ $

67,000 49,200 6,370 11,430 1,980 9,450 3,780 5,670 2,170 3,500

Chapter 2 Question 16 Input area:

Cash Patents and copyrights Accounts payable Accounts receivable Tangible net fixed assets Inventory Notes payable Accumulated retained earnings Long-term debt

$ $ $ $ $ $ $ $ $

197,000 863,000 288,000 265,000 5,150,000 563,000 194,000 4,586,000 1,590,000

Output area:

Cash Accounts receivable Inventory Current assets

Tangible net fixed assets Intangible net fixed assets Total assets

Balance sheet as o $ 197,000 265,000 563,000 $ 1,025,000

$ $

5,150,000 863,000 7,038,000

f Dec. 31, 2016 Accounts payable Notes payable Current liabilities Long-term debt Total liabilities Common stock Accumulated retained earnings Total liability & owners' equity

$ $ $ $ $

288,000 194,000 482,000 1,590,000 2,072,000 380,000 4,586,000 7,038,000

Chapter 2 Question 17 Input area:

Total liabilities

8,400

$ $

9,300 6,900

a) Owners' equity

900

b) Owners' equity

a) Total assets b) Total assets

Output area:

Chapter 2 Question 18 Input area: Corporation growth taxable income Corporation income taxable income

76,500 7,650,000

Taxable income 0 - 50,000 50,001 - 75,000 75,001 - 100,000 100,001 - 335,000 335,001 - 10,000,000 10,000,001 - 15,000,000 15,000,001 - 18,333,333 18,333,334 +

15% 25% 34% 39% 34% 35% 38% 35%

Output area:

Corporation Growth: Taxes: 15% 25% 34% 39% 34% 35% 38% 35%

50,000 25,000 1,500 0 0 0 0 0 14,260

With a marginal tax rate of 34%, the tax on an additional $10,000 would be $3,400.

Corporation Income: Taxes:

15% 25% 34% 39% 34% 35% 38% 35%

50,000 25,000 25,000 235,000 7,315,000 0 0 0 $ 2,601,000

With a marginal tax rate of 34%, the tax on an additional $10,000 would be $3,400. The tax bills on an additional $10,000 are the same because each firm has a marginal tax rate of 34%, despite their different average tax rates.

Chapter 2 Question 19 Input area:

Sales Costs of goods sold Administrative and selling expenses Depreciation expense Interest expense

$ $ $ $ $

Tax rate

2,350,000 1,295,000 530,000 420,000 245,000 35%

Output area:

Costs Income Statement Administrative and selling expenses $ Sales Depreciation expense EBIT $ Interest expense EBT $ Taxes a) Net income $

1,295,000 530,000 2,350,000 420,000 105,000 245,000 (140,000) 0 (140,000)

c) Net income was negative because of the tax deductibility and interest expense. However, the actual cash flow from operations b) Operating cash flow was positive because depreciation is a$non-cash expense and 525,000 interest is a financing, not an operating, expense.

Chapter 2 Question 20 Input area: From Problem 19: Operating Cash Flow Interest

$ $

525,000 245,000

395,000 0 0 0 0 0

Cash flow from assets Cash flow to stockholders Cash flow to creditors

525,000 395,000 130,000

Net new long-term debt

115,000

New information: Cash dividend New investment in net fixed income New investment in net working capital New stock issued during year Net capital spending Net new equity

Output area:

A firm can still pay out dividends if net income is negative; it just has to be sure there is sufficient cash flow to make dividend payments.

Chapter 2 Question 21 Input area: Sales Cost of goods sold Depreciation expense Interest expense Dividends paid Beginning net fixed assets Beginning current assets Beginning current liabilities Ending net fixed assets Ending current assets Ending current liabilities Tax rate

$ $ $ $ $ $ $ $ $ $ $

New debt issued

28,476 20,136 3,408 497 739 19,872 3,528 3,110 22,608 4,234 2,981 40% -

Output area: Income Statement Sales Costs Depreciation expense EBIT Interest expense EBT Taxes a Net income

$ 28,476 20,136 3,408 $ 4,932 497 $ 4,435 1,774 $ 2,661

b Operating cash flow

6,566

$ $

835 6,144

Change in net working capital Net capital spending c Cash flow from assets

(413)

d Cash flow to creditors

497

Cash flow to stockholders

Net new equity

(910) 1,649

Chapter 2 Question 22 Input area:

Sales Costs Depreciation Interest

$ $ $ $

40,664 20,393 3,434 638

Current assets Net fixed assets

$ $

2015 2,718 $ 12,602 $

2016 New fixed assets purchased Tax rate 2016 New long-term debt

$ $

2016 2,881 13,175

7,160 40% 2,155

Output area:

Costs Income Statement Depreciation expense Sales EBIT Interest expense EBT Taxes Net income

a) 2015 2015 Total Total liabilities assets 2015 Owners' equity

20,393 3,434 40,664 16,837 638 16,199 6,480 9,719

$ $

8,047 7,273 15,320

$ $ $

b) 2016 Net working capital 2015 Net working capital Change in net working capital

$ $

1,155 1,544 (389)

c) Net capital spending

4,007

# #

Fixed assets sold Operating cash flow Cash flow from assets d) Net new borrowing Cash flow to creditors Debt retired

3,153

$ $ $ $

13,791 10,173 1,146 (508)

1,009

Current liabilities Long-term debt

$ $

2016 Total assets 2016 Total liabilities 2016 Owners' equity

$ $

2015 1,174 $ 6,873 $

16,056 9,745 6,311

2016 1,726 8,019

Chapter 2 Question 23 Input area:

2016 Income Statement Sales $ Cost of goods sold Selling & Administrative Depreciation EBIT $ Interest EBT $ Taxes Net income $ Dividends $ Addition to retained earnings $

Cash Accounts receivable Inventory Current assets Net fixed assets Total assets

714,978 384,591 157,787 69,038 103,562 24,410 79,152 27,703 51,449 16,200 35,249

Balance sheet as of Dec. 31, 2015 $ 16,849 Accounts payable 24,027 Notes payable 17,449 Current liabilities $ 58,325 Long-term debt $ 435,670 Owners' equity $ 493,995 Total liab. & equity Balance sheet as of Dec. 31, 2016 $ 18,098 Accounts payable 26,690 Notes payable 28,783 Current liabilities $ 73,571 Long-term debt $ 513,980 Owners' equity $ 587,551 Total liab. & equity

$ $

12,115 18,237 30,352

$ $ $

173,100 290,543 493,995

$ $

13,297 20,830 34,127

$ $ $

192,300 361,124 587,551

Output area: Operating cash flow

144,897

513,980 435,670 69,038 147,348

Change in Net Working Capital Ending NWC $ -Beginning NWC Change in NWC $

39,444 27,973 11,471

Capital Spending Ending net fixed assets - Beginning net fixed assets + Depreciation Net capital spending

Cash Flow from Assets Operating cash flow - Net capital spending -Change in NWC Cash flow from assets

Cash Flow to Creditors Interest paid -Net New Borrowing Cash flow to Creditors

Cash Flow to Stockholders Dividends paid -Net new equity raised Cash flow to Stockholders

$ $

144,897 147,348 11,471 (13,922)

24,410 19,200 5,210

16,200 35,332 (19,132)

Chapter 2 Questions 24

Net capital spending = = = = =

NFAend - NFAbeg + Depreciation (NFAend - NFAbeg) + (Depreciation + ADbeg) - ADbeg (NFAend - NFAbeg) + ADend - ADbeg (NFAend + ADend) - (NFAbeg + ADbeg) FAend - FAbeg

Chapter 2 Questions 25 Input area: 1st Taxable income 2nd Taxable income

Taxable income 0 - 50,000 50,001 - 75,000 75,001 - 100,000 100,001 - 335,000 335,001 - 10,000,000 10,000,001 - 15,000,000 15,000,001 - 18,333,333 18,333,334 +

335,001 18,333,334

15% 25% 34% 39% 34% 35% 38% 35%

Output area:

a) The tax bubble causes average tax rates to catch up to marginal rates, thus eliminating the tax advantage of low marginal rates for high income corporations. b)

Taxes: 15% 25% 34% 39% 34% 35% 38% 35%

$ Average tax rate = $ = * denotes marginal tax rate

50,000 25,000 25,000 235,000 1 0 0 0 113,900 113,900 335,001 34%

50,000 25,000 25,000 235,000 9,665,000 5,000,000 3,333,334 0 $ 6,416,667

$ 6,416,667 18,333,334 35%

c) Income 15% 25% 34% 45.75% 34% 35% 38% 35%

200,000

50,000 25,000 25,000 100,000 0 0 0 0 68,000

$ Taxes = $ $

200,000 34% 68,000

Chapter 2 Question 1 Input area: Current assets Net fixed assets Current liabilities Long-term debt

$ $

2,030 9,780 1,640 4,490

Output area:

Current assets Net fixed assets

Balance sheet $ 2,030 Current liabilities 9,780 Long-term debt Owner's equity Total liabilities $ 11,810 and equity

1,640 4,490 5,680

11,810

Owner's equity

5,680

Net working capital

390

Total assets

Chapter 2 Questions 2-4 Input area: Sales Costs Depreciation expense Interest expense Tax rate Cash dividends

$ 634,000 328,000 73,000 38,000 35% $ 43,000

Common stock (shares)

35,000

Output area: Income Statement Sales $ 634,000 Costs 328,000 Depreciation expense 73,000 EBIT $ 233,000 Interest expense 38,000 EBT $ 195,000 Taxes 68,250 Net income $ 126,750

Addition to retained earnings

83,750

Earnings per share

3.62

Dividends per share

1.23

Chapter 2 Questions 5, 6 Input area: Taxable income

Taxable income 0 - 50,000 50,001 - 75,000 75,001 - 100,000 100,001 - 335,000 335,001 - 10,000,000 10,000,001 - 15,000,000 15,000,001 - 18,333,333 18,333,334 +

243,000

15% 25% 34% 39% 34% 35% 38% 35%

Output area: Taxes: 15% 25% 34% 39% 34% 35% 38% 35% Average tax rate:

$ $

The marginal tax rate is 39%.

50,000 25,000 25,000 143,000 0 0 0 0 78,020 78,020 = 243,000

32.11%

Chapter 2 Question 7 Input area: Sales Costs Depreciation expense Interest expense Tax rate

$ $ $ $

38,530 12,750 2,550 1,850 35%

Output area: Income Statement Sales $ 38,530.00 Costs 12,750.00 Depreciation 2,550.00 EBIT $ 23,230.00 Interest 1,850.00 EBT $ 21,380.00 Taxes 7,483.00 Net Income $ 13,897.00

Operating cash flow

$ 18,297.00

Chapter 2 Question 8 Input area:

Dec. 31, 2015 net fixed assets Dec. 31, 2016 net fixed assets

$ 1,975,000 2,134,000

Depreciation expense

325,000

484,000

Output area:

Net capital spending

Chapter 2 Question 9 Input area:

Dec. 31, 2015 Current assets Dec. 31, 2015 Current liabilities

1,530 1,270

Dec. 31, 2016 Current assets Dec. 31, 2016 Current liabilities

1,685 1,305

120

Output area:

Change in net working capital

Chapter 2 Question 10 Input area:

Dec. 31, 2015 Long-term debt

$ 1,410,000

Dec. 31, 2016 Long-term debt

$ 1,551,000

Interest expense

102,800

Output area: Cash flow to creditors

(38,200)

Chapter 2 Question 11 Input area:

Dec. 31, 2015 Common stock Dec. 31, 2015 Additional paid-in surplus

130,000 2,332,000

Dec. 31, 2016 Common stock Dec. 31, 2016 Additional paid-in surplus

148,000 2,618,000

Cash dividends

148,500

(155,500)

Output area: Cash flow to stockholders

Chapter 2 Question 12 Input area:

From problems 11,12: Cash flow to creditors Cash flow to stockholders

(38,200) (155,500)

New information: Net capital spending Change in net working capital

705,000 (115,000)

Cash flow from assets

(193,700)

Operating cash flow

396,300

Output area:

Chapter 2 Question 13 Input area:

Market value of net fixed assets Book value of net fixed assets Book value of current liabilities Net working capital Market value of current assets

$ $ $ $ $

4,800,000 3,300,000 850,000 220,000 1,050,000

Book value of current assets Book value of net fixed assets Book value of assets

1,070,000 3,300,000 4,370,000

NWC Market value of net fixed assets Total

Output area:

1,050,000 4,800,000 5,850,000

Chapter 2 Question 14 Input area:

Sales Costs Other expenses Depreciation expense Interest expense Taxes Dividends

$ 173,000 91,400 5,100 12,100 8,900 21,090 9,700

New equity Net new long-term debt Increase in fixed assets

2,900 (4,000) 23,140

Output area:

a. Operating cash flow

9,700 24,710

$ 55,410

b. Cash flow to creditors $ 12,900 c. Cash flow to stockholders $

6,800

d. Cash flow from assets

$ 19,700

Net capital spending

$ 35,240

Change in NWC

470

Chapter 2 Question 15 Input area: Sales Costs Addition to retained earnings Dividends paid Interest expense Tax rate

$ $ $ $ $

67,000 49,200 3,500 2,170 1,980 40%

Output area:

Income Statement $

Sales Costs Depreciation expense EBIT Interest expense EBT Taxes Net income

Dividends Addition to retained earnings

$ $ $ $ $

67,000 49,200 6,370 11,430 1,980 9,450 3,780 5,670 2,170 3,500

Chapter 2 Question 16 Input area:

Cash Patents and copyrights Accounts payable Accounts receivable Tangible net fixed assets Inventory Notes payable Accumulated retained earnings Long-term debt

$ $ $ $ $ $ $ $ $

197,000 863,000 288,000 265,000 5,150,000 563,000 194,000 4,586,000 1,590,000

Output area:

Cash Accounts receivable Inventory Current assets

Tangible net fixed assets Intangible net fixed assets Total assets

Balance sheet as o $ 197,000 265,000 563,000 $ 1,025,000

$ $

5,150,000 863,000 7,038,000

f Dec. 31, 2016 Accounts payable Notes payable Current liabilities Long-term debt Total liabilities Common stock Accumulated retained earnings Total liability & owners' equity

$ $ $ $ $

288,000 194,000 482,000 1,590,000 2,072,000 380,000 4,586,000 7,038,000

Chapter 2 Question 17 Input area:

Total liabilities

8,400

$ $

9,300 6,900

a) Owners' equity

900

b) Owners' equity

a) Total assets b) Total assets

Output area:

Chapter 2 Question 18 Input area: Corporation growth taxable income Corporation income taxable income

76,500 7,650,000

Taxable income 0 - 50,000 50,001 - 75,000 75,001 - 100,000 100,001 - 335,000 335,001 - 10,000,000 10,000,001 - 15,000,000 15,000,001 - 18,333,333 18,333,334 +

15% 25% 34% 39% 34% 35% 38% 35%

Output area:

Corporation Growth: Taxes: 15% 25% 34% 39% 34% 35% 38% 35%

50,000 25,000 1,500 0 0 0 0 0 14,260

With a marginal tax rate of 34%, the tax on an additional $10,000 would be $3,400.

Corporation Income: Taxes:

15% 25% 34% 39% 34% 35% 38% 35%

50,000 25,000 25,000 235,000 7,315,000 0 0 0 $ 2,601,000

Chapter 2 Question 19 Input area:

Sales Costs of goods sold Administrative and selling expenses Depreciation expense Interest expense

$ $ $ $ $

Tax rate

2,350,000 1,295,000 530,000 420,000 245,000 35%

Output area:

Costs Income Statement Administrative and selling expenses $ Sales Depreciation expense EBIT $ Interest expense EBT $ Taxes a) Net income $

1,295,000 530,000 2,350,000 420,000 105,000 245,000 (140,000) 0 (140,000)

Chapter 2 Question 20 Input area: From Problem 19: Operating Cash Flow Interest

$ $

525,000 245,000

395,000 0 0 0 0 0

Cash flow from assets Cash flow to stockholders Cash flow to creditors

525,000 395,000 130,000

Net new long-term debt

115,000

New information: Cash dividend New investment in net fixed income New investment in net working capital New stock issued during year Net capital spending Net new equity

Output area:

A firm can still pay out dividends if net income is negative; it just has to be sure there is sufficient cash flow to make dividend payments.

$ $ $ $ $ $ $ $ $ $ $

New debt issued

28,476 20,136 3,408 497 739 19,872 3,528 3,110 22,608 4,234 2,981 40% -

Output area: Income Statement Sales Costs Depreciation expense EBIT Interest expense EBT Taxes a Net income

$ 28,476 20,136 3,408 $ 4,932 497 $ 4,435 1,774 $ 2,661

b Operating cash flow

6,566

$ $

835 6,144

Change in net working capital Net capital spending c Cash flow from assets

(413)

d Cash flow to creditors

497

Cash flow to stockholders

Net new equity

(910) 1,649

Chapter 2 Question 22 Input area:

Sales Costs Depreciation Interest

$ $ $ $

40,664 20,393 3,434 638

Current assets Net fixed assets

$ $

2015 2,718 $ 12,602 $

2016 New fixed assets purchased Tax rate 2016 New long-term debt

$ $

2016 2,881 13,175

7,160 40% 2,155

Output area:

Costs Income Statement Depreciation expense Sales EBIT Interest expense EBT Taxes Net income

a) 2015 2015 Total Total liabilities assets 2015 Owners' equity

20,393 3,434 40,664 16,837 638 16,199 6,480 9,719

$ $

8,047 7,273 15,320

$ $ $

b) 2016 Net working capital 2015 Net working capital Change in net working capital

$ $

1,155 1,544 (389)

c) Net capital spending

4,007

# #

Fixed assets sold Operating cash flow Cash flow from assets d) Net new borrowing Cash flow to creditors Debt retired

3,153

$ $ $ $

13,791 10,173 1,146 (508)

1,009

Current liabilities Long-term debt

$ $

2016 Total assets 2016 Total liabilities 2016 Owners' equity

$ $

2015 1,174 $ 6,873 $

16,056 9,745 6,311

2016 1,726 8,019

Chapter 2 Question 23 Input area:

2016 Income Statement Sales $ Cost of goods sold Selling & Administrative Depreciation EBIT $ Interest EBT $ Taxes Net income $ Dividends $ Addition to retained earnings $

Cash Accounts receivable Inventory Current assets Net fixed assets Total assets

714,978 384,591 157,787 69,038 103,562 24,410 79,152 27,703 51,449 16,200 35,249

$ $

12,115 18,237 30,352

$ $ $

173,100 290,543 493,995

$ $

13,297 20,830 34,127

$ $ $

192,300 361,124 587,551

Output area: Operating cash flow

144,897

513,980 435,670 69,038 147,348

Change in Net Working Capital Ending NWC $ -Beginning NWC Change in NWC $

39,444 27,973 11,471

Capital Spending Ending net fixed assets - Beginning net fixed assets + Depreciation Net capital spending

Cash Flow from Assets Operating cash flow - Net capital spending -Change in NWC Cash flow from assets

Cash Flow to Creditors Interest paid -Net New Borrowing Cash flow to Creditors

Cash Flow to Stockholders Dividends paid -Net new equity raised Cash flow to Stockholders

$ $

144,897 147,348 11,471 (13,922)

24,410 19,200 5,210

16,200 35,332 (19,132)

Chapter 2 Questions 24

Net capital spending = = = = =

NFAend - NFAbeg + Depreciation (NFAend - NFAbeg) + (Depreciation + ADbeg) - ADbeg (NFAend - NFAbeg) + ADend - ADbeg (NFAend + ADend) - (NFAbeg + ADbeg) FAend - FAbeg

Chapter 2 Questions 25 Input area: 1st Taxable income 2nd Taxable income

Taxable income 0 - 50,000 50,001 - 75,000 75,001 - 100,000 100,001 - 335,000 335,001 - 10,000,000 10,000,001 - 15,000,000 15,000,001 - 18,333,333 18,333,334 +

335,001 18,333,334

15% 25% 34% 39% 34% 35% 38% 35%

Output area:

a) The tax bubble causes average tax rates to catch up to marginal rates, thus eliminating the tax advantage of low marginal rates for high income corporations. b)

Taxes: 15% 25% 34% 39% 34% 35% 38% 35%

$ Average tax rate = $ = * denotes marginal tax rate

50,000 25,000 25,000 235,000 1 0 0 0 113,900 113,900 335,001 34%

50,000 25,000 25,000 235,000 9,665,000 5,000,000 3,333,334 0 $ 6,416,667

$ 6,416,667 18,333,334 35%

c) Income 15% 25% 34% 45.75% 34% 35% 38% 35%

200,000

50,000 25,000 25,000 100,000 0 0 0 0 68,000

Taxes = $ $

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200,000 34% 68,000

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