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Essentials of Corporate Finance

Stephen Ross, Randolph Westerfield, Bradford Jordan

Chapter 2

Financial Statements, Taxes, and Cash Flow - all with Video Answers

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Chapter Questions

Problem 1

Arredondo, Inc., has current assets of $$\$ 2,170$$, net fixed assets of $$\$ 9,300$$, current liabilities of $$\$ 1,350$$, and long-term debt of $$\$ 3,980$$. What is the value of the shareholders' equity account for this firm? How much is net working capital?

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05:28

Problem 1

SDJ, Inc., has net working capital of $$\$ 1,410$$, current liabilities of $$\$ 5,810$$, and inventory of $$\$ 1,315$$. What is the current ratio? What is the quick ratio?

Puneet Prajapati
Puneet Prajapati
Numerade Educator

Problem 2

Lifeline, Inc., has sales of $$\$ 585,000$$, costs of $$\$ 273,000$$, depreciation expense of $$\$ 71,000$$, interest expense of $$\$ 38,000$$, and a tax rate of 35 percent. What is the net income for this firm?

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Problem 2

Here and Gone, Inc., has sales of $$\$ 18$$ million, total assets of $$\$ 13$$ million, and total debt of $$\$ 3.8$$ million. If the profit margin is 8 percent, what is net income? What is ROA? What is ROE?

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Problem 3

Pujols Lumber Yard has a current accounts receivable balance of $$\$ 438,516$$. Credit sales for the year just ended were $\$ 6,257,380$. What is the receivables turnover? The days' sales in receivables? How long did it take on average for credit customers to pay off their accounts during the past year?

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Problem 3

Suppose the firm in Problem 2 paid out $$\$ 36,000$$ in cash dividends. What is the addition to retained earnings?

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Problem 4

Suppose the firm in Problem 3 had 40,000 shares of common stock outstanding. What is the earnings per share, or EPS, figure? What is the dividends per share figure?

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Problem 5

Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $$\$ 4$$ million. The machinery can be sold to the Romulans today for $$\$6.2$$ million. Klingon's current balance sheet shows net fixed assets of $$\$2.8$$ million, current liabilities of $$\$ 710,000$$, and net working capital of $$\$ 130,000$$. If all the current assets were liquidated today, the company would receive $$\$ 825,000$$ cash. What is the book value of Klingon's assets today? What is the market value?

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Problem 6

The SGS Co. had $$\$ 275,000$$ in taxable income. Using the rates from Table 2.3 in the chapter, calculate the company's income taxes.

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Problem 7

In Problem 6, what is the average tax rate? What is the marginal tax rate?

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Problem 8

Hammett, Inc., has sales of $$\$ 19,570$$, costs of $$\$ 9,460$$, depreciation expense of $$\$ 2,130$$, and interest expense of $$\$ 1,620$$. If the tax rate is 35 percent, what is the operating cash flow, or OCF?

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Problem 9

Rotweiler Obedience School's December 31,2009, balance sheet showed net fixed assets of $$\$ 1.725$$ million, and the December 31, 2010, balance sheet showed net fixed assets of $$\$2.04$$ million. The company's 2010 income statement showed a depreciation expense of $$\$ 321,000$$. What was Rotweiler's net capital spending for 2010 ?

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Problem 10

The December 31, 2009, balance sheet of Anna's Tennis Shop, Inc., showed current assets of $$\$ 1,015$$ and current liabilities of $$\$ 870$$. The December 31, 2010, balance sheet showed current assets of $$\$ 1,230$$ and current liabilities of $$\$ 905$$. What was the company's 2010 change in net working capital, or NWC?

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Problem 11

The December 31,2009 , balance sheet of Schism, Inc., showed long-term debt of $$\$ 1.375$$ million, and the December 31, 2010, balance sheet showed long-term debt of $$\$ 1.53$$ million. The 2010 income statement showed an interest expense of $$\$ 91,500$$. What was the firm's cash flow to creditors during 2010 ?

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Problem 12

The December 31,2009 , balance sheet of Schism, Inc., showed $$\$ 135,000$$ in the common stock account and $$\$ 2.6$$ million in the additional paid-in surplus account. The December 31, 2010, balance sheet showed $$\$ 145,000$$ and $$\$ 2.9$$ million in the same two accounts, respectively. If the company paid out $$\$ 140,000$$ in cash dividends during 2010 , what was the cash flow to stockholders for the year?

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Problem 13

Given the information for Schism, Inc., in Problems 11 and 12, suppose you also know that the firm's net capital spending for 2010 was $$\$ 910,000$$, and that the firm reduced its net working capital investment by $$\$ 120,000$$. What was the firm's 2010 operating cash flow, or OCF?

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Problem 14

Sheffield Co. shows the following information on its 2010 income statement: sales $$=\$ 153,000$$; costs $$=\$ 81,900$$; other expenses $$=\$ 5,200$$; depreciation expense $$=\$ 10,900$$; interest expense $$=\$ 8,400$$; taxes $$=$ $\$ 16,330$$; dividends $$=\$ 7,200$$. In addition, you're told that the firm issued $$\$ 2,600$$ in new equity during 2010 , and redeemed $$\$ 3,900$$ in outstanding long-term debt.
a. What is the 2010 operating cash flow?
b. What is the 2010 cash flow to creditors?
c. What is the 2010 cash flow to stockholders?
d. If net fixed assets increased by $$\$ 20,250$$ during the year, what was the addition to NWC?

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Problem 15

Given the following information for Sookie's Cookies Co., calculate the depreciation expense: sales $$=\$ 51,000$$; costs $$=\$ 39,800$$; addition to retained earnings $$=\$ 2,300$$; dividends paid $$=\$ 925$$; interest expense $$=\$ 1,580$$; tax rate $=40$ percent.

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Problem 16

Prepare a balance sheet for Alaskan Orange Corp. as of December 31,2010 , based on the following information: cash = $$\$ 193,000$$; patents and copyrights $$=\$ 847,000$$; accounts payable $$=\$ 296,000$$; accounts receivable $$=\$ 253,000$$; tangible net fixed assets $$=\$ 5,100,000$$; inventory $$=\$ 538,000$$; notes payable $$=\$ 189,000$$; accumulated retained earnings $$=\$ 4,586,000 ;$$ long-term debt $$=\$ 1,250,000$$.

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Problem 17

Irrational, Inc., is obligated to pay its creditors $$\$ 8,400$$ during the year.
a. What is the value of the shareholders' equity if assets equal $$\$ 9,300$$ ?
b. What if assets equal $$\$ 6,900$$ ?

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Problem 18

(Refer to Table 2.3.) Corporation Growth has $$\$ 89,000$$ in taxable income, and Corporation Income has $$\$ 8,900,000$$ in taxable income.
a. What is the tax bill for each firm?
b. Suppose both firms have identified a new project that will increase taxable income by $$\$ 10,000$$. How much in additional taxes will each firm pay? Why is this amount the same?

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Problem 19

During the year, Belyk Paving $\mathrm{Co}$. had sales of $$\$ 2,400,000$$. Cost of goods sold, administrative and selling expenses, and depreciation expense were $$\$ 1,425,000, \$ 435,000$$, and $$\$ 490,000$$, respectively. In addition, the company had an interest expense of $$\$ 215,000$$ and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.)
a. What is Belyk's net income?
b. What is its operating cash flow?
c. Explain your results in (a) and (b).

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Problem 20

In Problem 19, suppose Belyk Paving $C_0$. paid out $$\$ 400,000$$ in cash dividends. Is this possible? If no new investments were made in net fixed assets or net working capital, and if no new stock was issued during the year, what do you know about the firm's long-term debt account?

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Problem 21

Titan Football Manufacturing had the following operating results for 2010 : sales $$=\$ 19,780$$; cost of goods sold $$=\$ 13,980$$; depreciation expense $$=\$ 2,370$$; interest expense $$=\$ 345$$; dividends paid $$=\$ 550$$. At the beginning of the year, net fixed assets were $$\$ 13,800$$, current assets were $$\$ 2,940$$, and current liabilities were $$\$ 2,070$$. At the end of the year, net fixed assets were $$\$ 16,340$$, current assets were $$\$ 3,280$$, and current liabilities were $$\$ 2,160$$. The tax rate for 2010 was 35 percent.
a. What is net income for 2010 ?
b. What is the operating cash flow for 2010 ?
c. What is the cash flow from assets for 2010? Is this possible? Explain.
d. If no new debt was issued during the year, what is the cash flow to creditors? What is the cash flow to stockholders? Explain and interpret the positive and negative signs of your answers in (a) through (d).

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Problem 22

Consider the following abbreviated financial statements for Cabo Wabo, Inc.:
TABLE CANT COPY
a. What is owners' equity for 2009 and 2010 ?
b. What is the change in net working capital for 2010 ?
c. In 2010, Cabo Wabo purchased $$\$5,616$$ in new fixed assets. How much in fixed assets did Cabo Wabo sell? What is the cash flow from assets for the year? (The tax rate is 40 percent.)
d. During 2010, Cabo Wabo raised $$\$ 1,690$$ in new long-term debt. How much long-term debt must Cabo Wabo have paid off during the year? What is the cash flow to creditors?

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01:55

Problem 23

Graffiti Advertising, Inc., reported the following financial statements for the last two years. Construct the cash flow identity for the company. Explain what each number means.
TABLE CANT COPY

Caleb Wood
Caleb Wood
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Problem 24

On the balance sheet, the net fixed assets (NFA) account is equal to the gross fixed assets (FA) account (which records the acquisition cost of fixed assets) minus the accumulated depreciation (AD) account (which records the total depreciation taken by the firm against its fixed assets). Using the fact that NFA $=\mathrm{FA}-\mathrm{AD}$, show that the expression given in the chapter for net capital spending, NFA $-\mathrm{NFA}_{\text {beg }}+\mathrm{D}$ (where $\mathrm{D}$ is the depreciation expense during the year), is equivalent to $\mathrm{FA}_{\text {end }}-\mathrm{FA}_{\mathrm{beg}}$.

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Problem 25

Refer to the corporate marginal tax rate information in Table 2.3.
a. Why do you think the marginal tax rate jumps up from 34 percent to 39 percent at a taxable income of $$\$ 100,001$$, and then falls back to a 34 percent marginal rate at a taxable income of $$\$ 335,001$$ ?
b. Compute the average tax rate for a corporation with exactly $$\$ 335,001$$ in taxable income. Does this confirm your explanation in part (a)? What is the average tax rate for a corporation with exactly $$\$ 18,333,334$$ ? Is the same thing happening here?
c. Both the 39 percent and 38 percent tax rates represent what is called a tax "bubble." Suppose the government wanted to lower the upper threshold of the 39 percent marginal tax bracket from $$\$ 335,000$$ to $$\$ 200,000$$. What would the new 39 percent bubble rate have to be?

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