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3-1 From the data given in the problem, we know the following:
b. We are given that the firm’s total assets equal $2,500,000. Since both sides of the balance
sheet must equal, total liabilities and equity must equal total assets = $2,500,000.
d. Total liabilities and equity = Current liabilities + Long-term debt + Total common equity
$2,500,000 = Current liabilities + $750,000 + $1,500,000
$2,500,000 = Current liabilities + $2,250,000
Current liabilities = $2,500,000 – $2,250,000
Current liabilities = $250,000.
g. Net operating working capital = Current assets – (Current liabilities – Notes payable)
Net operating working capital = $500,000 – ($250,000 – $150,000)
Net operating working capital = $400,000.
The difference between the two is equal to the notes payable balance.
Chapter 3: Financial Statements, Cash Flow, and Taxes Answers and Solutions 1
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
3-2 NI = $3,000,000; EBIT = $6,000,000; T = 40%; Interest = ?
Need to set up an income statement and work from the bottom up.
EBIT $6,000,000
Interest 1,000,000 $3,000,000 $3,000,000
EBT $5,000,000 EBT =
(1 T) 0.6
Taxes (40%) 2,000,000
NI $3,000,000
Chapter 3: Financial Statements, Cash Flow, and Taxes Answers and Solutions 2
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Total After -tax %
3-7 EVA = EBIT(1 – T) – invested cost of
capital capital
EVA = $3,000,000(0.6) – [$20,000,000 × 0.08]
EVA = $1,800,000 – $1,600,000
EVA = $200,000.
3-8 Statements b and d will decrease the amount of cash on a company’s balance sheet.
Statement a will increase cash through the sale of common stock. Selling stock provides cash
through financing activities. On one hand, Statement c would decrease cash; however, it is also
possible that Statement c would increase cash, if the firm receives a tax refund for taxes paid in
a prior year.
Sales $22,500,000
Operating costs (including depreciation) 18,000,000
EBIT $ 4,500,000
3-11 a. From the statement of cash flows the change in cash must equal cash flow from operating
activities plus long-term investing activities plus financing activities. First, we must identify
the change in cash as follows:
Cash at the end of the year $25,000
– Cash at the beginning of the year – 55,000
Change in cash -$30,000
The sum of cash flows generated from operations, investment, and financing must equal a
negative $30,000. Therefore, we can calculate the cash flow from operations as follows:
CF from operations CF from investing CF from financing = in cash
CF from operations $250,000 $170,000 = -$30,000
CF from operations = $50,000.
Chapter 3: Financial Statements, Cash Flow, and Taxes Answers and Solutions 3
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
b. Since we determined that the firm’s cash flow from operations totaled $50,000 in Part a of
this problem, we can now calculate the firm’s net income as follows:
Increase in Increase in
NI Depreciati on accrued A/R and = CF from
operations
liabilitie s inventory
NI + $10,000 + $25,000 – $100,000 = $50,000
NI – $65,000 = $50,000
NI = $115,000.
IV. Summary
Net increase in cash (Net sum of I., II., and III.) $ 200,000
Cash at beginning of year 100,000
Cash at end of year $ 300,000
Note: To arrive at capital expenditures you add depreciation to the change in net FA, so
Capital expenditures = $5,000 + $3,000 = $8,000.
Chapter 3: Financial Statements, Cash Flow, and Taxes Answers and Solutions 4
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
c. Statement of Stockholders’ Equity, 2014
Common Stock Retained Total Stockholders’
Shares Amount Earnings Equity
Balances, 12/31/13 5,000 $50,000 $20,850 $70,850
2014 Net income 22,350
Cash dividends (11,175)
Addition (Subtraction)
to retained earnings 11,175
Balances, 12/31/14 5,000 $50,000 $32,025 $82,025
d. From Bailey’s 2014 financial statements, you can determine EBIT = $39,000 and Tax rate =
40%. NOWC2014 was calculated in Part a.
3-14 Working up the income statement you can calculate the new sales level would be $12,681,482.
The retained earnings balance on December 31, 2014 is $1,600,000,000. To arrive at this
statement, you must work up the retained earnings column because you don’t know the
12/31/13 retained earnings balance.
Chapter 3: Financial Statements, Cash Flow, and Taxes Answers and Solutions 5
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
c. Cash + Equivalents = $15 million.
Net operating
3-16 a. = Current assets – (Current liabilities – Notes payable)
working capital 2013
= $360,000,000 – ($201,500,000 – $51,500,000)
= $360,000,000 – $150,000,000 = $210,000,000.
Net operating
working capital 2014 =$372,000,000 – ($247,000,000 – $67,000,000)
= $372,000,000 – $180,000,000 = $192,000,000.
Note that depreciation must be added to Net P&E to arrive at capital expenditures.
c. The large increase in dividends for 2014 can most likely be attributed to a large increase in
free cash flow from 2013 to 2014, since FCF represents the amount of cash available for
payment to stockholders after the company has made all investments in fixed assets, new
products, and working capital necessary to sustain the business.
Chapter 3: Financial Statements, Cash Flow, and Taxes Answers and Solutions 6
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Solutions to End-of-Chapter Problems
3-1 From the data given in the problem, we know the following:
b. We are given that the firm’s total assets equal $2,500,000. Since both sides of the balance
sheet must equal, total liabilities and equity must equal total assets = $2,500,000.
d. Total liabilities and equity = Current liabilities + Long-term debt + Total common equity
$2,500,000 = Current liabilities + $750,000 + $1,500,000
$2,500,000 = Current liabilities + $2,250,000
Current liabilities = $2,500,000 – $2,250,000
Current liabilities = $250,000.
g. Net operating working capital = Current assets – (Current liabilities – Notes payable)
Net operating working capital = $500,000 – ($250,000 – $150,000)
Net operating working capital = $400,000.
The difference between the two is equal to the notes payable balance.
Chapter 3: Financial Statements, Cash Flow, and Taxes Answers and Solutions 7
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
3-2 NI = $3,000,000; EBIT = $6,000,000; T = 40%; Interest = ?
Need to set up an income statement and work from the bottom up.
EBIT $6,000,000
Interest 1,000,000 $3,000,000 $3,000,000
EBT $5,000,000 EBT =
(1 T) 0.6
Taxes (40%) 2,000,000
NI $3,000,000
Chapter 3: Financial Statements, Cash Flow, and Taxes Answers and Solutions 8
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Total After -tax %
3-7 EVA = EBIT(1 – T) – invested cost of
capital capital
EVA = $3,000,000(0.6) – [$20,000,000 × 0.08]
EVA = $1,800,000 – $1,600,000
EVA = $200,000.
3-8 Statements b and d will decrease the amount of cash on a company’s balance sheet.
Statement a will increase cash through the sale of common stock. Selling stock provides cash
through financing activities. On one hand, Statement c would decrease cash; however, it is also
possible that Statement c would increase cash, if the firm receives a tax refund for taxes paid in
a prior year.
Sales $22,500,000
Operating costs (including depreciation) 18,000,000
EBIT $ 4,500,000
3-11 a. From the statement of cash flows the change in cash must equal cash flow from operating
activities plus long-term investing activities plus financing activities. First, we must identify
the change in cash as follows:
Cash at the end of the year $25,000
– Cash at the beginning of the year – 55,000
Change in cash -$30,000
The sum of cash flows generated from operations, investment, and financing must equal a
negative $30,000. Therefore, we can calculate the cash flow from operations as follows:
CF from operations CF from investing CF from financing = in cash
CF from operations $250,000 $170,000 = -$30,000
CF from operations = $50,000.
Chapter 3: Financial Statements, Cash Flow, and Taxes Answers and Solutions 9
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
b. Since we determined that the firm’s cash flow from operations totaled $50,000 in Part a of
this problem, we can now calculate the firm’s net income as follows:
Increase in Increase in
NI Depreciati on accrued A/R and = CF from
operations
liabilitie s inventory
NI + $10,000 + $25,000 – $100,000 = $50,000
NI – $65,000 = $50,000
NI = $115,000.
IV. Summary
Net increase in cash (Net sum of I., II., and III.) $ 200,000
Cash at beginning of year 100,000
Cash at end of year $ 300,000
Note: To arrive at capital expenditures you add depreciation to the change in net FA, so
Capital expenditures = $5,000 + $3,000 = $8,000.
Chapter 3: Financial Statements, Cash Flow, and Taxes Answers and Solutions 10
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
c. Statement of Stockholders’ Equity, 2014
Common Stock Retained Total Stockholders’
Shares Amount Earnings Equity
Balances, 12/31/13 5,000 $50,000 $20,850 $70,850
2014 Net income 22,350
Cash dividends (11,175)
Addition (Subtraction)
to retained earnings 11,175
Balances, 12/31/14 5,000 $50,000 $32,025 $82,025
d. From Bailey’s 2014 financial statements, you can determine EBIT = $39,000 and Tax rate =
40%. NOWC2014 was calculated in Part a.
3-14 Working up the income statement you can calculate the new sales level would be $12,681,482.
The retained earnings balance on December 31, 2014 is $1,600,000,000. To arrive at this
statement, you must work up the retained earnings column because you don’t know the
12/31/13 retained earnings balance.
Chapter 3: Financial Statements, Cash Flow, and Taxes Answers and Solutions 11
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
c. Cash + Equivalents = $15 million.
Net operating
3-16 a. = Current assets – (Current liabilities – Notes payable)
working capital 2013
= $360,000,000 – ($201,500,000 – $51,500,000)
= $360,000,000 – $150,000,000 = $210,000,000.
Net operating
working capital 2014 =$372,000,000 – ($247,000,000 – $67,000,000)
= $372,000,000 – $180,000,000 = $192,000,000.
Note that depreciation must be added to Net P&E to arrive at capital expenditures.
c. The large increase in dividends for 2014 can most likely be attributed to a large increase in
free cash flow from 2013 to 2014, since FCF represents the amount of cash available for
payment to stockholders after the company has made all investments in fixed assets, new
products, and working capital necessary to sustain the business.
Chapter 3: Financial Statements, Cash Flow, and Taxes Answers and Solutions 12
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter 3: Financial Statements, Cash Flow, and Taxes Answers and Solutions 13
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.