Chapter 2

Problems 1-26

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 the Office button
then "Excel Options," "Add-Ins" and select
"Go." Check "Analyis ToolPak" and
"Solver Add-In," then click "OK."
equire that
Chapter 2
Question 1

Input area:

Current assets $ 5,100

Net fixed assets 23,800

Current liabilities $ 4,300

Long-term debt 7,400

Output area:

Balance sheet
Current assets $ 5,100 Current liabilities $ 4,300
Net fixed assets 23,800 Long-term debt 7,400
Owner's equity 17,200
Total liabilities
Total assets $ 28,900 +total equity $ 28,900

Owner's equity $ 17,200

Net working capital $ 800

Chapter 2
Questions 2-4

Input area:

Sales $ 586,000
Costs 247,000
Depreciation expense 43,000
Interest expense 32,000

Tax rate 35%

Cash dividends $ 73,000

Shares outstanding 85,000

Output area:

Income Statement
Sales $ 586,000
Costs 247,000
Depreciation expense 43,000
EBIT $ 296,000
Interest expense 32,000
EBT $ 264,000
Taxes (35%) 92,400
Net income $ 171,600

Addition to retained earnings $ 98,600

Earnings per share $ 2.02

Dividends per share $ 0.86

Chapter 2
Question 5

Input area:

Book value of net fixed assets $ 3,700,000

Book value of current liabilities 1,100,000

Net working capital $ 380,000

Market value of net fixed assets $ 4,900,000

Market value of current assets 1,600,000

Output area:

Net working capital $ 380,000

Current liabilities 1,100,000
Book value of current assets $ 1,480,000
Book value of net fixed assets 3,700,000
Book value of total assets $ 5,180,000

Market value of current assets $ 1,600,000

Market value of net fixed assets 4,900,000
Market value of total assets $ 6,500,000
Chapter 2
Questions 6,7

Input area:

Taxable income $ 236,000

Taxable income
0 - 50,000 15%
50,001 - 75,000 25%
75,001 - 100,000 34%
100,001 - 335,000 39%
335,001 - 10,000,000 34%
10,000,001 - 15,000,000 35%
15,000,001 - 18,333,333 38%
18,333,334 + 35%

Output area:

Taxes:
15% $ 50,000
25% 25,000
34% 25,000
39% 136,000
34% 0
35% 0
38% 0
35% 0
$ 75,290

Average tax rate: $ 75,290 = 31.90%

236,000

The marginal tax rate is 39%

Chapter 2
Question 8

Input area:

Sales $ 27,500
Costs 13,280
Depreciation Expense 2,300
Interest Expense 1,105

Tax rate 35%

Output area:

Income Statement
Sales $ 27,500
Costs 13,280
Depreciation expense 2,300
EBIT $ 11,920
Interest expense 1,105
EBT $ 10,815
Taxes (35%) 3,785
Net income $ 7,030

Operating cash flow $ 10,435

Chapter 2
Question 9

Input area:

Dec. 31, 2008 net fixed assets $ 3,400,000

Dec. 31, 2009 net fixed assets 4,200,000

Depreciation expense $ 385,000

Output area:

Net capital spending $ 1,185,000

Chapter 2
Question 10

Input area:

Dec. 31, 2008 Current assets $ 2,100

Dec. 31, 2008 Current liabilities 1,380

Dec. 31, 2009 current assets $ 2,250

Dec. 31, 2009 current liabilities 1,710

Output area:

Ending NWC $ 540

Beginning NWC $ 720

Additions to net working capital $ (180)

Chapter 2
Question 11

Input area:

Dec. 31, 2008 Long-term debt $ 2,600,000

Dec. 31, 2009 Long-term debt $ 2,900,000

Interest expense $ 170,000

Output area:

Cash flow to creditors $ (130,000)

Chapter 2
Question 12

Input area:

Dec. 31, 2008 Common stock $ 740,000

Dec. 31, 2008 Additional paid-in surplus 5,200,000

Dec. 31, 2009 Common stock $ 815,000

Dec. 31, 2009 Additional paid-in surplus 5,500,000

Cash dividends $ 490,000

Output area:

Cash flow to stockholders $ 115,000

Chapter 2
Question 13

Input area:

From problems 11,12:

2009 Cash flow to creditors $ (130,000)
2009 Cash flow to stockholders 115,000

New information:
2009 Net capital spending $ 940,000
Change in net working capital (85,000)

Output area:

Cash flow from assets $ (15,000)

Operating cash flow $ 840,000

 Chapter 2
Questions 14

Input area:

Sales $ 196,000
Costs 104,000
Other expenses 6,800
Depreciation expense 9,100
Interest expense 14,800
Taxes 21,455
Dividends 10,400

2009 New equity $ 5,700

Net new long-term debt (7,300)
Change in fixed assets 27,000

Output area:

Income Statement
Sales $ 196,000
Costs 104,000
Other expenses 6,800
Depreciation expense 9,100
EBIT $ 76,100
Interest expense 14,800
EBT $ 61,300
Taxes 21,455
Net income $ 39,845
Dividends $ 10,400
Addition to retained earnings $ 29,445

a. Operating cash flow $ 63,745

b. Cash flow to creditors $ 22,100

c. Cash flow to stockholders $ 4,700

d. Cash flow from assets $ 26,800

Net capital spending $ 36,100

Change in NWC $ 845
Chapter 2
Questions 15

Input area:

Sales $ 41,000
Costs $ 19,500
Addition to retained earnings $ 5,100
Dividends paid $ 1,500
Interest expense $ 4,500
Tax rate 35%

Output area:

Income Statement
Sales $ 41,000
Costs 19,500
Depreciation expense $ 6,846
EBIT $ 14,654
Interest expense 4,500
EBT $ 10,154
Taxes 3,554
Net income $ 6,600
Dividends $ 1,500
Addition to retained earnings $ 5,100
Chapter 2
Question 16

Input area:

Cash $ 195,000
Intangible net fixed assets 780,000
Accounts payable 405,000
Accounts receivable 137,000
Tangible net fixed assets 2,800,000
Inventory 264,000
Notes payable 160,000
Accumulated retained earnings 1,934,000
Long-term debt 1,195,300

Output area:

Balance sheet as of Dec. 31, 2009

Cash $ 195,000
Accounts receivable 137,000
Inventory 264,000
Current assets $ 596,000

Tangible net fixed assets $ 2,800,000

Intangible net fixed assets 780,000
Total assets $ 4,176,000
e sheet as of Dec. 31, 2009
Accounts payable $ 405,000
Notes payable 160,000
Current liabilities $ 565,000
Long-term debt 1,195,300
Total liabilities $ 1,760,300

Common stock $ 481,700

Accumulated retained earnings 1,934,000
Total liability & owners' equity $ 4,176,000
 Chapter 2
Question 17

Input area:

Total liabilities $ 7,300

a. Total assets $ 8,400

b. Total assets 6,700

Output area:

a. Owners' equity $ 1,100

b. Owners' equity 0
Chapter 2
Questions 18

Input area:

Corporation growth taxable income $ 88,000

Corporation income taxable income 8,800,000

Taxable income
0 - 50,000 15%
50,001 - 75,000 25%
75,001 - 100,000 34%
100,001 - 335,000 39%
335,001 - 10,000,000 34%
10,000,001 - 15,000,000 35%
15,000,001 - 18,333,333 38%
18,333,334 + 35%

Output area:

Corporation Growth:
Taxes:
15% $ 50,000
25% 25,000
34% 13,000
39% 0
34% 0
35% 0
38% 0
35% 0
$ 18,170

With a marginal tax rate of 34%, the tax on an

additional $10,000 would be $3,400.

Corporation Income:
Taxes:
 15% $ 50,000
25% 25,000
34% 25,000
39% 235,000
34% 8,465,000
35% 0
38% 0
35% 0
$ 2,992,000

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
Questions 19

Input area:

Sales $ 730,000
Costs 580,000
Administrative and selling expenses 105,000
Depreciation expense 135,000
Interest expense 75,000

Tax rate 35%

Output area:

Income Statement
Sales $ 730,000
Costs 580,000
Administrative and selling expenses 105,000
Depreciation expense 135,000
EBIT $ (90,000)
Interest expense 75,000
EBT $ (165,000)
Taxes 0
a. Net income $ (165,000)

b. Operating cash flow $ 45,000

c. Net income was negative because of the tax deductibility and

interest expense. However, the actual cash flow from operations
was positive because depreciation is a non-cash expense and
interest is a financing, not an operating, expense.
Chapter 2
Question 20

Input area:

From Problem 19:

Operating Cash Flow $ 45,000
Interest 75,000

New information:
Cash dividend $ 25,000
New investment in net fixed income 0
New investment in net working capital 0
New stock issued during year 0
Net capital spending 0
Net new equity 0

Output area:

Cash flow from assets $ 45,000

Cash to from stockholders $ 25,000
Cash flow to creditors $ 20,000

Net new long-term debt $ 55,000

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
Questions 21

Input area:

Sales $ 22,800
Cost of goods sold 16,050
Depreciation expense 4,050
Interest expense 1,830
Dividends paid 1,300
New debt issued 0

2008 Net fixed assets $ 13,650

2008 Current assets 4,800
2008 Current liabilities 2,700

2009 Net fixed assets $ 16,800

2009 Current assets 5,930
2009 Current liabilities 3,150

Tax rate 34%

Output area:

Income Statement
Sales $ 22,800
Costs 16,050
Depreciation expense 4,050
EBIT $ 2,700
Interest expense 1,830
EBT $ 870
Taxes (34%) 296
a. Net income $ 574

b. Operating cash flow $ 6,454

c. Ending NWC $ 2,780

Beginning NWC $ 2,100
Change in net working capital $ 680
Net capital spending $ 7,200

Cash flow from assets $ (1,426)

 The cash flow from assets can be positive or negative, since it represents whether
the firm raised funds or distributed funds on a net basis. In this problem, even though
net income and OCF are positive, the firm invested heavily in both fixed assets and net
working capital; it had to raise a net $1,426 in funds from its stockholders and
creditors to make these investments.

d. Cash flow to creditors $ 1,830

Cash flow to stockholders $ (3,256)

New equity $ 4,556

The firm has positive earnings in the accounting sense (NI>0) and had positive cash flow
from operations. The firm invested $680 in new NWC and $7,200
in new fixed assets. The firm had to raise $1,426 from its
stakeholders to support this new investment. It accomplished this by raising $4,556
in the form of equity. After paying out $1,300 of this in the form of dividends to
shareholders and $1,830 in the form of interest to creditors,
$1,426 was left to just meet the firm's cash flow needs
for investment.
 Chapter 2
Questions 22

Input area:

Sales $ 8,280
Cost of goods sold $ 3,861
Depreciation expense $ 738
Interest expense $ 211

2008 Current assets $ 653

2008 Net fixed assets $ 2,691
2008 Current liabilities $ 261
2008 Long-term debt $ 1,422

2009 Current assets $ 707

2009 Net fixed assets $ 3,240
2009 Current liabilities $ 293
2009 Long-term debt $ 1,512

2009 New fixed assets purchased $ 1,350

2009 New long-term debt $ 270
Tax rate 35%

Output area:

Income Statement
Sales $ 8,280.00
Costs 3,861.00
Depreciation expense 738.00
EBIT $ 3,681.00
Interest expense 211.00
EBT $ 3,470.00
Taxes (35%) 1,214.50
Net income $ 2,255.50

a. 2008 Total assets $ 3,344.00

2008 Total liabilities $ 1,683.00
2008 Owners' equity $ 1,661.00

2009 Total assets $ 3,947.00

2009 Total liabilities $ 1,805.00
2009 Owners' equity $ 2,142.00
b. 2008 Net working capital $ 392.00
2009 Net working capital $ 414.00
Change in net working capital $ 22.00
c. Net capital spending $ 1,287.00
Fixed assets sold $ 63.00

2009 Operating cash flow $ 3,204.50

Cash flow from assets $ 1,895.50

d. Debt retired $ 180.00

Net new borrowing $ 90.00

Cash flow to creditors $ 121.00
Chapter 2
Questions 23

Net capital spending = NFAend - NFAbeg + Depreciation

= (NFAend - NFAbeg) + (Depreciation + ADbeg) - ADbeg
= (NFAend - NFAbeg) + ADend - ADbeg
= (NFAend + ADend) - (NFAbeg + ADbeg)
= FAend - FAbeg
 Chapter 2
Questions 24

Input area:

1st Taxable income $ 335,001

2nd Taxable income 18,333,334

Taxable income
0 - 50,000 15%
50,001 - 75,000 25%
75,001 - 100,000 34%
100,001 - 335,000 39%
335,001 - 10,000,000 34%
10,000,001 - 15,000,000 35%
15,000,001 - 18,333,333 38%
18,333,334 + 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% $ 50,000 $ 50,000
25% 25,000 25,000
34% 25,000 25,000
39% 235,000 235,000
34% 1 * 9,665,000
35% 0 5,000,000
38% 0 3,333,333
35% 0 1 *
$ 113,900 $ 6,416,667

Average tax rate = $ 113,900 $ 6,416,667

335,001 18,333,334
= 34% 35%
 * denotes marginal tax rate

c) Income $ 200,000

15% $ 50,000
25% 25,000
34% 25,000
45.75% 100,000
34% 0
35% 0
38% 0
35% 0
$ 68,000

Taxes = $ 200,000
34%
$ 68,000
Chapter 2
Questions 25

Input area:

2008 2009
Sales $ 7,233 $ 8,085
Depreciation 1,038 1,085
Cost of goods sold 2,487 2,942
Other expenses 591 515
Interest 485 579
Cash 3,792 4,041
Accounts receivable 5,021 5,892
Short-term notes payable 732 717
Long-term debt 12,700 15,435
Net fixed assets 31,805 33,921
Accounts payable 3,984 4,025
Inventory 8,927 9,555
Dividends 882 1,011

Tax rate 34% 34%

Output area:

Balance sheet as of Dec. 31, 2008

Cash $ 3,792 Accounts payable $ 3,984
Accounts receivable 5,021 Notes payable 732
Inventory 8,927 Current liabilities $ 4,716
Current assets $ 17,740
Long-term debt $ 12,700
Net fixed assets $ 31,805 Owners' equity 32,129
Total assets $ 49,545 Total liab. & equity $ 49,545

Balance sheet as of Dec. 31, 2009

Cash $ 4,041 Accounts payable $ 4,025
Accounts receivable 5,892 Notes payable 717
Inventory 9,555 Current liabilities $ 4,742
Current assets $ 19,488
Long-term debt $ 15,435
Net fixed assets $ 33,921 Owners' equity 33,232
Total assets $ 53,409 Total liab. & equity $ 53,409
 2008 Income Statement
Sales $ 7,233.00
Costs 2,487.00
Other expenses 591.00
Depreciation 1,038.00
EBIT $ 3,117.00
Interest 485.00
EBT $ 2,632.00
Taxes 894.88
Net income $ 1,737.12
Dividends $ 882.00
Addition to retained earnings 855.12

2009 Income Statement

Sales $ 8,085.00
Costs 2,942.00
Other expenses 515.00
Depreciation 1,085.00
EBIT $ 3,543.00
Interest 579.00
EBT $ 2,964.00
Taxes 1,007.76
Net income $ 1,956.24
Dividends $ 1,011.00
Addition to retained earnings 945.24
Chapter 2
Questions 26

Input area:

2008 2009
Sales $ 7,233 $ 8,085
Depreciation 1,038 1,085
Cost of goods sold 2,487 2,942
Other expenses 591 515
Interest 485 579
Cash 3,792 4,041
Accounts receivable 5,021 5,892
Short-term notes payable 732 717
Long-term debt 12,700 15,435
Net fixed assets 31,805 33,921
Accounts payable 3,984 4,025
Inventory 8,927 9,555
Dividends 882 1,011

Tax rate 34% 34%

From Problem 25:

Owners' equity $ 32,129 $ 33,232

Output area:

2009 Income Statement

Sales $ 8,085.00
Costs 2,942.00
Other expenses 515.00
Depreciation 1,085.00
EBIT $ 3,543.00
Interest 579.00
EBT $ 2,964.00
Taxes 1,007.76
Net income $ 1,956.24
Dividends $ 1,011.00
Addition to retained earnings 945.24

Operating cash flow $ 3,620.24

Change in NWC 1,722.00
Net capital spending 3,201.00

Cash flow from assets $ (1,302.76)

Net new long-term debt $ 2,735.00

Cash flow to creditors $ (2,156.00)

Net new equity $ 157.76

Cash flow to stockholders $ 853.24