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Chapter 2

Problems

Klingon Widgets, Inc., purchased new cloaking machinery four years ago for \$8 million. The machinery can be sold to the Romulans today for \$7.3 million. Klingons current balance sheet shows net fixed assets of \$6 million, current liabilities of \$760,000, and net working capital of \$219,000. If all the current assets were liquidated today, the company would receive \$1.01 million cash. What is the book value of Klingons total assets today? What is the market value?

CA = NWC + CL = \$219,000 + 760,000 = \$979,000

Book value CA Book value NFA \$ 979,000 6,000,000 Market value CA Market value NFA \$

1,010,000
7,300,000

6,979,000

Market value assets \$

8,310,000

Billys Exterminators, Inc., has sales of \$592,000, costs of \$284,000, depreciation expense of \$36,000, interest expense of \$28,000, and a tax rate of 35 percent. What is the net income?

Income Statement

Sales
Costs Depreciation EBIT

592,000
284,000 36,000

272,000

Interest
EBT Taxes (35%) Net income \$ \$

28,000
244,000 85,400 158,600

Corporation Growth has \$86,000 in taxable income, and Corporation Income has \$8,600,000 in taxable income. Use the tax rates from the table given below:

a What is the tax bill for each firm? . Suppose both firms have identified a new project that will increase taxable income by \$13,000. How much in additional taxes will each firm pay

Cash flow to creditors

The 2010 balance sheet of Marias Tennis Shop, Inc., showed long-term debt of \$2.5 million, and the 2011 balance sheet showed long-term debt of \$2.65 million. The 2011 income statement showed an interest expense of \$100,000. What is the cash flow to creditors?

Cash flow to creditors = Interest paid Net new borrowing Cash flow to creditors = Interest paid (LTDend LTDbeg) Cash flow to creditors = \$100,000 (\$2,650,000 2,500,000) Cash flow to creditors = \$50,000

Cash flow to stockholders

The 2010 balance sheet of The Sports Store showed \$800,000 in the common stock account and \$6.7 million in the additional paid-in surplus account. The 2011 balance sheet showed \$872,000 and \$8 million in the same two accounts, respectively. The company paid out \$600,000 in cash dividends during 2011. What is the cash flow to stockholders for 2011?

Cash flow to stockholders = \$600,000 [(\$872,000 + \$8,000,000) - (\$800,000 + \$6,700,000) = -\$772,000

During 2010, Raines Umbrella Corp. had sales of \$740,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were \$450,000, \$110,000, and \$150,000, respectively. In addition, the company had an interest expense of \$88,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.) a What is Rainess net income for 2010? .

b What is its operating cash flow? .

Income Statement Sales COGS A&S expenses Depreciation EBIT Interest \$ \$ \$ 740,000 450,000 110,000 150,000 30,000 88,000

Taxable income

58,000

Taxes (35%)
\$

58,000

Net Capital Spending

The Blue Bonnet's 2010 balance sheet showed net fixed assets of \$2.2 million, and the 2011 balance sheet showed net fixed assets of \$2.6 million. The company's income statement showed a depreciation expense of \$900,000. What was the amount of the net capital spending for 2011?