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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

Book value assets

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

a. $ 17490 and $ 2924000 b. $ 4420

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?

Answer
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%)
$

Net income (loss)

58,000

OCF = EBIT + Depreciation Taxes = $30,000 + 150,000 0 = $180,000

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?

Answer
Net capital spending = $2,600,000 - $2,200,000 + $900,000 = $1,300,000

The 2010 balance sheet of Greystone, Inc., showed current assets of $3,190 and current liabilities of $1,480. The 2011 balance sheet showed current assets of $3,240 and current liabilities of $1,670. What is the change in net working capital?

Change in NWC = NWCend NWCbeg Change in NWC = (CAend CLend) (CAbeg CLbeg) Change in NWC = ($3,240 1,670) ($3,190 1,480) Change in NWC = $1,570 1,710 = $140