The Smythe-Davidson Corporation just issued its annual report. The current year's balance Financial statements sheet and income statement as they appeared in the annual report are given below. Answer the questions that follow based on information given in the financial statements.

Smythe-Davidson Corporation: Balance Sheet as of December 31, 2002 (Millions of Dollars)

ASSETS LIABILITIES AND EQUITY Cash and marketable securities $ 15 Accounts payable $ 120 Accounts receivable 515 Notes payable 220 Inventories 880 Accruals 280 Total current assets $1,410 Total current liabilities $ 620 Net plant and equipment 2,590 Long-term bonds Total debt 1,520

$2,140 Preferred stock (800,000 shares) 80 Common stock (100 million shares) 260 Retained earnings 1,520 Common equity Total liabilities and equity

$1,780 Total assets $4,000 $4,000 Smythe-Davidson Corporation: Income Statement for Year Ending December 31, 2002

(Millions of Dollars)

Sales Operating costs excluding depreciation and amortization EBITDA Depreciation and amortization EBIT Less: Interest EBT Taxes (40 %)

Net income before preferred dividends Preferred dividends Net income available to common stockholders Common dividends paid Earnings per share J6,250 5,230 Jl,020 220 5 800 180 5 620 248 i 372 8

; 364 i 146 i 3.64

a. Assume th.it .ill ot the firm's revenues were received in cash during the year and th.u .ill costs except depreciation and amortization were paid in cash during the year. What is the tinn's net cash Bow available to common stockholders tor the year? I low is this number different from the accounting profit reported by the firm?
I). Construct the firm's Statement of Retained Earnings for December 31, 2002.

c. How much money has the firm reinvested in itself over the years instead of paying out dividends?

d. At the present time, how large a check could the firm write without it bouncing?

e. How much money must the firm pay its current creditors within the next year?
2-15 The Menendez Corporation expects to have sales of Si 2 million in 2003. Costs other than Income and cash flow analysis depreciation and amortization are expected to be 75 percent of sales, and depreciation and amortization expenses are expected to be $1.5 million. All sales revenues will be collected in cash, and costs other than depreciation and amortization must be paid for during the year.
Menendez's federal-plus-state tax rate is 40 percent.

a. Set up an income statement. What is Menendez's expected net cash flow?

b. Suppose Congress changed the tax laws so that Menendez's depreciation and amortization expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow ?

c. Now suppose that Congress, instead of doubling Menendez's depreciation and amortization expenses, reduced them by 50 percent. How would profit and net cash flow be affected?

d. If this were your companv. would you prefer Congress to cause your depreciation and amortization expenses to be doubled or halved? Why?

e. In the situation in which depreciation and amortization doubled, would this possibly have an adverse effect on the company's stock price and on its ability to borrow money?