Cash Flow and Acquisitions. The president of Van Horn Appliances cannot understand how a competing company, Murphy Appliances, can invest \(\$ 12,000,000\) in new plant and equipment in 1999 and yet not increase debt or capital stock. Furthermore, dividend payments to shareholders were not reduced. The president asks you to determine how the competitor was able to finance these additions without borrowing or issuing capital stock.

You also find that, during 1999 , equipment having a net book value of \(\$ 3,150,000\) was sold at a gain of \(\$ 420,000\), net of income tax. No other plant assets were sold. Financial data from the statements for Murphy Appliances for the past three years are as follows (in thousands of dollars):

\section*{Required:}
1. Explain to the president how cash might have been acquired for the plant and equipment additions made by Murphy Appliances.
2. For your answer to Part (1) to be true, what assumptions are you making about the current operations of Murphy Appliances?
III

Transcribed Image Text:

Year Ended December 31 1999 1998 1997 Operating net income (excluding gain) $3,153 $2,732 $2,068 Depreciation deducted for the year. 1,835 887 936 Dividends declared and paid. 500 500 500