3-13 through 3-14

Part 2 Fundamental Concepts in Financial Management 96 Chapter 3 Financial Statements, Cash Flow, and Taxes 97 3-2 INCOME STATEMENT Byron Books Inc. recently reported $13 million of net income. Its EBIT was $20.8 million, and its tax rate was 35 %. What was its interest expense? (Hint: Write out the headings for an income statement, and fill in the known values. Then divide $13 million of net income by (1 -T) = 0.65 to find the pretax income. The difference between EBIT and taxable income must be interest expense. Use this same procedure to complete similar problems.) 3-13 STATEMENT OF CASH FLOWS You have just been hired as a financial analyst for Barrington Industries. Unfortunately, company headquarters (where all of the firm's records are kept) has been destroyed by fire. So, your first job will be to recreate the firm's cash flow state ment for the year just ended. The firm had $100,000 in the bank at the end of the prior year, and its working capital accounts except cash remained constant during the year. It earned $5 million in net income during the year but paid $800,000 in dividends to com- mon shareholders. Throughout the year, the firm purchased $5.5 million of machinery that was needed for a new project. You have just spoken to the firm's accountants and learned that annual depreciation expense for the year is $450,000; however, the purchase price for the machinery represents additions to property, plant, and equipment before depreciation. Finally, you have determined that the only financing done by the firm was to issue long term debt of $1 million at a 6 % interest rate. What was the firm's end-of-year cash balance? Recreate the firm's cash flow statemernt to arrive at your answer 3-3 INCOME STATEMENT Patterson Brothers recently reported an EBITDA of $7.5 million and net income of $2.1 million. It had $2.0 million of interest expense, and its corporate tax rate was 30%. What was its charge for depreciation and amortization? 3-4 STATEMENT OF STOCKHOLDERS' EQUITY In its most recent financial statements, Nessler Inc. reported $75 million of net income and $825 million of retained earnings. The previous retained earnings were $784 million. How much in dividends were paid to shareholders during the year? Assume that all dividends declared were actually paid. 3-14 FREE CASH FLOW Arlington Corporation's financial statements (dollars and shares are in millions) are provided here 3-5 MVA Harper Industries has $900 million of common equity on its balance sheet, its stock price is $80 per share, and its market value added (MVA) is $50 million. How many com mon shares are currently outstanding? Balance Sheets as of December 31 2018 2017 3-6 MVA Over the years, Masterson Corporation's stockholders have provided $34,000,000 of capital when they purchased new issues of stock and allowed management to retain some of the firm's earnings. The firm now has 2,000,000 shares of common stock outstanding and the shares sell at a price of $28 per share. How much value has Masterson's manage- ment added to stockholder wealth over the years, that is, what is Masterson's MVA? Assets Cash and equivalents 15,000 14,000 Accounts receivable 35,000 30,000 Inventories 27,000 33,320 3-7 EVA Barton Industries has operating income for the year of $3,500,000 and a 36% tax rate Its total invested capital is $20,000,000 and its after-tax percentage cost of capital is 8% . What is the firm's EVA? $83,320 Total current assets 71,000 Net plant and equipment 48,000 46,000 Total assets $131,320 $117,000 3-8 PERSONAL TAXES Susan and Stan Britton are a married couple who file a joint income tax return, where the tax rates are based on the tax tables presented in the chapter. Assume that their taxable income this year was $375,000 Liabilities and Equity $ 9,000 Accounts payable 10,100 Accruals 8,000 6,000 a. What is their federal tax liability? b. What is their marginal tax rate? c. What is their average tax rate? Notes payable 7,000 5,050 Total current liabilities 25,100 20,050 20,000 Long-term bonds 20,000 Intermediate Problems 3-9 BALANCE SHEET Which of the following actions are most likely to directly increase cash as shown on a firm's balance sheet? Explain and state the assumptions that underlie your answer $ 45,100 Total liabilities 40,050 Common stock (4,000 shares) 40,000 40,000 9-14 a. It issues S4 million of new common stock b. It buys new plant and equipment at a cost of $3 million c. It reports a large loss for the year d. It increases the dividends paid on its common stock. Retained earnings 36,950 46,220 Common equity $ 76,950 86,220 Total liabilities and equity $131,320 $117,000 Income Statement for Year Ending December 31, 2018 STATEMENT OF STOCKHOLDERS' EQUITY Electronics World Inc. paid out $22.4 million in total common dividends and reported $144.7 million of retained earnings at year-end. The prior year's retained earnings were $95.5 million. What was the net income? Assume that all dividends declared were actually paid Sales $210,000 Operating costs excluding depreciation and amortization 160,000 ITDA 50,000 3-11 EVA For 2018, Gourmet Kitchen Products reported $22 million of sales and $19 million of operating costs (including depreciation). The company has $15 million of total invested capital. Its after-tax cost of capital is 10%, and its federal-plus-state income tax rate was 36%. What was the firm's economic value added (EVA), that is, how much value did man agement add to stockholders' wealth during 2018? Depreciation and amortization 6,000 $ 44,000 T Interest 5,350 $ 38,650 EBT Taxes (40 %) 15,460 3-12 STATEMENT OF CASH FLOWS Hampton Industries had $39,000 in cash at year-end 2017 and $11,000 in cash at year-end 2018. The firm invested in property, plant, and equipment totaling $210,000. Cash flow from financing activities totaled +$120,000 Net income 23,190 13,920 Dividends paid a. What was net operating working capital for 2017 and 2018? Assume that all cash is excess cash; i.e., this cash is not needed for operating purposes b. What was Arlington's 2018 free cash flow? c. Construct Arlington's 2018 statement of stockholders' equity a. What was the cash flow from operating activities? b. If accruals increased by $15,000, receivables and inventories increased by $50,000, and depreciation and amortization totaled $25,000, what was the firm's net income? o00.a00. Chapter 3 Financial Statements, Cash Flow, and Taxes STATEMENT OF CASH FLOWS You have just been hired as a financial analyst for Barrington 3-13 Industries. Unfortunately, company headquarters (where all of the firm's records are kept) has been destroyed by fire. So, your first job will be to recreate the firm's cash flow state- ment for the year just ended. The firm had $100,000 in the bank at the end of the prior year, and its working capital accounts except cash remained constant during the year. It earned $5 million in net income during the year but paid $800,000 in dividends to com- mon shareholders. Throughout the year, the firm purchased $5.5 million of machinery that was needed for a new project. You have just spoken to the firm's accountants and learned that annual depreciation expense for the year is $450,000; however, the purchase price for the machinery represents additions to property, plant, and equipment before depreciation Finally, you have determined that the only financing done by the firm was to issue long- term debt of $1 million at a 6 % interest rate. What was the firm's end-of-year cash balance? Recreate the firm's cash flow statement to arrive at your answer. FREE CASH FLOW millions) Arlington Corporation's financial statements (dollars and shares are in provided here. 3-14 are Balance Sheets as of December 31 2018 2017 Assets Cash and equivalents $ 15,000 S 14,000 Accounts recelvable 35,000 30,000 Inventories 33,320 27,000 Total current assets $ 83,320 S 71,000 Net plant and equipment 48,000 Total 3-14 FREE CASH FLOW Arlington Corporation's financial statements (dollars and shares are in millions) are provided here. Balance Sheets as of December 31 2018 2017 Assets Cash and equivalents $ 15,000 $ 14,000 Accounts receivable 35,000 30,000 Inventories 33,320 27,000 Total current assets $ 83,320 $ 71,000 Net plant and equipment 48,000 46,000 Total assets $131,320 $ 117.000 Liabilities and Equity Accounts payable $ 10,100 $ 9,000 Accruals 8,000 6,000 Miotes payable Total current liabilities 7,000 5,050 $ 25,100 5 20,050 Long-term bonds 20.000 20,000 Total liabilities $ 45,100 $ 40,050 Common stock (4,000 shares) 40,000 40.000 Retained earnings 46,220 36,950 Common equity $ 86.220 S 76,950 Total liabilities and equity $131,320 $ 117.000 Income Statement for Year Ending December 31, 2018 Sales $210.000 160.000 Operating costs excluding depreciation and amortization S S0.000 Inventories 33,320 27,000 Total current assets $ 83.320 $ 71,000 Net plant and equipment Total assets 48,000 000 $131,320 $117,000 Liabilities and Equity Accounts payable $ 10,100 $ 9,000 Accruals 8,000 6,000 otes payable 7,000 5,050 Total current liabilities $ 25,100 $ 20,050 Long-term bonds 20,000 20,000 Total liabilities $45.100 $ 40,050 Common stock (4,000 shares) Retained earnings 40,000 40,000 46,220 36,950 Common equity S 86,220 $76,950 Total liabilities and equity $131,320 $117.000 income Statement for Year Ending December 31, 2018 Sales $210,000 Operating costs excluding depreciation and amortization 160,000 0:3 EBITDA $ 50,000 Depreciation and amortization 6,000 EBIT $ 44.000 Interest 5.350 5 38.650 15,460 EBT Taxes (40 %) Net income $ 23.190 Dividends paid $ 13.920 a What wasnet operating working capital for 2017 and 2018? Assume that all cash is excess cash; ie., this cash is not needed for operating purposes. b. What was Arlington's 2018 free cash flow? c Construct Arlington's 2018 statement o stockholders equity Screen Sh 19