Instructions:

After studying the educational resources assigned in this module related to financial statements (statement of income and expenses, statement of position, statement of retained earnings and statement of cash flows), solve the following problems. It is important that you include the procedure and briefly explain how you obtained each result.

A. Income Statement (Value: 20 points)

At the end of last year, King Power Company achieved $6 million in revenues (EBITDA). Depreciation expense was $1.2 million, interest expense was $800,000, and the corporate tax rate was 35%. At the end of the fiscal year, the company had current assets totaling $12 million, $4 million in accounts payable, $1.5 million in accrued debt, $1.3 million in other debt payable, and $8 million in property, plant and equipment. Assume King Power has no excess cash, uses debt and equity to finance its operations, has no current liabilities, and recognizes depreciation periodically.

1. Determine the net income or loss of the business. Explain how this result can help the manager in making decisions in the company. (6 points)

2. Calculate operating and net working capital. Explain the difference between the two results. (6 points)

3. If the company had $6 million in property, plant, and equipment last year and net operating working capital remained constant, what is the company's free cash flow? Explain how the cash flow output helps managers in the financial planning process. (8 points)

A. Status (Balance Sheet) (Value: 25 points)

The assets of the company River & Stone Corp. include current assets, property, plant and equipment and it does not have excess cash (Free Cash). It has assets valued at $4 million and its fixed assets are valued at $3 million. It reports debts payable of $350,000, long-term debt of $650,000, and stockholders' equity of $2 million. Your balance sheet reflects that you have accounts payable and accumulated debts. Generally, the company operates on a debt and equity basis.

1. Determine the total amount of the company's debt. (4 points)

2. Calculate the balance of current assets and liabilities. (5 points)

3. Determine the net working capital of the company. (5 points)

4. Calculate net operating working capital. (5 points)

5. Explain how net working capital and operating working capital can support management decisions and strategic goals. (6 points)

A. Financial statements, cash flow and taxes (Value: 40 points)

The balance sheets at the end of 2018 and 2019 of Kairos Industries are shown below:

	2019	2018
Cash	$102,950	$89,825
Account recivable	103,465	85,627
Inventories	38, 544	35,082
Total current assets	244, 959	210, 534
Property, plant and equipment	67,265	42,536
Total assets	312,224	253,070
Accounts payable	30,861	23,209
accumulations	30,577	22,756
Obligation payable	16,817	14,317
Total current liabilities	78,255	60,282
Long term debts	76,364	64,014
Total liabilities	154, 619	124,296
Common actions	100,000	90,100
Retained accctions	57,605	38,874
Total Stockholder equity	157,605	128,974
Total liabilities plus equity	$312,224	$253,270

1. In 2019, Kairos Industries achieved sales of $330 million and an EBITDA of 17% of sales. Depreciation as amortization of fixed assets was 11% and interest paid was $2 million. On the other hand, the tax rate was 35% and 38% of net income is allocated to dividends. Prepare an income statement taking into consideration the data presented. (10 points)

2. Prepare the capital statement for the period ending December 31, 2019. (8 points)

3. Considering that Kairos Industries does not have excess cash on hand, determine the Free Cash Flow and the operating working capital. (6 points)

4. Explain the effect on the taxes paid by shareholders and the company if Kairos Industries were to increase the rate it pays out dividends. (8 points)

5. Calculate the economic value added (EVA) and the market value added (MVA) in 2019, assuming that the cost of capital after tax is 12% and the price of Kairos Industries shares is $20.9 million. of outstanding shares. (8 points)