Laiho Industries December 31 Balance Sheets (in thousands of dollars) 2018 2017 Assets Cash Accounts receivable Inventories Total current assets Net fixed assets Total assets 102,850 103,365 38,444 244,659 67,165 311.824 89,725 85,527 34,982 210,234 42,436 252,670 Liabilities and equity Accounts payable Accruals Notes payable Total current liabilities Long-term debt Total liabilities Common stock Retained earnings Total common equity Total liabilities and equity 30,761 30,477 16,717 77,955 76,263.634 154,218.634 100,000 57,605 157,605 311,823.634 23,109 22,656 14,217 59,982 63,914 123.896 90,000 38,774 128,774 252,670 a. Sales for 2018 were $455,150,000, and EBITDA was 15% of sales. Furthermore, depreciation and amortization were 11% of net fixed assets, interest was $8,575,000, the corporate tax rate was 40%, and Laiho pays 40% of its net income as dividends. Given this information, construct the firm's 2018 income statement. The input information required for the problem is outlined in the "Key Input Data" section below. Using this data and the balance sheet above, we constructed the income statement shown below. KEY INPUT DATA: Laiho Industries (in thousands of dollars) Sales $455,150 EBITDA as a percentage of sales 15% Depr. as a % of fixed assets 11% Tax rate 40% Interest expense $8,575 Dividend payout ratio 40% Laiho Industries Income Statement in thousands of dollars) 2018 Sales $455,150 Expenses excluding depreciation and amortization 386,878 Found after finding EBITDA EBITDA $68,273 Found this first Depreciation and amortization 7,388 EBIT $60.884 8,575 $52,309 Interest expense EBT Taxes (40%) Net Income 20,924 $31,386 Common dividends $12,554 Addition to retained earnings $18.831 b. Construct the statement of stockholders' equity for the year ending December 31, 2018, and the 2018 statement of cash flows. Statement of Stockholders' Equity (in thousands of dollars) Total Common Stock Retained Earnings Stockholders' Equity Balances, December 31, 2017 $90,000 $38,774 $128,774 Common stock issue 10,000 10,000 2018 Net income 31,386 Cash dividends (12,554) Addition to retained earnings 18,831 Balances, December 31, 2018 $100,000 $57,605 $157,605 Statement of Cash Flows (in thousands of dollars) $31,386 7,388 7,652 7.821 (17,838) (3,462) $32,947 Operating Activities Net Income Depreciation and amortization Increase in accounts payable Increase in accruals Increase in accounts receivable Increase in inventories Net cash provided by operating activities Investing Activities Additions to property, plant, and equipment Net cash used in investing activities Financing Activities Increase in notes payable Increase in long-term debt Increase in common stock Payment of common dividends Net cash provided by financing activities Summary Net increase/decrease in cash Cash balance at the beginning of the year Cash balance at the end of the year (S32,117) (532,117) $2,500 12,350 10,000 (12,554) $12,295 $13,125 89,725 $102,850 6. Calculate 2017 and 2018 net operating working capital (NOWC) and 2018 free cash flow (FCF). Assume the firm has no excesss cash. Net Operating Working Capital (must be financed by external sources) NOWC17 - Operating current assets Operating current liabilities NOWC17 (Current assets - (Current liabilities - Notes payable) NOWC17= $210,234 S45,765 NOWC17= $164.469 NOWC18 = Operating current assets Operating current liabilities NOWC18 - (Current assets - (Current liabilities - Notes payable) NOWCI8- $244.659 S61,238 NOWC18 $183,421 Free Cash Flow FCF18= EBIT (1-T) Depreciation Capital expenditures $32,117 Increase in NOWC $18,952 FCFIX= $7,388 $36,531 -$7,150 + FCF18 = d. If Laiho increased its dividend payout ratio, what effect would this have on its corporate taxes paid? What effect would this have on the taxes paid by the company's shareholders? An increase in the firm's dividend payout ratio would have no effect on its corporate taxes paid because dividends are paid with after tax dollars. However, the company's shareholders would pay additional taxes on the additional dividends they would receive. In 2017, the maximum tax rate on qualified dividends is 20% for taxpayers in the 39.6% tax bracket. However, for most taxpayers the top tax rate on qualified dividends remains at 15%. Assume that the firm's after-tax cost of capital is 10.5%. What is the firm's 2018 EVA? Tax rate 40.0% After-tax cost of capital 10.5% Calculate the firm's total invested capital first: Total invested capital18 - Notes payable LT debt Total invested capital18 S16,717 $76,264 Total invested capital 18 S250,586 Common equity S157,605 EVA18 Total invested capital S250.586 $26,311.49 EBIT(-) 536,530.61 $36,530.61 After-tax cost of capital 10.5% EVA18 EVAIN EVAIN- S10.219 I Anume that the firm's stock price is 522 per share and that at year-end 2018 the firm has 10 million shares outstanding. What is the firm's MVA at year-end 2018? Stock price, PO Shares outstanding $22.00 10,000 Shares are in thousands, same as dollars. MVAIN- MIVAIN- MVA18 - MVAIN Book value of common equity S157.605 Shares 10,000 S157,605 $22.00 $220,000 362,395 Laiho Industries December 31 Balance Sheets (in thousands of dollars) 2018 2017 Assets Cash Accounts receivable Inventories Total current assets Net fixed assets Total assets 102,850 103,365 38,444 244,659 67,165 311.824 89,725 85,527 34,982 210,234 42,436 252,670 Liabilities and equity Accounts payable Accruals Notes payable Total current liabilities Long-term debt Total liabilities Common stock Retained earnings Total common equity Total liabilities and equity 30,761 30,477 16,717 77,955 76,263.634 154,218.634 100,000 57,605 157,605 311,823.634 23,109 22,656 14,217 59,982 63,914 123.896 90,000 38,774 128,774 252,670 a. Sales for 2018 were $455,150,000, and EBITDA was 15% of sales. Furthermore, depreciation and amortization were 11% of net fixed assets, interest was $8,575,000, the corporate tax rate was 40%, and Laiho pays 40% of its net income as dividends. Given this information, construct the firm's 2018 income statement. The input information required for the problem is outlined in the "Key Input Data" section below. Using this data and the balance sheet above, we constructed the income statement shown below. KEY INPUT DATA: Laiho Industries (in thousands of dollars) Sales $455,150 EBITDA as a percentage of sales 15% Depr. as a % of fixed assets 11% Tax rate 40% Interest expense $8,575 Dividend payout ratio 40% Laiho Industries Income Statement in thousands of dollars) 2018 Sales $455,150 Expenses excluding depreciation and amortization 386,878 Found after finding EBITDA EBITDA $68,273 Found this first Depreciation and amortization 7,388 EBIT $60.884 8,575 $52,309 Interest expense EBT Taxes (40%) Net Income 20,924 $31,386 Common dividends $12,554 Addition to retained earnings $18.831 b. Construct the statement of stockholders' equity for the year ending December 31, 2018, and the 2018 statement of cash flows. Statement of Stockholders' Equity (in thousands of dollars) Total Common Stock Retained Earnings Stockholders' Equity Balances, December 31, 2017 $90,000 $38,774 $128,774 Common stock issue 10,000 10,000 2018 Net income 31,386 Cash dividends (12,554) Addition to retained earnings 18,831 Balances, December 31, 2018 $100,000 $57,605 $157,605 Statement of Cash Flows (in thousands of dollars) $31,386 7,388 7,652 7.821 (17,838) (3,462) $32,947 Operating Activities Net Income Depreciation and amortization Increase in accounts payable Increase in accruals Increase in accounts receivable Increase in inventories Net cash provided by operating activities Investing Activities Additions to property, plant, and equipment Net cash used in investing activities Financing Activities Increase in notes payable Increase in long-term debt Increase in common stock Payment of common dividends Net cash provided by financing activities Summary Net increase/decrease in cash Cash balance at the beginning of the year Cash balance at the end of the year (S32,117) (532,117) $2,500 12,350 10,000 (12,554) $12,295 $13,125 89,725 $102,850 6. Calculate 2017 and 2018 net operating working capital (NOWC) and 2018 free cash flow (FCF). Assume the firm has no excesss cash. Net Operating Working Capital (must be financed by external sources) NOWC17 - Operating current assets Operating current liabilities NOWC17 (Current assets - (Current liabilities - Notes payable) NOWC17= $210,234 S45,765 NOWC17= $164.469 NOWC18 = Operating current assets Operating current liabilities NOWC18 - (Current assets - (Current liabilities - Notes payable) NOWCI8- $244.659 S61,238 NOWC18 $183,421 Free Cash Flow FCF18= EBIT (1-T) Depreciation Capital expenditures $32,117 Increase in NOWC $18,952 FCFIX= $7,388 $36,531 -$7,150 + FCF18 = d. If Laiho increased its dividend payout ratio, what effect would this have on its corporate taxes paid? What effect would this have on the taxes paid by the company's shareholders? An increase in the firm's dividend payout ratio would have no effect on its corporate taxes paid because dividends are paid with after tax dollars. However, the company's shareholders would pay additional taxes on the additional dividends they would receive. In 2017, the maximum tax rate on qualified dividends is 20% for taxpayers in the 39.6% tax bracket. However, for most taxpayers the top tax rate on qualified dividends remains at 15%. Assume that the firm's after-tax cost of capital is 10.5%. What is the firm's 2018 EVA? Tax rate 40.0% After-tax cost of capital 10.5% Calculate the firm's total invested capital first: Total invested capital18 - Notes payable LT debt Total invested capital18 S16,717 $76,264 Total invested capital 18 S250,586 Common equity S157,605 EVA18 Total invested capital S250.586 $26,311.49 EBIT(-) 536,530.61 $36,530.61 After-tax cost of capital 10.5% EVA18 EVAIN EVAIN- S10.219 I Anume that the firm's stock price is 522 per share and that at year-end 2018 the firm has 10 million shares outstanding. What is the firm's MVA at year-end 2018? Stock price, PO Shares outstanding $22.00 10,000 Shares are in thousands, same as dollars. MVAIN- MIVAIN- MVA18 - MVAIN Book value of common equity S157.605 Shares 10,000 S157,605 $22.00 $220,000 362,395