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 EBITDA as a percentage of sales Depr. as a % of fixed assets Tax rate Interest expense Dividend payout ratio $455,150 15% 11% 40% $8,575 40% Laiho Industries Income Statement in thousands of dollars) Sales Expenses excluding depreciation and amortization EBITDA Depreciation and amortization EBIT Interest expense Taxes (40%) Net Income 2018 $455,150 386,878 Found after finding EBITDA $68,273 Found this first 7,388 $60,884 8,575 $52,309 20,924 $31,386 Common dividends Addition to retained earnings $12,554 $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 S57,605 $157,605 Statement of Cash Flows (in thousands of dollars) 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 $31,386 7,388 7,652 7,821 (17,838) (3,462) $32,947 Investing Activities Additions to property, plant, and equipment Net cash used in investing activities (S32,117) (S32,117) 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 $2,500 12,350 10,000 (12,554) $12,295 Summary Net increase/decrease in cash Cash balance at the beginning of the year Cash balance at the end of the year $13,125 89,725 $102.850 c. 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 - 1 (Current liabilities - Notes payable) NOWC17= $210,234 $45,765 NOWC17 = $164,469 NOWC18 = NOWC18 = NOWC18 - NOWC18 = Operating current assets (Current assets - 1 $244,659 $183,421 Operating current liabilities (Current liabilities - Notes payable) $61,238 Free Cash Flow FCF18 = EBIT (1-T) + Depreciation Capital expenditures $32,117 Increase in NOWC + $7,388 + $18,952 FCF18 = FCF18 = $36,531 -$7,150 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%. e. Assume that the firm's after-tax cost of capital is 10.5%. What is the firm's 2018 EVA? Tax rate After-tax cost of capital 40.0% 10.5% + Calculate the firm's total invested capital first: Total invested capital18 = Notes payable Total invested capital18 = $16,717 Total invested capital18= $250,586 LT debt $76,264 Common equity $157,605 + EVA 18 = EBIT(1-T) Total invested capital $250,586 $26,311.49 After-tax cost of capital 10.5% EVA 18 = EVA 18 - EVA 18 - $36,530.61 $36,530.61 $10,219 f. Assume that the firm's stock price is $22 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. MVA18 = MVA 18 = MVA18 = MVA 18 = Book value of common equity $157,605 PO $22.00 $220,000 $62,395 Shares 10,000 $157,605 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 EBITDA as a percentage of sales Depr. as a % of fixed assets Tax rate Interest expense Dividend payout ratio $455,150 15% 11% 40% $8,575 40% Laiho Industries Income Statement in thousands of dollars) Sales Expenses excluding depreciation and amortization EBITDA Depreciation and amortization EBIT Interest expense Taxes (40%) Net Income 2018 $455,150 386,878 Found after finding EBITDA $68,273 Found this first 7,388 $60,884 8,575 $52,309 20,924 $31,386 Common dividends Addition to retained earnings $12,554 $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 S57,605 $157,605 Statement of Cash Flows (in thousands of dollars) 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 $31,386 7,388 7,652 7,821 (17,838) (3,462) $32,947 Investing Activities Additions to property, plant, and equipment Net cash used in investing activities (S32,117) (S32,117) 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 $2,500 12,350 10,000 (12,554) $12,295 Summary Net increase/decrease in cash Cash balance at the beginning of the year Cash balance at the end of the year $13,125 89,725 $102.850 c. 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 - 1 (Current liabilities - Notes payable) NOWC17= $210,234 $45,765 NOWC17 = $164,469 NOWC18 = NOWC18 = NOWC18 - NOWC18 = Operating current assets (Current assets - 1 $244,659 $183,421 Operating current liabilities (Current liabilities - Notes payable) $61,238 Free Cash Flow FCF18 = EBIT (1-T) + Depreciation Capital expenditures $32,117 Increase in NOWC + $7,388 + $18,952 FCF18 = FCF18 = $36,531 -$7,150 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%. e. Assume that the firm's after-tax cost of capital is 10.5%. What is the firm's 2018 EVA? Tax rate After-tax cost of capital 40.0% 10.5% + Calculate the firm's total invested capital first: Total invested capital18 = Notes payable Total invested capital18 = $16,717 Total invested capital18= $250,586 LT debt $76,264 Common equity $157,605 + EVA 18 = EBIT(1-T) Total invested capital $250,586 $26,311.49 After-tax cost of capital 10.5% EVA 18 = EVA 18 - EVA 18 - $36,530.61 $36,530.61 $10,219 f. Assume that the firm's stock price is $22 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. MVA18 = MVA 18 = MVA18 = MVA 18 = Book value of common equity $157,605 PO $22.00 $220,000 $62,395 Shares 10,000 $157,605