Income Statement Sales $215,000 Costs 117,000 Other expenses 6,700 Depreciation 18,400 EBIT $72,900 Interest 10,000 Taxable income $62,900 Taxes 25,370 Net income $37,530 Dividends $9,500 Additions to RE $28,030 a. OCF = EBIT + Depreciation – Taxes OCF = $72,900 + 18,400 – 25,370 OCF = $65,930 b. CFC = Interest – Net new LTD CFC = $10,000 – (–$7,200) CFC = $17,200 Note that the net new long-term debt is negative because the company repaid part of its long- term debt. c. CFS = Dividends – Net new equity CFS = $9,500 – 8,100 CFS = $1,400 d. We know that CFA = CFC + CFS, so: CFA = $17,200 + 1,400 = $18,600 CFA is also equal to OCF – Net capital spending – Change in NWC. We already know OCF. Net capital spending is equal to: Net capital spending = Increase in NFA + Depreciation Net capital spending = $28,400 + 18,400 Net capital spending = $46,800 Now we can use: CFA = OCF – Net capital spending – Change in NWC $18,600 = $65,930 – 46,800 – Change in NWC Solving for the change in NWC $530, meaning the company increased its NWC by $530. 15. The solution to this question works the income statement backwards. Starting at the bottom: Net income = Dividends + Addition to retained earnings
(35%) 0 a. Net income –$140,000 b. OCF = EBIT + Depreciation – Taxes OCF = –$75,000 + 125,000 – 0 OCF = $50,000 c. Net income was negative because of the tax deductibility of depreciation and interest expense. However, the actual cash flow from operations was positive because depreciation is a non-cash expense and interest is a financing expense, not an operating expense. 19. A firm can pay out dividends if net income is negative; it just has to be sure there is sufficient cash flow to make the dividend payments. Change in NWC = Net capital spending = Net new equity = 0. (Given) Cash flow from assets = OCF – Change in NWC – Net capital spending Cash flow from assets = $50,000 – 0 – 0 = $50,000 Cash flow to stockholders = Dividends – Net new equity Cash flow to stockholders = $34,000 – 0 = $34,000 Cash flow to creditors = Cash flow from assets – Cash flow to stockholders Cash flow to creditors = $50,000 – 34,000 Cash flow to creditors = $16,000 Cash flow to creditors is also: Cash flow to creditors = Interest – Net new LTD So: Net new LTD = Interest – Cash flow to creditors Net new LTD = $65,000 – 16,000 Net new LTD = $49,000 20. a. The income statement is: Income Statement Sales $20,300 Cost of goods sold 14,500 Depreciation 2,900 EBIT $ 2,900 Interest 690 Taxable income $ 2,210 Taxes 884 Net income $1,326 b. OCF = EBIT + Depreciation – Taxes
OCF = $2,900 + 2,900 – 884 OCF = $4,916 c. Change in NWC = NWCend – NWCbeg = – CLend) – (CAbeg – CLbeg) = ($5,345 – 2,785) – ($4,630 – 2,520) = $2,560 – 2,110 = $450 Net capital spending = NFAend – NFAbeg + Depreciation = $17,120 – 15,470 + 2,900 = $4,550 CFA = OCF – Change in NWC – Net capital spending = $4,916 – 450 – 4,550 = –$84 The cash flow from assets can be positive or negative, since it represents whether the firm raised funds or distributed funds on a net basis. In this problem, even though net income and OCF are positive, the firm invested heavily in both fixed assets and net working capital; it had to raise a net $84 in funds from its stockholders and creditors to make these investments. d. Cash flow to creditors = Interest – Net new LTD = $690 – 0 = $690 Cash flow to stockholders = Cash flow from assets – Cash flow to creditors = –$84 – 690 = –$774 We can also calculate the cash flow to stockholders as: Cash flow to stockholders = Dividends – Net new equity Solving for net new equity, we get: Net new equity = $774 – (–660) = $1,434 The firm had positive earnings in an accounting sense (NI > 0) and had positive cash flow from operations. The firm invested $450 in new net working capital and $4,550 in new fixed assets. The firm had to raise $84 from its stakeholders to support this new investment. It accomplished this by raising $1,434 in the form of new equity. After paying out $660 of this in the form of dividends to shareholders and $690 in the form of interest to creditors, $84 was left to meet the firm’s cash flow needs for investment. 21. a. Total assets 2014 = $964 + 4,384 = $5,348 Total liabilities 2014 = $401 + 2,380 = $2,781 Owners’ equity 2014 = $5,348 – 2,781 = $2,567
Repurchase of stock 11 Cash to stockholders $ 92 Proceeds from new stock issue –43 Total $ 49 25. Net capital spending = NFAend – NFAbeg + Depreciation = (NFAend – NFAbeg) + (Depreciation + ADbeg) – ADbeg = (NFAend – NFAbeg)+ ADend – ADbeg = (NFAend + ADend) – (NFAbeg + ADbeg) = FAend – FAbeg 26. a. The tax bubble causes average tax rates to catch up to marginal tax rates, thus eliminating the tax advantage of low marginal rates for high income corporations. b. Assuming a taxable income of $335,000, the will be: Taxes = .15($50K) + .25($25K) + .34($25K) + .39($235K) = $113.9K Average tax rate = $113.9K / $335K = 34% The marginal tax rate on the next dollar of income is 34 percent. For corporate taxable income levels of $335K to $10M, average tax rates are equal to marginal tax rates. Taxes = .34($10M) + .35($5M) + .38($3.333M) = $6,416,667 Average tax rate = $6,416,667 / $18,333,334 = 35% The marginal tax rate on the next dollar of income is 35 percent. For corporate taxable income levels over $18,333,334, average tax rates are again equal to marginal tax rates. c. Taxes = .34($200K) = $68K = .15($50K) + .25($25K) + .34($25K) + X($100K); X($100K) = $68K – 22.25K = $45.75K X = $45.75K / $100K X = .4575, or 45.75%