LG1 2-16 Balance Sheet Glen’s Tobacco Shop has total assets of $91.8 million. Fifty percent of these
assets are financed with debt of which $28.9 million is current liabilities. The firm has no preferred
stock but the balance in common stock and paid-in surplus is $20.4 million. Using this information
what is the balance for long-term debt and retained earnings on Glen’s Tobacco Shop’s balance sheet?
(in millions)
Total current liabilities $28.9
LG2 2-17 Market Value versus Book Value Muffin’s Masonry, Inc’s balance sheet lists net fixed asset as
$14 million. The fixed assets could currently be sold for $19 million. Muffin’s current balance sheet
shows current liabilities of $5.5 million and net working capital of $4.5 million. If all the current
accounts were liquidated today, the company would receive $7.25 million cash after paying the $5.5
million in current liabilities. What is the book value of Muffin’s Masonry’s assets today? What is the
market value of these assets?
BOOK MARKET
LG2 2-18 Market Value versus Book Value Ava’s SpinBall Corp. lists fixed assets of $12 million on
its balance sheet. The firm’s fixed assets have recently been appraised at $16 million. Ava’s
SpinBall Corp.’s balance sheet also lists current assets at $5 million. Current assets were
appraised at $6 million. Current liabilities’ book and market values stand at $3 million and the
firm’s book and market values of long-term debt are $7 million. Calculate the book and market
values of the firm’s stockholders’ equity. Construct the book value and market value balance
sheets for Ava’s SpinBall Corp.
LG1 2-19 Debt versus Equity Financing You are considering a stock investment in one of two firms
(NoEquity, Inc., and NoDebt, Inc.), both of which operate in the same industry and have
identical operating income of $32.5 million. NoEquity, Inc., finances its $65 million in assets
with $64 million in debt (on which it pays 10 percent interest annually) and $1 million in equity.
NoDebt, Inc., finances its $65 million in assets with no debt and $65 million in equity. Both
firms pay a tax rate of 30 percent on their taxable income. Calculate the net income and return on
assets for the two firms.
NoEquity NoDebt
LG1 2-20 Debt versus Equity Financing You are considering a stock investment in one of two firms
(AllDebt, Inc., and AllEquity, Inc.), both of which operate in the same industry and have
identical operating income of $12.5 million. AllDebt, Inc., finances its $25 million in assets with
$24 million in debt (on which it pays 10 percent interest annually) and $1 million in equity.
AllEquity, Inc., finances its $25 million in assets with no debt and $25 million in equity. Both
firms pay a tax rate of 30 percent on their taxable income. Calculate the income available to pay
the asset funders (the debtholders and stockholders) and resulting return on assets for the two
firms.
LG1 2-21 Income Statement You have been given the following information for Corky’s Bedding
Corp.:
a. Net sales = $11,250,000
b. Cost of goods sold = $7,500,000;
c. Other operating expenses = $250,000;
d. Addition to retained earnings = $1,000,000;
e. Dividends paid to preferred and common stockholders = $495,000;
f. Interest expense = $850,000.
The firm’s tax rate is 35 percent. Calculate the depreciation expense for Corky’s Bedding Corp.
Step 1. Net income = Common and preferred stock dividends + Addition to retained earnings =
LG1 2-22 Income Statement You have been given the following information for Moore’s HoneyBee
Corp.:
a. Net sales = $32,000,000;
b. Gross profits = $18,700,000;
c. Other operating expenses = $2,500,000;
d. Addition to retained earnings = $4,700,000;
e. Dividends paid to preferred and common stockholders = $2,900,000;
f. Depreciation expense = $2,800,000.
The firm’s tax rate is 35 percent. Calculate the cost of goods sold and the interest expense for
Moore’s HoneyBee Corp.
LG1 2-23 Income Statement Consider a firm with an EBIT of $1,000,000. The firm finances its
assets with $4,500,000 debt (costing 8 percent) and 200,000 shares of stock selling at $16.00 per
share. To reduce risk associated with this financial leverage, the firm is considering reducing its
debt by $2,500,000 by selling additional shares of stock. The firm is in the 40 percent tax
bracket. The change in capital structure will have no effect on the operations of the firm. Thus,
EBIT will remain at $1,000,000. Calculate the change in the firm’s EPS from this change in
capital structure.
Number of shares of stock that must be sold to raise $2,500,000:
LG1 2-24 Income Statement Consider a firm with an EBIT of $10,500,000. The firm finances its
assets with $50,000,000 debt (costing 6.5 percent) and 10,000,000 shares of stock selling at
$10.00 per share. The firm is considering increasing its debt by $25,000,000, using the proceeds
to buy back shares of stock. The firm is in the 40 percent tax bracket. The change in capital
structure will have no effect on the operations of the firm. Thus, EBIT will remain at
$10,500,000. Calculate the change in the firm’s EPS from this change in capital structure.
Number of shares of stock that can be repurchased with $25,000,000:
LG3 2-25 Corporate Taxes The Dakota Corporation had a 2015 taxable income of $33,365,000 from
operations after all operating costs but before
(1) interest charges of $8,500,000;
(2) dividends received of $750,000;
(3) dividends paid of $5,250,000; and
(4) income taxes.
a. Use the tax schedule in Table 2.3 to calculate Dakota’s income tax liability.
The first 70 percent of the dividends received is not taxable. Thus, only 30 percent of the dividends received are
b. What are Dakota’s average and marginal tax rates on taxable income?
LG3 2-26 Corporate Taxes Suppose that in addition to $17.85 million of taxable income, Texas Taco,
Inc., received $1,105,000 of interest on state-issued bonds and $760,000 of dividends on
common stock it owns in ArizonaTaco, Inc.
a. Use the tax schedule in Table 2.3 to calculate Texas Taco’s income tax liability.
b. What are Texas Taco’s average and marginal tax rates on taxable income?
LG5 2-27 Statement of Cash Flows Use the balance sheet and following income statement to
construct a statement of cash flows for Clancy’s Dog Biscuit Corporation.
2015 2014 2015 2014
Assets Liabilities & Equity
Current assets: Current liabilities :
Cash and marketable Accrued wages and
securities $ 5 $ 5 taxes $ 10 $ 6
Accounts receivable 20 19 Accounts payable 16 15
Inventory 36 29 Notes payable 14 13
Clancy’s Dog Biscuit Corporation
Income Statement for Years Ending December 31, 2015 and 2014
(in millions of dollars)
2015 2014
Net sales $ 76 $ 80
Less: Cost of goods sold 38 34
Gross profits $ 38 $ 46
Less: Other operating expenses 6 5
Earnings before interest, taxes, depreciation, and
SOLUTION: Statement of Cash Flows for Year Ending December 31, 2015
(in millions of dollars)
2015
A. Cash flows from operating activities
LG5 2-28 Statement of Cash Flows Use the balance sheet and following income statement to
construct a statement of cash flows for Valium’s Medical Supply Corporation.
2015 2014 2015 2014
Assets Liabilities & Equity
Current assets: Current liabilities :
Cash and marketable Accrued wages and
Valium’s Medical Supply Corporation
Income Statement for Years Ending December 31, 2015 and 2014
(in thousands of dollars)
2015 2014
Net sales $ 888 $ 798
Less: Cost of goods sold 387 350
Gross profits $ 501 $ 448
Less: Preferred stock dividends $ 6 $ 6
Statement of Cash Flows for Year Ending December 31, 2015
(in thousands of dollars)
A. Cash flows from operating activities
C. Cash flows from financing activities
Additions:
D. Net change in cash and marketable securities $ 1
LG5 2-29 Statement of Cash Flows Chris’ Outdoor Furniture, Inc., has net cash flows from operating
activities for the last year of $340 million. The income statement shows that net income is $315
million and depreciation expense is $46 million. During the year, the change in inventory on the
balance sheet was $38 million, change in accrued wages and taxes was $15 million, and change
in accounts payable was $20 million. At the beginning of the year the balance of accounts
receivable was $50 million. Calculate the end-of-year balance for accounts receivable.
LG5 2-30 Statement of Cash Flows Dogs 4 U Corporation has net cash flow from financing
activities for the last year of $34 million. The company paid $178 million in dividends last year.
During the year, the change in notes payable on the balance sheet was $39 million, and change in
common and preferred stock was $0. The end-of-year balance for long-term debt was $315
million. Calculate the beginning-of-year balance for long-term debt.
LG5 2-31 Free Cash Flow The 2015 income statement for Duffy’s Pest Control shows that
depreciation expense was $197 million, EBIT was $494 million, and the tax rate was 30 percent.
At the beginning of the year, the balance of gross fixed assets was $1,562 million and net
operating working capital was $417 million. At the end of the year, gross fixed assets was $1,803
million. Duffy’s free cash flow for the year was $424 million. Calculate the end-of-year balance
for net operating working capital.
LG5 2-32 Free Cash Flow The 2015 income statement for Egyptian Noise Blasters shows that
depreciation expense is $85 million, NOPAT is $246 million. At the end of the year, the balance
of gross fixed assets was $655 million. The change in net operating working capital during the
year was $73 million. Egyptian’s free cash flow for the year was $190 million. Calculate the
beginning-of-year balance for gross fixed assets.
