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16. The solution to this question works the income statement backwards. Starting at the bottom:
Net income = Dividends + Addition to retained earnings
Net income = $5,200 + 8,100
Net income = $13,300
Now, looking at the income statement:
EBT – (EBT × Tax rate) = Net income
The last step is to use:
EBIT = Sales – Costs – Depreciation
$22,512 = $57,900 – 28,600 – Depreciation
Depreciation = $6,788
17. The balance sheet for the company looks like this:
Balance Sheet
Cash $168,000 Accounts payable $429,000
Accounts receivable 237,000 Notes payable 171,000
Inventory 385,000 Current liabilities $600,000
TL & OE = CL + LTD + Common stock
Solving this equation for equity gives us:
Common stock = $5,027,000 – 2,084,000 – 2,585,000
Common stock = $358,000
18. The market value of shareholders’ equity cannot be negative. A negative market value in this case
would imply that the company would pay you to own the stock. The market value of shareholders’
19. a. Taxes Growth = .15($50,000) + .25($25,000) + .34($4,500) = $15,280
b. Each firm has a marginal tax rate of 34 percent on the next $10,000 of taxable income, despite
20. a. The income statement for the company is:
Income Statement
Sales
$809,000
Costs
549,000
Administrative and selling expenses
136,000
Depreciation expense
85,000
EBIT
$ 39,000
Interest expense
67,000
EBT
–$28,000
Taxes
0
Net income
–$28,000
b. OCF = EBIT + Depreciation – Taxes
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.
21. A firm can still 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 to creditors = $49,000
So:
Net new LTD = $18,000
22. a. The income statement is:
Income Statement
Sales
$44,600
Cost of goods sold
27,500
Depreciation
4,630
EBIT
$12,470
Interest
1,050
Taxable income
$11,420
Taxes (40%)
4,568
Net income
$ 6,852
b. OCF = EBIT + Depreciation – Taxes
c. Change in NWC = NWCend – NWCbeg
Net capital spending = NFAend – NFAbeg + Depreciation
CFA = OCF – Change in NWC – Net capital spending
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
d. Cash flow to creditors = Interest – Net new LTD
Cash flow to stockholders = Cash flow from assets – Cash flow to creditors
= –$828 – 1,050
Net new equity = $2,275 – (–1,878)
= $4,153
The firm had positive earnings in an accounting sense (NI > 0) and had positive cash flow from
operations. The firm invested $630 in new net working capital and $12,730 in new fixed assets.
The firm had to raise $828 from its stakeholders to support this new investment. It accomplished
this by raising $4,153 in the form of new equity. After paying out $2,275 of this in the form of
23. a. Total assets 2016 = $1,066 + 5,184 = $6,250
Total liabilities 2016 = $475 + 2,880 = $3,355
Owners’ equity 2016 = $6,250 – 3,355 = $2,895
b. NWC 2016 = CA2016 – CL2016 = $1,066 – 475 = $591
NWC 2017 = CA2017 – CL2017 = $1,145 – 518 = $627
Change in NWC = NWC2017 – NWC2016 = $627 – 591 = $36
c. We can calculate net capital spending as:
Net capital spending = Net fixed assets 2017 – Net fixed assets 2016 + Depreciation
Net capital spending = $5,472 – 5,184 + 1,339
Net capital spending = $1,627
So, the company had a net capital spending cash flow of $1,627. We also know that net capital
spending is:
Net capital spending = Fixed assets bought – Fixed assets sold
EBIT = $15,690 – 3,739 – 1,339
EBIT = $10,612
EBT = EBIT – Interest
EBT = $10,612 – 562
EBT = $10,050
Taxes = EBT .35
Taxes = $10,050 .35
Taxes = $3,518
Net new borrowing = $210 = Debt issued – Debt retired
Debt retired = $634 – 210
Debt retired = $424
Balance sheet as of Dec. 31, 2016
Cash
$21,364
Accounts payable
$27,349
Accounts receivable
28,283
Inventory
50,287
Long-term debt
71,550
Current assets
$99,934
Net fixed assets
$179,166
Owners' equity
180,201
Total assets
$279,100
Total liab. & equity
$279,100
Balance sheet as of Dec. 31, 2017
Cash
$21,856
Accounts payable
$25,639
Accounts receivable
31,864
Inventory
51,675
Long-term debt
83,476
Current assets
$105,395
Net fixed assets
$183,440
Owners' equity
179,720
Total assets
$288,835
Total liab. & equity
$288,835
2016 Income Statement 2017 Income Statement
Sales
$40,743.00
Sales
$43,277.00
COGS
14,020.00
COGS
15,912.00
Other expenses
3,322.00
Other expenses
2,776.00
Depreciation
5,853.00
Depreciation
5,858.00
EBIT
$17,548.00
EBIT
$18,731.00
Interest
2,098.00
Interest
3,142.00
EBT
$15,450.00
EBT
$15,589.00
Taxes (35%)
5,407.50
Taxes (35%)
5,456.15
Net income
$10,042.50
Net income
$10,132.85
Dividends
$4,966.00
Dividends
$5,468.00
Additions to RE
$5,076.50
Additions to RE
4,664.85
OCF = $19,132.85
Change in NWC = NWCend – NWCbeg = (CA – CL) end – (CA – CL) beg
Change in NWC = ($105,395 – 25,639) – ($99,934 – 27,349)
Change in NWC = $7,171
Net capital spending = NFAend – NFAbeg + Depreciation
Net capital spending = $183,440 – 179,166 + 5,858
Cash flow to creditors = –$8,784
Net new equity = Common stockend – Common stockbeg
Common stock + Retained earnings = Total owners’ equity
Net new equity = (OE – RE) end – (OE – RE) beg
Net new equity = OEend – OEbeg + REbeg – REend
Net new equity = –$5,145.85
Cash flow to stockholders = Dividends – Net new equity
Cash flow to stockholders = $5,468 – (–$5,145.85)
Cash flow to stockholders = $10,613.85
26. We will begin by calculating the operating cash flow. First, we need the EBIT, which can be calculated
as:
EBIT = Net income + Current taxes + Deferred taxes + Interest
EBIT = $321 + 185 + 34 + 96
EBIT = $636
Now we can calculate the operating cash flow as:
Operating cash flow
Earnings before interest and taxes
$636
Depreciation
177
– Current taxes
185
Operating cash flow
$628
Net capital spending
Acquisition of fixed assets
$332
– Sale of fixed assets
42
Capital spending
$290
The net working capital cash flows are all found in the operations cash flow section of the accounting
Net working capital cash flow
Cash
$27
Accounts receivable
52
Inventories
–41
Accounts payable
–33
Accrued expenses
17
Other
–4
NWC cash flow
$18
Cash flow to creditors
Interest
$96
Retirement of debt
195
Debt service
$291
– Proceeds from sale of long-term debt
–105
Total
$186
Cash flow to stockholders
Dividends
$158
Repurchase of stock
26
Cash to stockholders
$184
– Proceeds from new stock issue
–50
Total
$134
= (NFAend + ADend) – (NFAbeg + ADbeg) = FAend – FAbeg
28. a. The tax bubble causes average tax rates to catch up to marginal tax rates, thus eliminating the tax
Taxes = .15($50,000) + .25($25,000) + .34($25,000) + .39($235,000)
Taxes = $113,900
Average tax rate = $113,900 / $335,000
Average tax rate = .34, or 34%
Average tax rate = $6,416,667 / $18,333,334
Average tax rate = .35, or 35%
X($100,000) = $68,000 – 22,250 = $45,750
X = $45,750 / $100,000
X = .4575, or 45.75%
