Chapter 2

Problems 1-26
Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-In" be installed in Excel. To install these, click on the Office button then "Excel Options," "Add-Ins" and select "Go." Check "Analyis ToolPak" and "Solver Add-In," then click "OK."

require that

Chapter 2
Question 1 Input area:

Current assets Net fixed assets Current liabilities Long-term debt

5,100 23,800 4,300 7,400

Output area:

Current assets Net fixed assets

Total assets Owner's equity Net working capital

Balance sheet $ 5,100 Current liabilities 23,800 Long-term debt Owner's equity Total liabilities $ 28,900 +total equity $ 17,200 $ 800

4,300 7,400 17,200 28,900

Chapter 2
Questions 2-4 Input area:

Sales Costs Depreciation expense Interest expense Tax rate Cash dividends Shares outstanding

$ 586,000 247,000 43,000 32,000 35% $ 73,000 85,000

Output area:

Income Statement Sales $ 586,000 Costs 247,000 Depreciation expense 43,000 EBIT $ 296,000 Interest expense 32,000 EBT $ 264,000 Taxes (35%) 92,400 Net income $ 171,600

Addition to retained earnings Earnings per share Dividends per share

$ 98,600 $ $ 2.02 0.86

Chapter 2
Question 5 Input area:

Book value of net fixed assets Book value of current liabilities Net working capital Market value of net fixed assets Market value of current assets

3,700,000 1,100,000 380,000 4,900,000 1,600,000

$ $

Output area:

Net working capital Current liabilities Book value of current assets Book value of net fixed assets Book value of total assets Market value of current assets Market value of net fixed assets Market value of total assets

$ $ $ $ $

380,000 1,100,000 1,480,000 3,700,000 5,180,000 1,600,000 4,900,000 6,500,000

Chapter 2
Questions 6,7 Input area:

Taxable income Taxable income 0 - 50,000 50,001 - 75,000 75,001 - 100,000 100,001 - 335,000 335,001 - 10,000,000 10,000,001 - 15,000,000 15,000,001 - 18,333,333 18,333,334 +

236,000

15% 25% 34% 39% 34% 35% 38% 35%

Output area:

Taxes: 15% 25% 34% 39% 34% 35% 38% 35%

$ Average tax rate: $

50,000 25,000 25,000 136,000 0 0 0 0 75,290 75,290 = 236,000 39% 31.90%

The marginal tax rate is

Chapter 2
Question 8 Input area:

Sales Costs Depreciation Expense Interest Expense Tax rate

$ 27,500 13,280 2,300 1,105 35%

Output area:

Income Statement Sales $ 27,500 Costs 13,280 Depreciation expense 2,300 EBIT $ 11,920 Interest expense 1,105 EBT $ 10,815 Taxes (35%) 3,785 Net income $ 7,030 Operating cash flow $ 10,435

Chapter 2
Question 9 Input area:

Dec. 31, 2008 net fixed assets Dec. 31, 2009 net fixed assets Depreciation expense

$ 3,400,000 4,200,000 $ 385,000

Output area:

Net capital spending

$ 1,185,000

Chapter 2
Question 10 Input area:

Dec. 31, 2008 Current assets Dec. 31, 2008 Current liabilities Dec. 31, 2009 current assets Dec. 31, 2009 current liabilities

2,100 1,380 2,250 1,710

Output area:

Ending NWC Beginning NWC Additions to net working capital

$ $ $

540 720 (180)

Chapter 2
Question 11 Input area:

Dec. 31, 2008 Long-term debt Dec. 31, 2009 Long-term debt Interest expense

$ 2,600,000 $ 2,900,000 $ 170,000

Output area:

Cash flow to creditors

(130,000)

Chapter 2
Question 12 Input area:

Dec. 31, 2008 Common stock Dec. 31, 2008 Additional paid-in surplus Dec. 31, 2009 Common stock Dec. 31, 2009 Additional paid-in surplus Cash dividends

740,000 5,200,000 815,000 5,500,000 490,000

Output area:

Cash flow to stockholders

115,000

Chapter 2
Question 13 Input area:

From problems 11,12: 2009 Cash flow to creditors 2009 Cash flow to stockholders New information: 2009 Net capital spending Change in net working capital

(130,000) 115,000

940,000 (85,000)

Output area:

Cash flow from assets Operating cash flow

$ $

(15,000) 840,000

Chapter 2
Questions 14 Input area:

Sales Costs Other expenses Depreciation expense Interest expense Taxes Dividends 2009 New equity Net new long-term debt Change in fixed assets

$ 196,000 104,000 6,800 9,100 14,800 21,455 10,400 $ 5,700 (7,300) 27,000

Output area:

Income Statement Sales $ Costs Other expenses Depreciation expense EBIT $ Interest expense EBT $ Taxes Net income $ Dividends $ Addition to retained earnings $

196,000 104,000 6,800 9,100 76,100 14,800 61,300 21,455 39,845 10,400 29,445

a. Operating cash flow b. Cash flow to creditors c. Cash flow to stockholders d. Cash flow from assets Net capital spending Change in NWC

$ 63,745 $ 22,100 $ 4,700

$ 26,800 $ 36,100 $ 845

Chapter 2
Questions 15 Input area:

Sales Costs Addition to retained earnings Dividends paid Interest expense Tax rate

$ 41,000 $ 19,500 $ 5,100 $ 1,500 $ 4,500 35%

Output area:

Income Statement Sales $ 41,000 Costs 19,500 Depreciation expense $ 6,846 EBIT $ 14,654 Interest expense 4,500 EBT $ 10,154 Taxes 3,554 Net income $ 6,600 Dividends $ 1,500 Addition to retained earnings $ 5,100

Chapter 2
Question 16 Input area:

Cash Intangible net fixed assets Accounts payable Accounts receivable Tangible net fixed assets Inventory Notes payable Accumulated retained earnings Long-term debt

195,000 780,000 405,000 137,000 2,800,000 264,000 160,000 1,934,000 1,195,300

Output area:

Cash Accounts receivable Inventory Current assets Tangible net fixed assets Intangible net fixed assets Total assets

Balance sheet as of Dec. 31, 2009 $ 195,000 137,000 264,000 $ 596,000 $ 2,800,000 780,000 $ 4,176,000

e sheet as of Dec. 31, 2009 Accounts payable Notes payable Current liabilities Long-term debt Total liabilities Common stock Accumulated retained earnings Total liability & owners' equity

$ $ $ $ $

405,000 160,000 565,000 1,195,300 1,760,300 481,700 1,934,000 4,176,000

Chapter 2
Question 17 Input area:

Total liabilities a. Total assets b. Total assets

$ $

7,300 8,400 6,700

Output area:

a. Owners' equity b. Owners' equity

1,100 0

Chapter 2
Questions 18 Input area:

Corporation growth taxable income Corporation income taxable income Taxable income 0 - 50,000 50,001 - 75,000 75,001 - 100,000 100,001 - 335,000 335,001 - 10,000,000 10,000,001 - 15,000,000 15,000,001 - 18,333,333 18,333,334 +

88,000 8,800,000

15% 25% 34% 39% 34% 35% 38% 35%

Output area:

Corporation Growth: Taxes: 15% 25% 34% 39% 34% 35% 38% 35%

50,000 25,000 13,000 0 0 0 0 0 18,170

With a marginal tax rate of 34%, the tax on an additional $10,000 would be $3,400.

Corporation Income: Taxes: 15%

50,000

25% 34% 39% 34% 35% 38% 35% $

25,000 25,000 235,000 8,465,000 0 0 0 2,992,000

With a marginal tax rate of 34%, the tax on an additional $10,000 would be $3,400. The tax bills on an additional $10,000 are the same because each firm has a marginal tax rate of 34%, despite their different average tax rates.

Chapter 2
Questions 19 Input area:

Sales Costs Administrative and selling expenses Depreciation expense Interest expense Tax rate

$ 730,000 580,000 105,000 135,000 75,000 35%

Output area:

Income Statement Sales Costs Administrative and selling expenses Depreciation expense EBIT Interest expense EBT Taxes a. Net income

$ 730,000 580,000 105,000 135,000 $ (90,000) 75,000 $ (165,000) 0 $ (165,000)

b. Operating cash flow

$ 45,000

c. Net income was negative because of the tax deductibility and interest expense. However, the actual cash flow from operations was positive because depreciation is a non-cash expense and interest is a financing, not an operating, expense.

Chapter 2
Question 20 Input area:

From Problem 19: Operating Cash Flow Interest New information: Cash dividend New investment in net fixed income New investment in net working capital New stock issued during year Net capital spending Net new equity

45,000 75,000

25,000 0 0 0 0 0

Output area:

Cash flow from assets Cash to from stockholders Cash flow to creditors Net new long-term debt

$ $ $ $

45,000 25,000 20,000 55,000

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 dividend payments.

Chapter 2
Questions 21 Input area:

Sales Cost of goods sold Depreciation expense Interest expense Dividends paid New debt issued 2008 Net fixed assets 2008 Current assets 2008 Current liabilities 2009 Net fixed assets 2009 Current assets 2009 Current liabilities Tax rate

$ 22,800 16,050 4,050 1,830 1,300 0 $ 13,650 4,800 2,700 $ 16,800 5,930 3,150 34%

Output area:

Income Statement Sales Costs Depreciation expense EBIT Interest expense EBT Taxes (34%) a. Net income

$ 22,800 16,050 4,050 $ 2,700 1,830 $ 870 296 $ 574

b. Operating cash flow c. Ending NWC Beginning NWC Change in net working capital Net capital spending Cash flow from assets

$ $ $ $ $ $

6,454 2,780 2,100 680 7,200 (1,426)

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 $1,426 in funds from its stockholders and creditors to make these investments.

d. Cash flow to creditors Cash flow to stockholders New equity

$ $ $

1,830 (3,256) 4,556

The firm has positive earnings in the accounting sense (NI>0) and had positive cash flow in new NWC and from operations. The firm invested $680 $7,200 in new fixed assets. The firm had to raise $1,426 from its stakeholders to support this new investment. It accomplished this by raising $4,556 in the form of equity. After paying out $1,300 of this in the form of dividends to shareholders and $1,830 in the form of interest to creditors, $1,426 was left to just meet the firm's cash flow needs for investment.

Chapter 2
Questions 22 Input area:

Sales Cost of goods sold Depreciation expense Interest expense 2008 Current assets 2008 Net fixed assets 2008 Current liabilities 2008 Long-term debt 2009 Current assets 2009 Net fixed assets 2009 Current liabilities 2009 Long-term debt 2009 New fixed assets purchased 2009 New long-term debt Tax rate

$ $ $ $ $ $ $ $ $ $ $ $ $ $

8,280 3,861 738 211 653 2,691 261 1,422 707 3,240 293 1,512 1,350 270 35%

Output area:

Income Statement Sales Costs Depreciation expense EBIT Interest expense EBT Taxes (35%) Net income

$ 8,280.00 3,861.00 738.00 $ 3,681.00 211.00 $ 3,470.00 1,214.50 $ 2,255.50

a. 2008 Total assets 2008 Total liabilities 2008 Owners' equity 2009 Total assets 2009 Total liabilities 2009 Owners' equity b. 2008 Net working capital

$ 3,344.00 $ 1,683.00 $ 1,661.00 $ 3,947.00 $ 1,805.00 $ 2,142.00 $ 392.00

2009 Net working capital Change in net working capital

$ $

414.00 22.00

c. Net capital spending Fixed assets sold 2009 Operating cash flow Cash flow from assets d. Debt retired Net new borrowing Cash flow to creditors

$ 1,287.00 $ 63.00 $ 3,204.50 $ 1,895.50 $ $ $ 180.00 90.00 121.00

Chapter 2
Questions 23

Net capital spending = NFAend - NFAbeg + Depreciation = (NFAend - NFAbeg) + (Depreciation + ADbeg) - ADbeg = (NFAend - NFAbeg) + ADend - ADbeg = (NFAend + ADend) - (NFAbeg + ADbeg) = FAend - FAbeg

ADbeg) - ADbeg

Chapter 2
Questions 24 Input area:

1st Taxable income 2nd Taxable income Taxable income 0 - 50,000 50,001 - 75,000 75,001 - 100,000 100,001 - 335,000 335,001 - 10,000,000 10,000,001 - 15,000,000 15,000,001 - 18,333,333 18,333,334 +

335,001 18,333,334

15% 25% 34% 39% 34% 35% 38% 35%

Output area:

a) The tax bubble causes average tax rates to catch up to marginal rates, thus eliminating the tax advantage of low marginal rates for high income corporations. b) Taxes: 15% 25% 34% 39% 34% 35% 38% 35%

$ Average tax rate = $ = * denotes marginal tax rate

50,000 25,000 25,000 235,000 1 0 0 0 113,900 113,900 335,001 34%

50,000 25,000 25,000 235,000 9,665,000 5,000,000 3,333,333 1 $ 6,416,667

$ 6,416,667 18,333,334 35%

c) Income 15% 25% 34% 45.75% 34% 35% 38% 35%

$ $

200,000 50,000 25,000 25,000 100,000 0 0 0 0 68,000

Taxes = $ $

200,000 34% 68,000

Chapter 2
Questions 25 Input area:

Sales Depreciation Cost of goods sold Other expenses Interest Cash Accounts receivable Short-term notes payable Long-term debt Net fixed assets Accounts payable Inventory Dividends Tax rate

2008 7,233 1,038 2,487 591 485 3,792 5,021 732 12,700 31,805 3,984 8,927 882 34%

2009 $ 8,085 1,085 2,942 515 579 4,041 5,892 717 15,435 33,921 4,025 9,555 1,011 34%

Output area:

Cash Accounts receivable Inventory Current assets Net fixed assets Total assets

Balance sheet as of Dec. 31, 2008 $ 3,792 Accounts payable 5,021 Notes payable 8,927 Current liabilities $ 17,740 Long-term debt $ 31,805 Owners' equity $ 49,545 Total liab. & equity

$ 3,984 732 $ 4,716 $ 12,700 32,129 $ 49,545

Cash Accounts receivable Inventory Current assets Net fixed assets Total assets

Balance sheet as of Dec. 31, 2009 $ 4,041 Accounts payable 5,892 Notes payable 9,555 Current liabilities $ 19,488 Long-term debt $ 33,921 Owners' equity $ 53,409 Total liab. & equity

$ 4,025 717 $ 4,742 $ 15,435 33,232 $ 53,409

2008 Income Statement Sales $ Costs Other expenses Depreciation EBIT $ Interest EBT $ Taxes Net income $ Dividends $ Addition to retained earnings

7,233.00 2,487.00 591.00 1,038.00 3,117.00 485.00 2,632.00 894.88 1,737.12 882.00 855.12

2009 Income Statement Sales $ Costs Other expenses Depreciation EBIT $ Interest EBT $ Taxes Net income $ Dividends $ Addition to retained earnings

8,085.00 2,942.00 515.00 1,085.00 3,543.00 579.00 2,964.00 1,007.76 1,956.24 1,011.00 945.24

Chapter 2
Questions 26 Input area:

Sales Depreciation Cost of goods sold Other expenses Interest Cash Accounts receivable Short-term notes payable Long-term debt Net fixed assets Accounts payable Inventory Dividends Tax rate From Problem 25: Owners' equity

2008 7,233 1,038 2,487 591 485 3,792 5,021 732 12,700 31,805 3,984 8,927 882 34%

2009 8,085 1,085 2,942 515 579 4,041 5,892 717 15,435 33,921 4,025 9,555 1,011 34%

32,129

$ 33,232

Output area:

2009 Income Statement Sales $ 8,085.00 Costs 2,942.00 Other expenses 515.00 Depreciation 1,085.00 EBIT $ 3,543.00 Interest 579.00 EBT $ 2,964.00 Taxes 1,007.76 Net income $ 1,956.24 Dividends $ 1,011.00 Addition to retained earnings 945.24

Operating cash flow Change in NWC Net capital spending Cash flow from assets Net new long-term debt

$ 3,620.24 1,722.00 3,201.00 $ (1,302.76) $ 2,735.00

Cash flow to creditors Net new equity Cash flow to stockholders

$ (2,156.00) $ $ 157.76 853.24