a)
To calculate: The shareholders’ equity for 2016 and 2015.
Introduction:
Cash flow refers to the difference between the cash that comes into the business and the cash that goes out of the business. The following are the different types of cash flows in a corporation:
- Cash flow from assets:
It refers to difference between the revenues from the sale of assets and the money invested in purchasing the assets.
- Cash flow to creditors:
It refers to the interest paid to the creditors minus the net fresh debt borrowed by the company.
- Cash flow to stockholders:
It refers to the dividend paid to the shareholders of the company minus the fresh equity raised by the company.
- Operating cash flow:
It refers to the cash flow from operating activities of the firm.
a)
Answer to Problem 22QP
The stockholders’ equity for 2015 is $7,273. The stockholders’ equity for 2016 is $6,311.
Explanation of Solution
Given information:
The current assets are $2,718, the net fixed assets are $12,602, the current liabilities are $1,174, and the long-term debt is $6,873 for the year 2015. The current assets are $2,881, the net fixed assets are $13,175, the current liabilities are $1,726, and the long-term debt is $8,019 for the year 2016.
Formulae:
Compute the total assets for 2015:
Hence, the total assets for 2015 is $15,320.
Compute the total liabilities for 2015:
Hence, the total liabilities for 2015 is $8,047.
Compute the stockholders’ equity for 2015:
Hence, the stockholders’ equity for 2015 is $7,273.
Compute the total assets for 2016:
Hence, the total assets for 2016 is $16,056.
Compute the total liabilities for 2016:
Hence, the total liabilities for 2016 is $9,745.
Compute the stockholders’ equity for 2016:
Hence, the stockholders’ equity for 2016 is $6,311.
b)
To calculate: The change in net working capital for 2016.
Introduction:
Cash flow refers to the difference between the cash that comes into the business and the cash that goes out of the business. The following are the different types of cash flows in a corporation:
- Cash flow from assets:
It refers to difference between the revenues from the sale of assets and the money invested in purchasing the assets.
- Cash flow to creditors:
It refers to the interest paid to the creditors minus the net fresh debt borrowed by the company.
- Cash flow to stockholders:
It refers to the dividend paid to the shareholders of the company minus the fresh equity raised by the company.
- Operating cash flow:
It refers to the cash flow from operating activities of the firm.
b)
Answer to Problem 22QP
The change in net working capital for 2016 is ($389).
Explanation of Solution
Given information:
The current assets are $2,718 and the current liabilities are $1,174for the year 2015. The current assets are $2,881 and the current liabilities are $1,726 for the year 2016.
Formulae:
Compute the ending net working capital:
Hence, the ending net working capital is $1,155.
Compute the beginning net working capital:
Hence, the beginning net working capital is $1,544.
Compute the change in net working capital:
Hence, the change in net working capital is ($389).
c)
To calculate: The cash flow from assets for 2016, and the fixed assets sold in 2016.
Introduction:
Cash flow refers to the difference between the cash that comes into the business and the cash that goes out of the business. The following are the different types of cash flows in a corporation:
- Cash flow from assets:
It refers to difference between the revenues from the sale of assets and the money invested in purchasing the assets.
- Cash flow to creditors:
It refers to the interest paid to the creditors minus the net fresh debt borrowed by the company.
- Cash flow to stockholders:
It refers to the dividend paid to the shareholders of the company minus the fresh equity raised by the company.
- Operating cash flow:
It refers to the cash flow from operating activities of the firm.
c)
Answer to Problem 22QP
The cash flow from assets is $10,239. The company sold $3,153 worth of fixed assets.
Explanation of Solution
Given information:
The company had sales of $40,664. The costs of goods sold were $20,393. The company charged $3,434 as depreciation. It had to pay interest expenses amounting to $938. The tax rate applicable is 40 percent. The change in net working capital is ($389). The net fixed assets are $12,602 for the year 2015, and the net fixed assets are $13,175 for the year 2016. The company purchased $7,160 worth of fixed assets.
Formulae:
Compute the net income:
Company P | ||
Income statement | ||
Particulars | Amount | Amount |
Net sales | $40,664 | |
Less: | ||
Costs | $20,393 | |
Depreciation | $3,434 | $23,827 |
Earnings before interest and taxes | $16,837 | |
Less: Interest paid | $938 | |
Taxable income | $15,899 | |
Less: Taxes ($15,899×40%) | $6,360 | |
Net income | $9,539 |
Hence, the net income is $9,539.
Compute the operating cash flow:
Company Q | |
Operating cash flow | |
Particulars | Amount |
Earnings before interest and taxes | $16,837 |
Add: Depreciation | $3,434 |
$20,271 | |
Less: Taxes | $6,360 |
Operating cash flow | $13,911 |
Hence, the operating cash flow is $13,911.
Compute the net capital spending:
Company Q | |
Net capital spending | |
Particulars | Amount |
Ending net fixed assets | $13,175 |
Less: Beginning net fixed assets | $12,602 |
$573 | |
Add: Depreciation | $3,434 |
Net capital spending | $4,007 |
Hence, the net capital spending is $4,007.
Compute the cash flow from assets:
The operating cash flow is $13,911. The change in net working capital is ($389), and the net capital spending is $4,007.
Hence, the cash flow from assets is $10,293.
Compute the fixed assets sold:
Hence, the value of fixed assets sold is $3,153.
d)
To calculate: The cash flow to creditors, and the amount of long-term debt paid off.
Introduction:
Cash flow refers to the difference between the cash that comes into the business and the cash that goes out of the business. The following are the different types of cash flows in a corporation:
- Cash flow from assets:
It refers to difference between the revenues from the sale of assets and the money invested in purchasing the assets.
- Cash flow to creditors:
It refers to the interest paid to the creditors minus the net fresh debt borrowed by the company.
- Cash flow to stockholders:
It refers to the dividend paid to the shareholders of the company minus the fresh equity raised by the company.
- Operating cash flow:
It refers to the cash flow from operating activities of the firm.
d)
Answer to Problem 22QP
The cash flow to creditors is ($208). The company paid off $1,009 worth of long-term debt.
Explanation of Solution
Given information:
The long-term debt is $6,873 for the year 2015, and the long-term debt is $8,019 for the year 2016. The raised $2,155 in new long-term debt. The company paid interest amounting to $938.
Formulae:
Compute the net new borrowing:
Hence, the net new borrowing is $1,146.
Compute the cash flow to creditors:
Hence, the cash flow to creditors is ($208).
Compute the debt paid off:
Hence, the value of debt paid off is $1,009.
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Chapter 2 Solutions
Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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