1)
Case summary:
Company SB manufactures surf boards. It was founded by Person T. Initially, the company was funded by the family, and hence, there were no detailed financial statements maintained by the company. Presently, the company plans to expand its business by raising equity and debt.
The company hires a financial analyst named Person C to evaluate the performance of the company. Person C collects the following information about the company:
Particulars | 2014 | 2015 |
Sales | $385,724 | $470,172 |
Cost of goods sold | $196,619 | $248,263 |
$55,506 | $62,738 | |
Interest | $12,067 | $13,831 |
Selling and administrative | $38,668 | $50,469 |
Cash | $28,372 | $42,865 |
Accounts receivable | $20,104 | $26,078 |
Inventory | $38,706 | $52,057 |
Net fixed assets | $244,881 | $298,350 |
Accounts payable | $20,143 | $34,091 |
Notes payable | $22,855 | $24,955 |
Long-term debt | $123,607 | $140,000 |
New equity | $0 | $15,000 |
Characters in the case:
- Company SB
- Person T: Owner of Company SB
- Person C: Financial analyst
To prepare: The income statement of Company S for the year 2014 and 2015.
Introduction:
The income statement indicates the performance of an organization for a short period. In other words, the income statement helps to determine the income of an organization for a given accounting period.
1)
Answer to Problem 2M
The net income for 2014 and 2015 is $58,005 and $66,410 respectively.
Explanation of Solution
Given information:
Particulars | 2014 | 2015 |
Sales | $385,724 | $470,172 |
Cost of goods sold | $196,619 | $248,263 |
Depreciation | $55,506 | $62,738 |
Interest | $12,067 | $13,831 |
Selling and administrative | $38,668 | $50,469 |
Cash | $28,372 | $42,865 |
Accounts receivable | $20,104 | $26,078 |
Inventory | $38,706 | $52,057 |
Net fixed assets | $244,881 | $298,350 |
Accounts payable | $20,143 | $34,091 |
Notes payable | $22,855 | $24,955 |
Long-term debt | $123,607 | $140,000 |
New equity | $0 | $15,000 |
Prepare the income statement for 2014:
Company S | ||
Income statement for the year 2014 | ||
Particulars | Amount | Amount |
Net sales | $385,724 | |
Less: | ||
Costs | $196,619 | |
Other expenses | $38,668 | |
Depreciation | $55,506 | $290,793 |
Earnings before interest and taxes | $94,931 | |
Less: Interest paid | $12,067 | |
Taxable income | $82,864 | |
Less: Taxes ($82,864×30%) | $24,859 | |
Net income (A) | $58,005 | |
Dividends (B)=(A)×40% | $23,202 | |
Addition to | $34,803 |
Hence, the net income for 2014 is $58,005.
Prepare the income statement for 2015:
Company S | ||
Income statement for the year 2015 | ||
Particulars | Amount | Amount |
Net sales | $470,172 | |
Less: | ||
Costs | $248,263 | |
Other expenses | $50,469 | |
Depreciation | $62,738 | $361,470 |
Earnings before interest and taxes | $108,702 | |
Less: Interest paid | $13,831 | |
Taxable income | $94,871 | |
Less: Taxes ($94,871×30%) | $28,461 | |
Net income (A) | $66,410 | |
Dividends (B)=(A)×40% | $26,564 | |
Addition to retained earnings (A)−(B) | $39,846 |
Hence, the net income for 2015 is $66,410.
2)
Case summary:
Company SB manufactures surf boards. It was founded by Person T. Initially, the company was funded by the family, and hence, there were no detailed financial statements maintained by the company. Presently, the company plans to expand its business by raising equity and debt.
The company hires a financial analyst named Person C to evaluate the performance of the company. Person C collects the following information about the company:
Particulars | 2014 | 2015 |
Sales | $385,724 | $470,172 |
Cost of goods sold | $196,619 | $248,263 |
Depreciation | $55,506 | $62,738 |
Interest | $12,067 | $13,831 |
Selling and administrative | $38,668 | $50,469 |
Cash | $28,372 | $42,865 |
Accounts receivable | $20,104 | $26,078 |
Inventory | $38,706 | $52,057 |
Net fixed assets | $244,881 | $298,350 |
Accounts payable | $20,143 | $34,091 |
Notes payable | $22,855 | $24,955 |
Long-term debt | $123,607 | $140,000 |
New equity | $0 | $15,000 |
Characters in the case:
- Company SB
- Person T: Owner of Company SB
- Person C: Financial analyst
To prepare: The balance sheet of Company S for the year 2014 and 2015.
Introduction:
The balance sheet refers to the statement that indicates the financial position of a firm.
2)
Answer to Problem 2M
The total assets of the company for the year 2014 and 2015 are $332,063 and $419,350 respectively.
Explanation of Solution
Given information:
Particulars | 2014 | 2015 |
Sales | $385,724 | $470,172 |
Cost of goods sold | $196,619 | $248,263 |
Depreciation | $55,506 | $62,738 |
Interest | $12,067 | $13,831 |
Selling and administrative | $38,668 | $50,469 |
Cash | $28,372 | $42,865 |
Accounts receivable | $20,104 | $26,078 |
Inventory | $38,706 | $52,057 |
Net fixed assets | $244,881 | $298,350 |
Accounts payable | $20,143 | $34,091 |
Notes payable | $22,855 | $24,955 |
Long-term debt | $123,607 | $140,000 |
New equity | $0 | $15,000 |
Prepare the balance sheet for 2014:
Company S | |||
Balance sheet | |||
For the year 2014 | |||
Assets | Amount | Liabilities | Amount |
Current assets: | Current liabilities: | ||
Cash | $28,372 | Accounts payable | $20,143 |
Accounts receivable | $20,104 | Notes payable | $22,855 |
Inventory | $38,706 | Total | $42,998 |
Total(A) | $87,182 | ||
Long-term debt | $123,607 | ||
Fixed assets: | |||
Tangible net fixed assets(B) | $244,881 | Shareholders' equity: | |
Common stock (Balance) | $130,655 | ||
Addition to Retained earnings | $34,803 | ||
Total | $165,458 | ||
Total assets (A)+(B) | $332,063 | Total liabilities and shareholders' equity | $332,063 |
Hence, the total assets of Company S is 2014 is $332,063.
Prepare the balance sheet for 2015:
The retained earnings for the year 2015 is the sum of addition to retained earnings of 2014 and the addition to retained earnings of 2015. The common stock of 2015 includes the new equity raised amounting to $15,000.
Company S | |||
Balance sheet | |||
For the year 2015 | |||
Assets | Amount | Liabilities | Amount |
Current assets: | Current liabilities: | ||
Cash | $42,865 | Accounts payable | $34,091 |
Accounts receivable | $26,078 | Notes payable | $24,955 |
Inventory | $52,057 | Total | $59,046 |
Total (A) | $121,000 | ||
Long-term debt | $140,000 | ||
Fixed assets: | |||
Tangible net fixed assets (B) | $298,350 | Shareholders' equity: | |
Common stock (Balance) | $145,655 | ||
Addition to Retained earnings | $74,649 | ||
Total | $220,304 | ||
Total assets (A)+(B) | $419,350 | Total liabilities and shareholders' equity | $419,350 |
Hence, the total assets of Company S are 2015 is $419,350.
3)
Case summary:
Company SB manufactures surf boards. It was founded by Person T. Initially, the company was funded by the family, and hence, there were no detailed financial statements maintained by the company. Presently, the company plans to expand its business by raising equity and debt.
The company hires a financial analyst named Person C to evaluate the performance of the company. Person C collects the following information about the company:
Particulars | 2014 | 2015 |
Sales | $385,724 | $470,172 |
Cost of goods sold | $196,619 | $248,263 |
Depreciation | $55,506 | $62,738 |
Interest | $12,067 | $13,831 |
Selling and administrative | $38,668 | $50,469 |
Cash | $28,372 | $42,865 |
Accounts receivable | $20,104 | $26,078 |
Inventory | $38,706 | $52,057 |
Net fixed assets | $244,881 | $298,350 |
Accounts payable | $20,143 | $34,091 |
Notes payable | $22,855 | $24,955 |
Long-term debt | $123,607 | $140,000 |
New equity | $0 | $15,000 |
Characters in the case:
- Company SB
- Person T: Owner of Company SB
- Person C: Financial analyst
To calculate: The operating cash flow for 2014 and 2015.
3)
Answer to Problem 2M
The operating cash flow for 2014 is $125,578. The operating cash flow for 2015 is $142,979.
Explanation of Solution
Given information:
The earnings before interest and taxes is $94,931 and $108,702 for the year 2014 and 2015 respectively. The depreciation is $55,506 and $62,738 for the year 2014 and 2015 respectively. The taxes are $24,859 and $28,461 for the year 2014 and 2015 respectively.
Compute the operating cash flow for 2014:
Company S | |
Operating cash flow for 2014 | |
Particulars | Amount |
Earnings before interest and taxes | $94,931 |
Add: Depreciation | $55,506 |
$150,437 | |
Less: Taxes | $24,859 |
Operating cash flow | $125,578 |
Hence, the operating cash flow is $125,578.
Compute the operating cash flow for 2015:
Company S | |
Operating cash flow for 2015 | |
Particulars | Amount |
Earnings before interest and taxes | $108,702 |
Add: Depreciation | $62,738 |
$171,440 | |
Less: Taxes | $28,461 |
Operating cash flow | $142,979 |
Hence, the operating cash flow is $142,979.
4)
Case summary:
Company SB manufactures surf boards. It was founded by Person T. Initially, the company was funded by the family, and hence, there were no detailed financial statements maintained by the company. Presently, the company plans to expand its business by raising equity and debt.
The company hires a financial analyst named Person C to evaluate the performance of the company. Person C collects the following information about the company:
Particulars | 2014 | 2015 |
Sales | $385,724 | $470,172 |
Cost of goods sold | $196,619 | $248,263 |
Depreciation | $55,506 | $62,738 |
Interest | $12,067 | $13,831 |
Selling and administrative | $38,668 | $50,469 |
Cash | $28,372 | $42,865 |
Accounts receivable | $20,104 | $26,078 |
Inventory | $38,706 | $52,057 |
Net fixed assets | $244,881 | $298,350 |
Accounts payable | $20,143 | $34,091 |
Notes payable | $22,855 | $24,955 |
Long-term debt | $123,607 | $140,000 |
New equity | $0 | $15,000 |
Characters in the case:
- Company SB
- Person T: Owner of Company SB
- Person C: Financial analyst
To calculate: The cash flow from assets.
4)
Answer to Problem 2M
The cash flow from assets for 2015 is $9,002.
Explanation of Solution
Formulae:
Compute the net capital spending:
Company S | |
Net capital spending | |
Particulars | Amount |
Ending net fixed assets | $298,350 |
Less: Beginning net fixed assets | $244,881 |
$53,469 | |
Add: Depreciation | $62,738 |
Net capital spending | $116,207 |
Hence, the net capital spending is $116,207.
Compute the ending net working capital:
Hence, the ending net working capital is $61,954.
Compute the beginning net working capital:
Hence, the beginning net working capital is $44,184.
Compute the change in net working capital:
Hence, the change in net working capital is $17,770.
Compute the cash flow from assets:
The operating cash flow is $142,979. The change in net working capital is $17,770, and the net capital spending is $116,207.
Hence, the cash flow from assets is $9,002.
5)
Case summary:
Company SB manufactures surf boards. It was founded by Person T. Initially, the company was funded by the family, and hence, there were no detailed financial statements maintained by the company. Presently, the company plans to expand its business by raising equity and debt.
The company hires a financial analyst named Person C to evaluate the performance of the company. Person C collects the following information about the company:
Particulars | 2014 | 2015 |
Sales | $385,724 | $470,172 |
Cost of goods sold | $196,619 | $248,263 |
Depreciation | $55,506 | $62,738 |
Interest | $12,067 | $13,831 |
Selling and administrative | $38,668 | $50,469 |
Cash | $28,372 | $42,865 |
Accounts receivable | $20,104 | $26,078 |
Inventory | $38,706 | $52,057 |
Net fixed assets | $244,881 | $298,350 |
Accounts payable | $20,143 | $34,091 |
Notes payable | $22,855 | $24,955 |
Long-term debt | $123,607 | $140,000 |
New equity | $0 | $15,000 |
Characters in the case:
- Company SB
- Person T: Owner of Company SB
- Person C: Financial analyst
To calculate: The cash flow to creditors.
5)
Answer to Problem 2M
The cash flow to creditors is ($2,562).
Explanation of Solution
Given information:
Company S had to pay interest expenses amounting to $13,831. The new net borrowings were $16,393
Formula:
Compute the cash flow to creditors:
Hence, the cash flow to creditors is ($2,562).
6)
Case summary:
Company SB manufactures surf boards. It was founded by Person T. Initially, the company was funded by the family, and hence, there were no detailed financial statements maintained by the company. Presently, the company plans to expand its business by raising equity and debt.
The company hires a financial analyst named Person C to evaluate the performance of the company. Person C collects the following information about the company:
Particulars | 2014 | 2015 |
Sales | $385,724 | $470,172 |
Cost of goods sold | $196,619 | $248,263 |
Depreciation | $55,506 | $62,738 |
Interest | $12,067 | $13,831 |
Selling and administrative | $38,668 | $50,469 |
Cash | $28,372 | $42,865 |
Accounts receivable | $20,104 | $26,078 |
Inventory | $38,706 | $52,057 |
Net fixed assets | $244,881 | $298,350 |
Accounts payable | $20,143 | $34,091 |
Notes payable | $22,855 | $24,955 |
Long-term debt | $123,607 | $140,000 |
New equity | $0 | $15,000 |
Characters in the case:
- Company SB
- Person T: Owner of Company SB
- Person C: Financial analyst
To calculate: The cash flow to stockholders.
6)
Answer to Problem 2M
The cash flow to stockholders is ($2,562).
Explanation of Solution
Given information:
Company S paid dividends amounting to $26,564. It issued new equity worth $15,000.
Formula:
Compute the cash flow to stockholders:
Hence, the cash flow to stockholders is $11,564.
To discuss: The expansion plans of Person T.
Explanation of Solution
Although Company SB has positive cash flow from operations, most of it goes for meeting the capital needs. The company is already using its cash flow to build assets. Moreover, it is raising addition capital from creditors through bonds. The expansion plans are risky because of the increased capital spending.
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Chapter 2 Solutions
Fundamentals of Corporate Finance
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