ch2 Homework Assignment

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Questions 5,7,8,10,14 and 18

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c HA uu 2 Financial Statements, Thxes, andCashFlow ffi cormect' 8:ff:it"8i:ffi ffiJlilffi #ffi1;Y;xJ, QUE$TIONS AND PROBLEMS lFlNAilcE section of tho preface for more lnformaflon, l. Building a Balance Sheet. Kroeger, Inc., has culrent assets of $1,970, net fixed Basic assets of $9,650, current liabilities of $ 1,520, and long-term debt of $4,370. What is (Questions 1-1 3) the value of the shareholders' equity account for this firm? How much is net working capital? m 2. Building an lncome $tatement. Draiman, Inc., has sales of $795,000, costs of $345,000, depreciation expense of $76,000, interest expense of $41,000, and a tax rate of 35 percent. What is the net income for this firm? @ @ 3. Dividends and Retained Earnings. Suppose the firm in Problem 2 paid out $56,000 in cash dividends. What is the addirion to retained earnings? 4. Penshare Earnings and Dividends, suppose the firm in Problem 3 had 60,000 shares of common stock outstanding. What is the earnings per share, or EPS, figure? What is the dividends per share figure? TM @ @ @ @ pr5 R 5. Market Values and Book Values. Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $B million. The machinery can be sold to the Romulans today for $6.7 million. Klingon's cuffent balance sheet shows net fixed assets of $3.1 million, current liabilities of $790,000, and net working capital of $145,000. If all the curent assets were liquidated today, the company would receive $865,000 cash. What is the book value of Klingon's total assets today? What is the market value? 6. Galculating Taxes. The SGS Co. had $215,000 in taxable income. Using the rates from Trible 2.3 in the chapter, calculate the company's income taxes. 7. Tax Rates' In Problem 6, what is the average tax rate? What is the marginal tax rate? 8. Calculating OCF, Hammett, Inc., has sales of $34,630, costs of $10,340, depreciation expense of $2,520, and interest expense of $1,750. If the tax rate is 35 percent, what is the operating cash flow, or OCF? 9. Calculating Net Gapital Spending. Rotweiler Obedience School's December 31, 2013, balance sheet showed net fixed assets of $ 1,635,000, and the December 3 1 , 2Ul4,balance sheet showed nel fixed assets of 91,976,000. The company'sZ0l4 income statement showed a depreciation expense of $305,000. What was Rotweiler's net capital spending for 2014? I O. Calculating Additions to NWC. The Decemb er 31, 2013, balance sheet of Maria's Tennis Shop, Inc., showed current assets of $1,045 and current liabilities of $960. The December 3t,2014, balance sheet showed current assets of $1,310 and cuffent liabilities of $ 1 ,090. what was the company's 2014 change in net working capital, or NWC? I '1. Gash Flow to credltors. The December 31,2013, balance sheet of Schism, Inc., showed long-term debt of $1,280,000, and the December 3I,Z}L4,balance sheet showed long-term debt of $1,410,000. The 2014 income statement showed an interest expense of $93,400. What was the frm's cash flow to creditors d:unng2}l4? 12. Cash Flow to $tockholders. The December 31, 2013, balance sheet of Schism, Inc., showed $120,000 in the common stock account and $2,120,000 in the additional paid-in surplus account. The December 31,20t4, balance sheet showed $135,000 and $2,380,000 in the same two accounts, respectively. If the company paid out $135,000 in cash dividends during 2}l4,whatwas the cash flow to stockholders for the year? 45 pAn 46 r 2 Understanding Financial Statements and Cash Flow 13" Calculating Gash Flows. Given the information for Schism, Inc., in Problems 11 and 12, suppose you also know that the firm's net capital spending for 2014 was $640,000, and that the firm reduced its net working capital investment by $105,000. What was the firm's 2014 operating cash flow, or OCF? lntermediate (Questions 14*23) 14, Calculating Cash Flows. Weiland Co. shows the following information on its 2014 income statement: sales = $167,000; costs : $88,600; otler expenses : $4,900; depreciation expense = $11,600; interestexpense : $8,7ff)i t&xes = $18,620; dividends : $9,700.In addition, you're told that the firm issued $2,900 in new equity during 20!4, andredeemed $4,000 in outstanding long-term debt. a. What is the2014 operating cash flow? b. What is the2014 cash flow to creditors? c. What is uhe 2Al4 cash flow to stockholders? d. If net fixed assets increased by $23,140 during the year, what was the addition to NWC? 15. Using tncome Statements. Given the following intbrmation for Sookie's Cookies Co., calculate the depreciation expense: sales addition l.o retained earnings $2,600: dividends paid rate percent. tax $1,670; 40 : : : $55.0001 costs : $43,200; : $1.150; interest expense = 16, Preparing a Balance Sheet. Prepare a balance sheel for Alaskiur Orange Corp. as of December 31,2014, based on the following information: cash = $197,000; : : patents and copyrights $863,000; accounts payable $288,000; accounrs receivable $265,000: tangible net fixed assets $5,300.000; invenrory $563,000; notes payable $194,000; accumulaled retained eamings $4.586,000; : long-term debt : = : : : $1,450,000. 17. Residual Claims. Chevelle, Inc., is obligated to pay irs creditors $7,800 during the year. a. b. What is the value of the shareholders' equity What if assets equal $6,900? if assets equal $9,300? 18, Marginal versus Average Tax Rates. (Refer to Table 2.3.) Corporation Growth has $83,000 in taxable income, and Corporation Income has $8,300,000 in taxable income. a. b. fr, What is the tax bill for each firm? Suppose both firms have identified a new project that will increase taxable income by $10,000. How much in additional taxes will each flrm pay? Why is this amount the same? 19, Net lncome and OGF. During the year, Belyk Paving Co. had sales of $2,600,000. Cost of goods sold, administrative and selling expense.q, and depreciation expense were $1,,535,000, $465,000, and $520,000, respectively. In addition, the company had an interest expense of $245,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.) a. b. c. What is Belyk's net income? What is its operating cash flow? Explain your results in (a) and (b). 2O. Accounting Valucs versus Cash Flows. In Problem 19, suppose Belyk Paving Co. paid out $420,000 in cash dividends. Is this possible? If net capital spending was zero, no new investments were made in net working capital, and no new stock was issued during the year, what do you know about the firm's long-tenn debt account? r -@ E R 2 Financial Statements, Taxes, and Cash trlow 47 21. Galculating Cash Flows. Titan Foorball Manufacturing had the following : : operating results for 2014: sales $23,730; cost of goods sold $16,780; depreciation expense = $2,840; interest expense $414; dividends paid $616. At the beginning of the year, net fixed assets were $16,560, current assets were fi2,940, and cunent liabilities were $2,592. At the end of the year, net fixed assets were $18,840, current assets were $3,528, and current liabilities were $2,484. The tax rate for 2014 was 35 percent. a. b. c. d. : : What is net income for 2014? What is the operating cash flow for 2014'l What is the cash flow from assets for 2014? Is this possible? Explain. If no new debt was issued during the year, what is the cash flow to creditors? What is the cash flow to stockholders? Explain and interpret the positive and negative signs of your answers in (a) through (d). 22. Calculating Cash Florars, Consider the following abbreviated financial statements for Cabo Wabo, Inc.: oABO WABO, !NC. Partial Balance Sheets as of December 3'1, 2013 and 2014 2013 2013 2014 CABO WABO, INC. 2014lncome Statement 2014 Liabilities and Assets Owners'Equity Current assets $ 3,198 $ 3,389 Net fixed assets 14,826 15,500 a. b. c. Current liabilities Long-term debt $1 ,381 $2,030 8,086 Sales Costs Depreciation lnterest paid 9,434 What is owners' equity for 2013 arrd2014? What is the change in net working capital for 20L4? ln20L4, Cabo Wabo purchased $8,424 in new fixed assets. How much in fixed assets did Cabo Wabo sell? What is the cash flow from assets for the year? (The tax rate is 40 percent.) d. During 2014, Cabo Wabo raised $2,535 in new long-term debt. How much longterm debt must Cabo Wbbo have paid off during the year? What is the cash flow to crcditors? 23, Gash Flow ldentity. GraffitiAdvertising,Inc., reported the fbllowing financial statements for the last two years. Construct the cash flow identity for the company. Explain what each number means. 2014lncome Statement Sales Cost of goods sold Selling & administrative Depreciation EBIT $621,720 334,427 137,206 60,033 $ lnterest EBT Taxes 90,054 21,226 $ 68,828 27,531 Net income Dividends Addition to retained earnings $ 15,600 $ 25,697 $47,842 23,992 4,040 750 48 paH r 2 Understanding Financial Statements and Cash Flow GRAFFITI AD]/ERTISING, INC. Balance Sheet as of December 31, 20'13 $ Cash Accounts receivable lnventory Current assets Net fixed assets 14,652 20,893 Accounts payable Notes payable $ 10,535 15,858 15,173 Current liabilities Long-term debt $ 26,393 $ 50,718 $378,869 $150,500 $252,694 Owners'equity Total liabilities and Total assets $139{92 owners'equity $429,587 GRAFFITI ADVERTISING, INC. Bal€nce Sheet as of December 31, 2014 $ 15,737 Cash Accounts receivable lnventory Current assets Net fixed assets 23,209 25,029 $ 63,975 $446,942 Accounts payable Notes payable $ 11,563 18,1 1 3 Current liabilities Long-term debt $ 29,676 $167,200 $314,041 Owners'equity Total liabilities and Total assets @ Challenge (Questions 24-25) $51q91_z owners'equity 24, Net Fixed Assets and Depreciation. on the balance $510,917 sheet, the net fixed assets (NFA) account is equal to the gross fixed assets (FA) account (which records the acquisition cost of fixed assets) minus the accumulated depreciation (AD) account (which records the total depreciation taken by the firm against its'fixed assets). Using the fact that NFA : FA - AD, show that the expression given in the chapter for net capital spending, NFA -, - NFA-_ * D (where D is rhe depreciation expense during the year), is equiruenfit rn""u j'Fq*. 25. Thx Rates. Refer to the corporate marginal tax rate information in Table 2.3. b. Why do you think the marginal tax rate jumps up from 34 percent to 39 percent at a taxable income of $100,001, and then falls back to a 34 percent marginal rate al a taxable income of $335,001? Compute the average tax rate for a corporation with exactly $335,001 in taxable income. Does this confum your explanation in part (a)? What is the average tax rate for a corporation with exactly $18,333,334? Is the same thing happening here? c. ffi ffi Both the 39 percent and 38 percent tax rates represent what is called a tax "bubble." Suppose the government wanted to lower the upper threshold of the 39 percent marginal tax bracket from $335,000 to $200,000. What would the new 39 percent bubble rate have to be? 2.1 Change in ilet Working Gapita!. Visit Alcoa ITUHAT'$ OT{ TIIE I'UEB? at www;alcoa.com. Find the most recent annual report and locate the balance sheets for the past two years. Use these balance sheets to calculate the change in net working capital. Hcm do you interpret this number? 2.2 Book Yalues vorsus Market Values. The home page for Coca-Cola Company be fbund at www.coca-cola.com. Locate the most recent armual repofi, which contains a balance sheet for the company. What is the book value of equity for Coca-Cola? The T can r E R 2 Financial Statements, Thxes, and Cash Flow market value of a company is the number of shares of stock outstanding times the price per share. This information can be found at finance.yahoo.com using the ticker symbol for Coca-Cola (KO). What is the market value of equity? Which number is more relevanr for shareholders? 2.3 Net Working Capital. Duke Energy is one of the world's largest energy companies. Go to the company's home page at www.dukeenergy.com, follow ttre link to the investor's page, and locate the annual reports. What was Duke Energy's net working capital for the most recent year? Does this number seem low to you given Duke's curent liabilities? Does this indicate that Duke Energy may be experiencing financial problems? Why or why not? 2.4 Cash FIows to Stockholdens and Greditors. Cooper Tire and Rubber Company provides financial information for investors on its website at www.coopertires.com. Follow the "lnvestors" link and find the most recent annual report. Using the consolidated statement ofcash flows, calculate fhe cash flow to stockholders and the cash flow to creditors. EXCEL MASTEfr 'I' PROBLEM Using Excel to find the marginal tax rate can be accomplished using the VLOOKUP function. However, calculating the total tax bill is a little more difficult. Below we have shown a copy of the IRS tax table for an individual from a recent year. Often, tax tables are presented in this format. lf taxable income Is over. But not ., over.,. $0 7,825 $7,825 31,850 ,850 77,100 77,100 160,850 160,850 349,700 31 Thetaxls: '10% of the amount over $0 $782.50 plus 15% of the amount over $7,825 $4,386.25 plus 25% of the amount over $31 ,850 $'15,698.75 plus 28% of the amount over $77,100 $39,148.75 ptus 33% of the amount over $1 60,850 $101 ,469.25 plus 35% of the amount over $349,700 349,700 ln reading this table, the marginal tax rate for taxable income less than $7,825 is 107o. If the taxable income is between $7,825 and $31 ,850, the tax bill is $782.50 plus the marginal taxes. The marginal taxes are calculated as the taxable income minus $7,825 times the marginal tax rate of l5Vo. Below, we have the corporate tax table as shown in the textbook, as well as a taxable income. faxable income is grcater than or equal to . . . $0 But less fhx than rate .. . 50,001 $50,000 75,000 75,001 100,001 33s,000 34 39 335,001 10,000,000 34 10,000,001 15,000,001 15,000,000 35 18,333,333 38 I 8,333,334 100,000 l5Vo 25 35 49 50 pAR r 2 Understanding Financial Statements and Cash Flow a. Create a tax table in Excel lor corporate taxes similar to the individual tax table shown above. Your spreadsheet should then calculate the marginal tax rate, the average tax rate, and the tax bill for any level of taxable income inprut by a user. b. c. d. For a taxable income of $ 1 ,3-50.000. what is the marginal tax rate? For a taxable income of $ 1.350,000, whal is the total tax bi]l? For a taxable income of $1,350,000, what is the average tax rate'l c HA uu 2 Financial Statements, Thxes, andCashFlow ffi cormect' 8:ff:it"8i:ffi ffiJlilffi #ffi1;Y;xJ, QUE$TIONS AND PROBLEMS lFlNAilcE section of tho preface for more lnformaflon, l. Building a Balance Sheet. Kroeger, Inc., has culrent assets of $1,970, net fixed Basic assets of $9,650, current liabilities of $ 1,520, and long-term debt of $4,370. What is (Questions 1-1 3) the value of the shareholders' equity account for this firm? How much is net working capital? m 2. Building an lncome $tatement. Draiman, Inc., has sales of $795,000, costs of $345,000, depreciation expense of $76,000, interest expense of $41,000, and a tax rate of 35 percent. What is the net income for this firm? @ @ 3. Dividends and Retained Earnings. Suppose the firm in Problem 2 paid out $56,000 in cash dividends. What is the addirion to retained earnings? 4. Penshare Earnings and Dividends, suppose the firm in Problem 3 had 60,000 shares of common stock outstanding. What is the earnings per share, or EPS, figure? What is the dividends per share figure? TM @ @ @ @ pr5 R 5. Market Values and Book Values. Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $B million. The machinery can be sold to the Romulans today for $6.7 million. Klingon's cuffent balance sheet shows net fixed assets of $3.1 million, current liabilities of $790,000, and net working capital of $145,000. If all the curent assets were liquidated today, the company would receive $865,000 cash. What is the book value of Klingon's total assets today? What is the market value? 6. Galculating Taxes. The SGS Co. had $215,000 in taxable income. Using the rates from Trible 2.3 in the chapter, calculate the company's income taxes. 7. Tax Rates' In Problem 6, what is the average tax rate? What is the marginal tax rate? 8. Calculating OCF, Hammett, Inc., has sales of $34,630, costs of $10,340, depreciation expense of $2,520, and interest expense of $1,750. If the tax rate is 35 percent, what is the operating cash flow, or OCF? 9. Calculating Net Gapital Spending. Rotweiler Obedience School's December 31, 2013, balance sheet showed net fixed assets of $ 1,635,000, and the December 3 1 , 2Ul4,balance sheet showed nel fixed assets of 91,976,000. The company'sZ0l4 income statement showed a depreciation expense of $305,000. What was Rotweiler's net capital spending for 2014? I O. Calculating Additions to NWC. The Decemb er 31, 2013, balance sheet of Maria's Tennis Shop, Inc., showed current assets of $1,045 and current liabilities of $960. The December 3t,2014, balance sheet showed current assets of $1,310 and cuffent liabilities of $ 1 ,090. what was the company's 2014 change in net working capital, or NWC? I '1. Gash Flow to credltors. The December 31,2013, balance sheet of Schism, Inc., showed long-term debt of $1,280,000, and the December 3I,Z}L4,balance sheet showed long-term debt of $1,410,000. The 2014 income statement showed an interest expense of $93,400. What was the frm's cash flow to creditors d:unng2}l4? 12. Cash Flow to $tockholders. The December 31, 2013, balance sheet of Schism, Inc., showed $120,000 in the common stock account and $2,120,000 in the additional paid-in surplus account. The December 31,20t4, balance sheet showed $135,000 and $2,380,000 in the same two accounts, respectively. If the company paid out $135,000 in cash dividends during 2}l4,whatwas the cash flow to stockholders for the year? 45 pAn 46 r 2 Understanding Financial Statements and Cash Flow 13" Calculating Gash Flows. Given the information for Schism, Inc., in Problems 11 and 12, suppose you also know that the firm's net capital spending for 2014 was $640,000, and that the firm reduced its net working capital investment by $105,000. What was the firm's 2014 operating cash flow, or OCF? lntermediate (Questions 14*23) 14, Calculating Cash Flows. Weiland Co. shows the following information on its 2014 income statement: sales = $167,000; costs : $88,600; otler expenses : $4,900; depreciation expense = $11,600; interestexpense : $8,7ff)i t&xes = $18,620; dividends : $9,700.In addition, you're told that the firm issued $2,900 in new equity during 20!4, andredeemed $4,000 in outstanding long-term debt. a. What is the2014 operating cash flow? b. What is the2014 cash flow to creditors? c. What is uhe 2Al4 cash flow to stockholders? d. If net fixed assets increased by $23,140 during the year, what was the addition to NWC? 15. Using tncome Statements. Given the following intbrmation for Sookie's Cookies Co., calculate the depreciation expense: sales addition l.o retained earnings $2,600: dividends paid rate percent. tax $1,670; 40 : : : $55.0001 costs : $43,200; : $1.150; interest expense = 16, Preparing a Balance Sheet. Prepare a balance sheel for Alaskiur Orange Corp. as of December 31,2014, based on the following information: cash = $197,000; : : patents and copyrights $863,000; accounts payable $288,000; accounrs receivable $265,000: tangible net fixed assets $5,300.000; invenrory $563,000; notes payable $194,000; accumulaled retained eamings $4.586,000; : long-term debt : = : : : $1,450,000. 17. Residual Claims. Chevelle, Inc., is obligated to pay irs creditors $7,800 during the year. a. b. What is the value of the shareholders' equity What if assets equal $6,900? if assets equal $9,300? 18, Marginal versus Average Tax Rates. (Refer to Table 2.3.) Corporation Growth has $83,000 in taxable income, and Corporation Income has $8,300,000 in taxable income. a. b. fr, What is the tax bill for each firm? Suppose both firms have identified a new project that will increase taxable income by $10,000. How much in additional taxes will each flrm pay? Why is this amount the same? 19, Net lncome and OGF. During the year, Belyk Paving Co. had sales of $2,600,000. Cost of goods sold, administrative and selling expense.q, and depreciation expense were $1,,535,000, $465,000, and $520,000, respectively. In addition, the company had an interest expense of $245,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.) a. b. c. What is Belyk's net income? What is its operating cash flow? Explain your results in (a) and (b). 2O. Accounting Valucs versus Cash Flows. In Problem 19, suppose Belyk Paving Co. paid out $420,000 in cash dividends. Is this possible? If net capital spending was zero, no new investments were made in net working capital, and no new stock was issued during the year, what do you know about the firm's long-tenn debt account? r -@ E R 2 Financial Statements, Taxes, and Cash trlow 47 21. Galculating Cash Flows. Titan Foorball Manufacturing had the following : : operating results for 2014: sales $23,730; cost of goods sold $16,780; depreciation expense = $2,840; interest expense $414; dividends paid $616. At the beginning of the year, net fixed assets were $16,560, current assets were fi2,940, and cunent liabilities were $2,592. At the end of the year, net fixed assets were $18,840, current assets were $3,528, and current liabilities were $2,484. The tax rate for 2014 was 35 percent. a. b. c. d. : : What is net income for 2014? What is the operating cash flow for 2014'l What is the cash flow from assets for 2014? Is this possible? Explain. If no new debt was issued during the year, what is the cash flow to creditors? What is the cash flow to stockholders? Explain and interpret the positive and negative signs of your answers in (a) through (d). 22. Calculating Cash Florars, Consider the following abbreviated financial statements for Cabo Wabo, Inc.: oABO WABO, !NC. Partial Balance Sheets as of December 3'1, 2013 and 2014 2013 2013 2014 CABO WABO, INC. 2014lncome Statement 2014 Liabilities and Assets Owners'Equity Current assets $ 3,198 $ 3,389 Net fixed assets 14,826 15,500 a. b. c. Current liabilities Long-term debt $1 ,381 $2,030 8,086 Sales Costs Depreciation lnterest paid 9,434 What is owners' equity for 2013 arrd2014? What is the change in net working capital for 20L4? ln20L4, Cabo Wabo purchased $8,424 in new fixed assets. How much in fixed assets did Cabo Wabo sell? What is the cash flow from assets for the year? (The tax rate is 40 percent.) d. During 2014, Cabo Wabo raised $2,535 in new long-term debt. How much longterm debt must Cabo Wbbo have paid off during the year? What is the cash flow to crcditors? 23, Gash Flow ldentity. GraffitiAdvertising,Inc., reported the fbllowing financial statements for the last two years. Construct the cash flow identity for the company. Explain what each number means. 2014lncome Statement Sales Cost of goods sold Selling & administrative Depreciation EBIT $621,720 334,427 137,206 60,033 $ lnterest EBT Taxes 90,054 21,226 $ 68,828 27,531 Net income Dividends Addition to retained earnings $ 15,600 $ 25,697 $47,842 23,992 4,040 750 48 paH r 2 Understanding Financial Statements and Cash Flow GRAFFITI AD]/ERTISING, INC. Balance Sheet as of December 31, 20'13 $ Cash Accounts receivable lnventory Current assets Net fixed assets 14,652 20,893 Accounts payable Notes payable $ 10,535 15,858 15,173 Current liabilities Long-term debt $ 26,393 $ 50,718 $378,869 $150,500 $252,694 Owners'equity Total liabilities and Total assets $139{92 owners'equity $429,587 GRAFFITI ADVERTISING, INC. Bal€nce Sheet as of December 31, 2014 $ 15,737 Cash Accounts receivable lnventory Current assets Net fixed assets 23,209 25,029 $ 63,975 $446,942 Accounts payable Notes payable $ 11,563 18,1 1 3 Current liabilities Long-term debt $ 29,676 $167,200 $314,041 Owners'equity Total liabilities and Total assets @ Challenge (Questions 24-25) $51q91_z owners'equity 24, Net Fixed Assets and Depreciation. on the balance $510,917 sheet, the net fixed assets (NFA) account is equal to the gross fixed assets (FA) account (which records the acquisition cost of fixed assets) minus the accumulated depreciation (AD) account (which records the total depreciation taken by the firm against its'fixed assets). Using the fact that NFA : FA - AD, show that the expression given in the chapter for net capital spending, NFA -, - NFA-_ * D (where D is rhe depreciation expense during the year), is equiruenfit rn""u j'Fq*. 25. Thx Rates. Refer to the corporate marginal tax rate information in Table 2.3. b. Why do you think the marginal tax rate jumps up from 34 percent to 39 percent at a taxable income of $100,001, and then falls back to a 34 percent marginal rate al a taxable income of $335,001? Compute the average tax rate for a corporation with exactly $335,001 in taxable income. Does this confum your explanation in part (a)? What is the average tax rate for a corporation with exactly $18,333,334? Is the same thing happening here? c. ffi ffi Both the 39 percent and 38 percent tax rates represent what is called a tax "bubble." Suppose the government wanted to lower the upper threshold of the 39 percent marginal tax bracket from $335,000 to $200,000. What would the new 39 percent bubble rate have to be? 2.1 Change in ilet Working Gapita!. Visit Alcoa ITUHAT'$ OT{ TIIE I'UEB? at www;alcoa.com. Find the most recent annual report and locate the balance sheets for the past two years. Use these balance sheets to calculate the change in net working capital. Hcm do you interpret this number? 2.2 Book Yalues vorsus Market Values. The home page for Coca-Cola Company be fbund at www.coca-cola.com. Locate the most recent armual repofi, which contains a balance sheet for the company. What is the book value of equity for Coca-Cola? The T can r E R 2 Financial Statements, Thxes, and Cash Flow market value of a company is the number of shares of stock outstanding times the price per share. This information can be found at finance.yahoo.com using the ticker symbol for Coca-Cola (KO). What is the market value of equity? Which number is more relevanr for shareholders? 2.3 Net Working Capital. Duke Energy is one of the world's largest energy companies. Go to the company's home page at www.dukeenergy.com, follow ttre link to the investor's page, and locate the annual reports. What was Duke Energy's net working capital for the most recent year? Does this number seem low to you given Duke's curent liabilities? Does this indicate that Duke Energy may be experiencing financial problems? Why or why not? 2.4 Cash FIows to Stockholdens and Greditors. Cooper Tire and Rubber Company provides financial information for investors on its website at www.coopertires.com. Follow the "lnvestors" link and find the most recent annual report. Using the consolidated statement ofcash flows, calculate fhe cash flow to stockholders and the cash flow to creditors. EXCEL MASTEfr 'I' PROBLEM Using Excel to find the marginal tax rate can be accomplished using the VLOOKUP function. However, calculating the total tax bill is a little more difficult. Below we have shown a copy of the IRS tax table for an individual from a recent year. Often, tax tables are presented in this format. lf taxable income Is over. But not ., over.,. $0 7,825 $7,825 31,850 ,850 77,100 77,100 160,850 160,850 349,700 31 Thetaxls: '10% of the amount over $0 $782.50 plus 15% of the amount over $7,825 $4,386.25 plus 25% of the amount over $31 ,850 $'15,698.75 plus 28% of the amount over $77,100 $39,148.75 ptus 33% of the amount over $1 60,850 $101 ,469.25 plus 35% of the amount over $349,700 349,700 ln reading this table, the marginal tax rate for taxable income less than $7,825 is 107o. If the taxable income is between $7,825 and $31 ,850, the tax bill is $782.50 plus the marginal taxes. The marginal taxes are calculated as the taxable income minus $7,825 times the marginal tax rate of l5Vo. Below, we have the corporate tax table as shown in the textbook, as well as a taxable income. faxable income is grcater than or equal to . . . $0 But less fhx than rate .. . 50,001 $50,000 75,000 75,001 100,001 33s,000 34 39 335,001 10,000,000 34 10,000,001 15,000,001 15,000,000 35 18,333,333 38 I 8,333,334 100,000 l5Vo 25 35 49 50 pAR r 2 Understanding Financial Statements and Cash Flow a. Create a tax table in Excel lor corporate taxes similar to the individual tax table shown above. Your spreadsheet should then calculate the marginal tax rate, the average tax rate, and the tax bill for any level of taxable income inprut by a user. b. c. d. For a taxable income of $ 1 ,3-50.000. what is the marginal tax rate? For a taxable income of $ 1.350,000, whal is the total tax bi]l? For a taxable income of $1,350,000, what is the average tax rate'l c HA uu 2 Financial Statements, Thxes, andCashFlow ffi cormect' 8:ff:it"8i:ffi ffiJlilffi #ffi1;Y;xJ, QUE$TIONS AND PROBLEMS lFlNAilcE section of tho preface for more lnformaflon, l. Building a Balance Sheet. Kroeger, Inc., has culrent assets of $1,970, net fixed Basic assets of $9,650, current liabilities of $ 1,520, and long-term debt of $4,370. What is (Questions 1-1 3) the value of the shareholders' equity account for this firm? How much is net working capital? m 2. Building an lncome $tatement. Draiman, Inc., has sales of $795,000, costs of $345,000, depreciation expense of $76,000, interest expense of $41,000, and a tax rate of 35 percent. What is the net income for this firm? @ @ 3. Dividends and Retained Earnings. Suppose the firm in Problem 2 paid out $56,000 in cash dividends. What is the addirion to retained earnings? 4. Penshare Earnings and Dividends, suppose the firm in Problem 3 had 60,000 shares of common stock outstanding. What is the earnings per share, or EPS, figure? What is the dividends per share figure? TM @ @ @ @ pr5 R 5. Market Values and Book Values. Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $B million. The machinery can be sold to the Romulans today for $6.7 million. Klingon's cuffent balance sheet shows net fixed assets of $3.1 million, current liabilities of $790,000, and net working capital of $145,000. If all the curent assets were liquidated today, the company would receive $865,000 cash. What is the book value of Klingon's total assets today? What is the market value? 6. Galculating Taxes. The SGS Co. had $215,000 in taxable income. Using the rates from Trible 2.3 in the chapter, calculate the company's income taxes. 7. Tax Rates' In Problem 6, what is the average tax rate? What is the marginal tax rate? 8. Calculating OCF, Hammett, Inc., has sales of $34,630, costs of $10,340, depreciation expense of $2,520, and interest expense of $1,750. If the tax rate is 35 percent, what is the operating cash flow, or OCF? 9. Calculating Net Gapital Spending. Rotweiler Obedience School's December 31, 2013, balance sheet showed net fixed assets of $ 1,635,000, and the December 3 1 , 2Ul4,balance sheet showed nel fixed assets of 91,976,000. The company'sZ0l4 income statement showed a depreciation expense of $305,000. What was Rotweiler's net capital spending for 2014? I O. Calculating Additions to NWC. The Decemb er 31, 2013, balance sheet of Maria's Tennis Shop, Inc., showed current assets of $1,045 and current liabilities of $960. The December 3t,2014, balance sheet showed current assets of $1,310 and cuffent liabilities of $ 1 ,090. what was the company's 2014 change in net working capital, or NWC? I '1. Gash Flow to credltors. The December 31,2013, balance sheet of Schism, Inc., showed long-term debt of $1,280,000, and the December 3I,Z}L4,balance sheet showed long-term debt of $1,410,000. The 2014 income statement showed an interest expense of $93,400. What was the frm's cash flow to creditors d:unng2}l4? 12. Cash Flow to $tockholders. The December 31, 2013, balance sheet of Schism, Inc., showed $120,000 in the common stock account and $2,120,000 in the additional paid-in surplus account. The December 31,20t4, balance sheet showed $135,000 and $2,380,000 in the same two accounts, respectively. If the company paid out $135,000 in cash dividends during 2}l4,whatwas the cash flow to stockholders for the year? 45 pAn 46 r 2 Understanding Financial Statements and Cash Flow 13" Calculating Gash Flows. Given the information for Schism, Inc., in Problems 11 and 12, suppose you also know that the firm's net capital spending for 2014 was $640,000, and that the firm reduced its net working capital investment by $105,000. What was the firm's 2014 operating cash flow, or OCF? lntermediate (Questions 14*23) 14, Calculating Cash Flows. Weiland Co. shows the following information on its 2014 income statement: sales = $167,000; costs : $88,600; otler expenses : $4,900; depreciation expense = $11,600; interestexpense : $8,7ff)i t&xes = $18,620; dividends : $9,700.In addition, you're told that the firm issued $2,900 in new equity during 20!4, andredeemed $4,000 in outstanding long-term debt. a. What is the2014 operating cash flow? b. What is the2014 cash flow to creditors? c. What is uhe 2Al4 cash flow to stockholders? d. If net fixed assets increased by $23,140 during the year, what was the addition to NWC? 15. Using tncome Statements. Given the following intbrmation for Sookie's Cookies Co., calculate the depreciation expense: sales addition l.o retained earnings $2,600: dividends paid rate percent. tax $1,670; 40 : : : $55.0001 costs : $43,200; : $1.150; interest expense = 16, Preparing a Balance Sheet. Prepare a balance sheel for Alaskiur Orange Corp. as of December 31,2014, based on the following information: cash = $197,000; : : patents and copyrights $863,000; accounts payable $288,000; accounrs receivable $265,000: tangible net fixed assets $5,300.000; invenrory $563,000; notes payable $194,000; accumulaled retained eamings $4.586,000; : long-term debt : = : : : $1,450,000. 17. Residual Claims. Chevelle, Inc., is obligated to pay irs creditors $7,800 during the year. a. b. What is the value of the shareholders' equity What if assets equal $6,900? if assets equal $9,300? 18, Marginal versus Average Tax Rates. (Refer to Table 2.3.) Corporation Growth has $83,000 in taxable income, and Corporation Income has $8,300,000 in taxable income. a. b. fr, What is the tax bill for each firm? Suppose both firms have identified a new project that will increase taxable income by $10,000. How much in additional taxes will each flrm pay? Why is this amount the same? 19, Net lncome and OGF. During the year, Belyk Paving Co. had sales of $2,600,000. Cost of goods sold, administrative and selling expense.q, and depreciation expense were $1,,535,000, $465,000, and $520,000, respectively. In addition, the company had an interest expense of $245,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.) a. b. c. What is Belyk's net income? What is its operating cash flow? Explain your results in (a) and (b). 2O. Accounting Valucs versus Cash Flows. In Problem 19, suppose Belyk Paving Co. paid out $420,000 in cash dividends. Is this possible? If net capital spending was zero, no new investments were made in net working capital, and no new stock was issued during the year, what do you know about the firm's long-tenn debt account? r -@ E R 2 Financial Statements, Taxes, and Cash trlow 47 21. Galculating Cash Flows. Titan Foorball Manufacturing had the following : : operating results for 2014: sales $23,730; cost of goods sold $16,780; depreciation expense = $2,840; interest expense $414; dividends paid $616. At the beginning of the year, net fixed assets were $16,560, current assets were fi2,940, and cunent liabilities were $2,592. At the end of the year, net fixed assets were $18,840, current assets were $3,528, and current liabilities were $2,484. The tax rate for 2014 was 35 percent. a. b. c. d. : : What is net income for 2014? What is the operating cash flow for 2014'l What is the cash flow from assets for 2014? Is this possible? Explain. If no new debt was issued during the year, what is the cash flow to creditors? What is the cash flow to stockholders? Explain and interpret the positive and negative signs of your answers in (a) through (d). 22. Calculating Cash Florars, Consider the following abbreviated financial statements for Cabo Wabo, Inc.: oABO WABO, !NC. Partial Balance Sheets as of December 3'1, 2013 and 2014 2013 2013 2014 CABO WABO, INC. 2014lncome Statement 2014 Liabilities and Assets Owners'Equity Current assets $ 3,198 $ 3,389 Net fixed assets 14,826 15,500 a. b. c. Current liabilities Long-term debt $1 ,381 $2,030 8,086 Sales Costs Depreciation lnterest paid 9,434 What is owners' equity for 2013 arrd2014? What is the change in net working capital for 20L4? ln20L4, Cabo Wabo purchased $8,424 in new fixed assets. How much in fixed assets did Cabo Wabo sell? What is the cash flow from assets for the year? (The tax rate is 40 percent.) d. During 2014, Cabo Wabo raised $2,535 in new long-term debt. How much longterm debt must Cabo Wbbo have paid off during the year? What is the cash flow to crcditors? 23, Gash Flow ldentity. GraffitiAdvertising,Inc., reported the fbllowing financial statements for the last two years. Construct the cash flow identity for the company. Explain what each number means. 2014lncome Statement Sales Cost of goods sold Selling & administrative Depreciation EBIT $621,720 334,427 137,206 60,033 $ lnterest EBT Taxes 90,054 21,226 $ 68,828 27,531 Net income Dividends Addition to retained earnings $ 15,600 $ 25,697 $47,842 23,992 4,040 750 48 paH r 2 Understanding Financial Statements and Cash Flow GRAFFITI AD]/ERTISING, INC. Balance Sheet as of December 31, 20'13 $ Cash Accounts receivable lnventory Current assets Net fixed assets 14,652 20,893 Accounts payable Notes payable $ 10,535 15,858 15,173 Current liabilities Long-term debt $ 26,393 $ 50,718 $378,869 $150,500 $252,694 Owners'equity Total liabilities and Total assets $139{92 owners'equity $429,587 GRAFFITI ADVERTISING, INC. Bal€nce Sheet as of December 31, 2014 $ 15,737 Cash Accounts receivable lnventory Current assets Net fixed assets 23,209 25,029 $ 63,975 $446,942 Accounts payable Notes payable $ 11,563 18,1 1 3 Current liabilities Long-term debt $ 29,676 $167,200 $314,041 Owners'equity Total liabilities and Total assets @ Challenge (Questions 24-25) $51q91_z owners'equity 24, Net Fixed Assets and Depreciation. on the balance $510,917 sheet, the net fixed assets (NFA) account is equal to the gross fixed assets (FA) account (which records the acquisition cost of fixed assets) minus the accumulated depreciation (AD) account (which records the total depreciation taken by the firm against its'fixed assets). Using the fact that NFA : FA - AD, show that the expression given in the chapter for net capital spending, NFA -, - NFA-_ * D (where D is rhe depreciation expense during the year), is equiruenfit rn""u j'Fq*. 25. Thx Rates. Refer to the corporate marginal tax rate information in Table 2.3. b. Why do you think the marginal tax rate jumps up from 34 percent to 39 percent at a taxable income of $100,001, and then falls back to a 34 percent marginal rate al a taxable income of $335,001? Compute the average tax rate for a corporation with exactly $335,001 in taxable income. Does this confum your explanation in part (a)? What is the average tax rate for a corporation with exactly $18,333,334? Is the same thing happening here? c. ffi ffi Both the 39 percent and 38 percent tax rates represent what is called a tax "bubble." Suppose the government wanted to lower the upper threshold of the 39 percent marginal tax bracket from $335,000 to $200,000. What would the new 39 percent bubble rate have to be? 2.1 Change in ilet Working Gapita!. Visit Alcoa ITUHAT'$ OT{ TIIE I'UEB? at www;alcoa.com. Find the most recent annual report and locate the balance sheets for the past two years. Use these balance sheets to calculate the change in net working capital. Hcm do you interpret this number? 2.2 Book Yalues vorsus Market Values. The home page for Coca-Cola Company be fbund at www.coca-cola.com. Locate the most recent armual repofi, which contains a balance sheet for the company. What is the book value of equity for Coca-Cola? The T can r E R 2 Financial Statements, Thxes, and Cash Flow market value of a company is the number of shares of stock outstanding times the price per share. This information can be found at finance.yahoo.com using the ticker symbol for Coca-Cola (KO). What is the market value of equity? Which number is more relevanr for shareholders? 2.3 Net Working Capital. Duke Energy is one of the world's largest energy companies. Go to the company's home page at www.dukeenergy.com, follow ttre link to the investor's page, and locate the annual reports. What was Duke Energy's net working capital for the most recent year? Does this number seem low to you given Duke's curent liabilities? Does this indicate that Duke Energy may be experiencing financial problems? Why or why not? 2.4 Cash FIows to Stockholdens and Greditors. Cooper Tire and Rubber Company provides financial information for investors on its website at www.coopertires.com. Follow the "lnvestors" link and find the most recent annual report. Using the consolidated statement ofcash flows, calculate fhe cash flow to stockholders and the cash flow to creditors. EXCEL MASTEfr 'I' PROBLEM Using Excel to find the marginal tax rate can be accomplished using the VLOOKUP function. However, calculating the total tax bill is a little more difficult. Below we have shown a copy of the IRS tax table for an individual from a recent year. Often, tax tables are presented in this format. lf taxable income Is over. But not ., over.,. $0 7,825 $7,825 31,850 ,850 77,100 77,100 160,850 160,850 349,700 31 Thetaxls: '10% of the amount over $0 $782.50 plus 15% of the amount over $7,825 $4,386.25 plus 25% of the amount over $31 ,850 $'15,698.75 plus 28% of the amount over $77,100 $39,148.75 ptus 33% of the amount over $1 60,850 $101 ,469.25 plus 35% of the amount over $349,700 349,700 ln reading this table, the marginal tax rate for taxable income less than $7,825 is 107o. If the taxable income is between $7,825 and $31 ,850, the tax bill is $782.50 plus the marginal taxes. The marginal taxes are calculated as the taxable income minus $7,825 times the marginal tax rate of l5Vo. Below, we have the corporate tax table as shown in the textbook, as well as a taxable income. faxable income is grcater than or equal to . . . $0 But less fhx than rate .. . 50,001 $50,000 75,000 75,001 100,001 33s,000 34 39 335,001 10,000,000 34 10,000,001 15,000,001 15,000,000 35 18,333,333 38 I 8,333,334 100,000 l5Vo 25 35 49 50 pAR r 2 Understanding Financial Statements and Cash Flow a. Create a tax table in Excel lor corporate taxes similar to the individual tax table shown above. Your spreadsheet should then calculate the marginal tax rate, the average tax rate, and the tax bill for any level of taxable income inprut by a user. b. c. d. For a taxable income of $ 1 ,3-50.000. what is the marginal tax rate? For a taxable income of $ 1.350,000, whal is the total tax bi]l? For a taxable income of $1,350,000, what is the average tax rate'l
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