FINA 408
Homework #2
Spring 2020
Please answer the following questions from your textbook. SHOW ALL WORK, to receive
credit. Submit one spreadsheet (must be in Microsoft excel format) and upload it on the
blackboard by the class start on April 14th. Please name your file using the following naming
convention: LASTNAME_FIRSTNAME_HW2_SECTION#. Failure to adhere to this policy will
result in final score reduction.
1. Problems from Chapter 5: E5.1, E5.3, E5.9, E5.13
2. Problems from Chapter 8: E8.1, E8.3, E8.5, E8.6
3. Problems from Chapter 10: E10.4, E10.5
Chapter 10 The Analysis of the Balance Sheet and Income Statement 327
Income Statement
$7,493
6,321
221
951
Revenues
Operating expenses
Interest expense
Income before tax
Income tax
Net income
Preferred dividends
Net income available to common
295
656
26
$ 630
E10.6. Reformulation of a Balance Sheet, Income Statement, and Statement
of Shareholders' Equity (Medium)
The following financial statements were reported for a firm for fiscal year 2012 (in millions
of dollars):
Balance Sheet
2012
2011
2012
2011
60
550
Operating cash
Short-term investments (at market)
Accounts receivable
Inventory
Property and plant
50
500
790
840
2,710
4,890
Accounts payable
Accrued liabilities
Long-term debt
Common equity
1,200
390
1,840
1,870
1,040
450
1,970
1,430
940
910
2,840
5,300
5,300
4,890
Statement of Shareholders' Equity
Balance, end of fiscal year 2011
Share issues
Repurchase 24 million shares
Cash dividend
Unrealized gain on debt investments
Net income
Balance, end of fiscal year 2012
1,430
822
(720)
(180)
50
468
1,870
-5
19
2
78
32
12
28
The firm's income tax rate is 35%. The firm reported $15 million in interest income and $98
million in interest expense for 2012. Sales revenue was $3,726 million.
a. Reformulate the balance sheet for 2012 in a way that distinguishes operating and
financing activities. Also reformulate the equity statement.
b. Prepare a reformulated statement of comprehensive income.
E10.7. Testing Relationships in Reformulated Income Statements (Medium)
Fill in the missing numbers, indicated by capital letters, in the following reformulated
income statement. Amounts are in millions of dollars. The firm's marginal tax rate is
35 percent.
U.
Revenue
3,487
Cost of goods sold
428
Operating expenses
56
Interest income
132
Interest expense
The firm pays no taxes. Prepare a reformulated income statement that distinguishes
items involved in operations from those involved in financing activities.
Tax Allocation (Easy)
A firm reported $818 million of net income in its income statement after $140 million of
net interest expense and income tax expense of $402 million. Calculate operating income
after tax and net financial expense after tax, using a statutory tax rate of 35 percent.
Effective Tax Rates (Medium)
Consider the following short income statement (in millions):
E10.2.
E10.3.
Operating income before taxes
Interest expense before taxes
Tax expense
Net income
$100
10
25
$ 65
The statutory tax rate is 35 percent. What is the effective tax rate on net income before tax?
What is the effective tax rate on operating income?
E10.4. Tax Allocation: Top-Down and Bottom-Up Methods (Easy)
From the following income statement (in millions), calculate operating income after tax,
using both the top-down and bottom-up methods. Use a tax rate of 37 percent.
Revenue
Cost of goods sold
Operating expenses
Interest expense
Income taxes
Net income
$ 6,450
(3,870)
(1,843)
(135)
(181)
$ 421
E10.5.
Reformulation of a Balance Sheet and Income Statement (Easy)
Reformulate the following balance sheet and income statement for a manufacturing
concern. Amounts are in millions. The firm bears a 36 percent statutory tax rate.
Balance Sheet
Assets
Operating cash
Cash equivalents
Accounts receivable
Inventory
Property, plant, and equipment
$ 23
435
1,827
2,876
3,567
Liabilities and Equity
Accounts payable
Accrued expenses
Deferred tax liability
$1,245
1,549
712
Total assets
Long-term debt
Preferred stock
Common equity
Liabilities and equity
$8,728
3,678
432
1,112
$8,728
54 Part Two The Analysis of Financial Statements
E8.6. Using Accounting Relations (Medium)
Below are a balance sheet and an income statement that have been reformulated according
to the templates laid out in this chapter. Ignore income taxes.
Balance Sheet
Liabilities and Equity
Assets
2012
2011
2012
2011
Operating assets
Financial assets
205.3
45.7
189.9
42.0
Operating liabilities
Financial liabilities
Shareholders' equity
40.6
120.4
90.0
251.0
34.2
120.4
77.3
231.9
251.0
231.9
Income Statement
2012
Operating revenues
Operating expenses
Operating income
Interest revenues
Interest expenses
Comprehensive income
134.5
(112.8)
21.7
2.5
(9.6)
14.6
a. How much was paid out in net dividends during 2012?
b. What is free cash flow for 2012?
E8.7. Using Accounting Relations (Medium)
Below are financial statements that have been reformulated using the templates in this
chapter. Some items are missing; they are indicated by capital letters.
Income Statement
Six Months to June 30, 2012
A
Revenues
Operating expenses
Cost of sales
Research and development expenses
Selling, administrative, and general expenses
Other operating expenses, including taxes
Operating income after tax
Net financial expenses after tax
Interest expense
Interest income
Comprehensive income
2,453
507
2,423
2,929
B
850
153
C с
59
791
Chapter 8 Viewing the Business Through the Financial Statements 253
C8.4. Distinguish an operating asset from a financial asset.
C8.5. Distinguish an operating liability from a financial liability.
C8.6. If an analyst has reformulated balance sheets and income statements, she does not
need a cash flow statement to calculate free cash flow. True or false?
C8.7. What drives free cash flow?
C8.8. What drives dividends?
C8.9. What drives net operating assets?
C8.10. What drives net financial obligations?
C8.11. Free cash flow does not affect common shareholders' equity. True or false?
C8.12. Explain why profitable companies sometimes have negative free cash flows (like
General Electric in this chapter).
Exercises
Drill Exercises
E8.1. Applying the Cash Conservation Equation (Easy)
a. A firm generated $143 million in free cash flow and paid a net dividend of $49 million
to shareholders. How much was paid to debtholders and debt issuers?
b. A firm paid a dividend to shareholders of $162 million and repurchased stock for
$53 million. There were no share issues. The firm received net cash of $86 million from
debt financing transactions. What was its free cash flow?
E8.2. A Question for the Treasurer (Easy)
A firm generated $220 million in free cash flow. It paid out $35 million in dividends and
there were no share issues or repurchases. It incurred $6 million in net interest expense
(after tax). The boss wants to know what happened to the amount left over. Your answer is:
a. Impossible to track it.
b. It must have been spent on paying down debt or invested in interest-bearing debt.
c. It has been invested back into the business operations.
d. Most likely some combination of (b) and (c).
E8.3. What Were the Payments to Shareholders? (Easy)
a. A firm generated $410 million in free cash flow and spent $340 million of this paying
net interest and buying down its net debt. What was the net payout to shareholders?
b. The same firm issued shares for $50 million and there were no share repurchases. What
was the cash dividend paid to shareholders?
E8.4. Applying the Treasurer's Rule (Medium)
a. A firm generated free cash flow of $2,348 million and paid net interest of $23 million
after tax. It paid a dividend of $14 million and issued shares for $54 million. There
were no share repurchases. What did the treasurer do with the remaining cash flow and
for how much?
b. A firm generated a negative free cash flow of $1,857 million, but the board of directors,
understanding that the firm was quite profitable, maintained the dividend of $1.25 per
share on the 840 million shares outstanding. The firm also paid $32 million in net
interest (after tax). What are the responses open to the treasurer?
E8.5. Balance Sheet and Income Statement Relations (Easy)
a. A firm holding $432 million in interest-bearing financial assets and with financing debt
of $1,891 million, reported shareholders' equity of $597 million. What were its net
financial assets? What were its net operating assets?
b. The same firm reported $108 million in comprehensive income and net financial
expense, after tax, of $47 million. What was its after-tax operating income?
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