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SolutionsManual

CorporateFinance

Ross,Westerfield,andJaffe

9thedition

CHAPTER1

INTRODUCTIONTOCORPORATEFINANCE

AnswerstoConceptQuestions

1. Inthecorporateformofownership,theshareholdersaretheownersofthefirm.Theshareholderselectthedirectorsofthecorporation,whointurnappointthefirm’smanagement.Thisseparationofownershipfromcontrolinthecorporateformoforganizationiswhatcausesagencyproblemstoexist.Managementmayactinitsownorsomeoneelse’sbestinterests,ratherthanthoseoftheshareholders.Ifsucheventsoccur,theymaycontradictthegoalofmaximizingthesharepriceoftheequityofthefirm.

2. Suchorganizationsfrequentlypursuesocialorpoliticalmissions,somanydifferentgoalsareconceivable.Onegoalthatisoftencitedisrevenueminimization;i.e.,providewhatevergoodsandservicesareofferedatthelowestpossiblecosttosociety.Abetterapproachmightbetoobservethatevenanot-for-profitbusinesshasequity.Thus,oneansweristhattheappropriategoalistomaximizethevalueoftheequity.

3. Presumably,thecurrentstockvaluereflectstherisk,timing,andmagnitudeofallfuturecashflows,bothshort-termandlong-term.Ifthisiscorrect,thenthestatementisfalse.

4. Anargumentcanbemadeeitherway.Attheoneextreme,wecouldarguethatinamarketeconomy,allofthesethingsarepriced.Thereisthusanoptimallevelof,forexample,ethicaland/orillegalbehavior,andtheframeworkofstockvaluationexplicitlyincludesthese.Attheotherextreme,wecouldarguethatthesearenon-economicphenomenaandarebesthandledthroughthepoliticalprocess.Aclassic(andhighlyrelevant)thoughtquestionthatillustratesthisdebategoessomethinglikethis:“Afirmhasestimatedthatthecostofimprovingthesafetyofoneofitsproductsis$30million.However,thefirmbelievesthatimprovingthesafetyoftheproductwillonlysave$20millioninproductliabilityclaims.Whatshouldthefirmdo?”

5. Thegoalwillbethesame,butthebestcourseofactiontowardthatgoalmaybedifferentbecauseofdifferingsocial,political,andeconomicinstitutions.

6. Thegoalofmanagementshouldbetomaximizethesharepriceforthecurrentshareholders.Ifmanagementbelievesthatitcanimprovetheprofitabilityofthefirmsothatthesharepricewillexceed$35,thentheyshouldfighttheofferfromtheoutsidecompany.Ifmanagementbelievesthatthisbidderorotherunidentifiedbidderswillactuallypaymorethan$35persharetoacquirethecompany,thentheyshouldstillfighttheoffer.However,ifthecurrentmanagementcannotincreasethevalueofthefirmbeyondthebidprice,andnootherhigherbidscomein,thenmanagementisnotactingintheinterestsoftheshareholdersbyfightingtheoffer.Sincecurrentmanagersoftenlosetheirjobswhenthecorporationisacquired,poorlymonitoredmanagershaveanincentivetofightcorporatetakeoversinsituationssuchasthis.

7. Wewouldexpectagencyproblemstobelesssevereinothercountries,primarilyduetotherelativelysmallpercentageofindividualownership.Fewerindividualownersshouldreducethenumberofdiverseopinionsconcerningcorporategoals.Thehighpercentageofinstitutionalownershipmightleadtoahigherdegreeofagreementbetweenownersandmanagersondecisionsconcerningriskyprojects.Inaddition,institutionsmaybebetterabletoimplementeffectivemonitoringmechanismsonmanagersthancanindividualowners,basedontheinstitutions’deeperresourcesandexperienceswiththeirownmanagement.

8. TheincreaseininstitutionalownershipofstockintheUnitedStatesandthegrowingactivismoftheselargeshareholdergroupsmayleadtoareductioninagencyproblemsforU.S.corporationsandamoreefficientmarketforcorporatecontrol.However,thismaynotalwaysbethecase.Ifthemanagersofthemutualfundorpensionplanarenotconcernedwiththeinterestsoftheinvestors,theagencyproblemcouldpotentiallyremainthesame,orevenincreasesincethereisthepossibilityofagencyproblemsbetweenthefundanditsinvestors.

9. Howmuchistoomuch?Whoisworthmore,RayIraniorTigerWoods?Thesimplestansweristhatthereisamarketforexecutivesjustasthereisforalltypesoflabor.Executivecompensationisthepricethatclearsthemarket.Thesameistrueforathletesandperformers.Havingsaidthat,oneaspectofexecutivecompensationdeservescomment.Aprimaryreasonexecutivecompensationhasgrownsodramaticallyisthatcompanieshaveincreasinglymovedtostock-basedcompensation.Suchmovementisobviouslyconsistentwiththeattempttobetteralignstockholderandmanagementinterests.Inrecentyears,stockpriceshavesoared,somanagementhascleanedup.Itissometimesarguedthatmuchofthisrewardissimplyduetorisingstockpricesingeneral,notmanagerialperformance.Perhapsinthefuture,executivecompensationwillbedesignedtorewardonlydifferentialperformance,i.e.,stockpriceincreasesinexcessofgeneralmarketincreases.

10. Maximizingthecurrentsharepriceisthesameasmaximizingthefuturesharepriceatanyfutureperiod.Thevalueofashareofstockdependsonallofthefuturecashflowsofcompany.Anotherwaytolookatthisisthat,barringlargecashpaymentstoshareholders,theexpectedpriceofthestockmustbehigherinthefuturethanitistoday.Whowouldbuyastockfor$100todaywhenthesharepriceinoneyearisexpectedtobe$80?

CHAPTER2

FINANCIALSTATEMENTSANDCASHFLOW

AnswerstoConceptsReviewandCriticalThinkingQuestions

1. True.Everyassetcanbeconvertedtocashatsomeprice.However,whenwearereferringtoaliquidasset,theaddedassumptionthattheassetcanbequicklyconvertedtocashatornearmarketvalueisimportant.

2. Therecognitionandmatchingprinciplesinfinancialaccountingcallforrevenues,andthecostsassociatedwithproducingthoserevenues,tobe“booked”whentherevenueprocessisessentiallycomplete,notnecessarilywhenthecashiscollectedorbillsarepaid.Notethatthiswayisnotnecessarilycorrect;it’sthewayaccountantshavechosentodoit.

3. Thebottomlinenumbershowsthechangeinthecashbalanceonthebalancesheet.Assuch,itisnotausefulnumberforanalyzingacompany.

4. Themajordifferenceisthetreatmentofinterestexpense.Theaccountingstatementofcashflowstreatsinterestasanoperatingcashflow,whilethefinancialcashflowstreatinterestasafinancingcashflow.Thelogicoftheaccountingstatementofcashflowsisthatsinceinterestappearsontheincomestatement,whichshowstheoperationsfortheperiod,itisanoperatingcashflow.Inreality,interestisafinancingexpense,whichresultsfromthecompany’schoiceofdebtandequity.Wewillhavemoretosayaboutthisinalaterchapter.Whencomparingthetwocashflowstatements,thefinancialstatementofcashflowsisamoreappropriatemeasureofthecompany’sperformancebecauseofitstreatmentofinterest.

5. Marketvaluescanneverbenegative.Imagineashareofstocksellingfor–$20.Thiswouldmeanthatifyouplacedanorderfor100shares,youwouldgetthestockalongwithacheckfor$2,000.Howmanysharesdoyouwanttobuy?Moregenerally,becauseofcorporateandindividualbankruptcylaws,networthforapersonoracorporationcannotbenegative,implyingthatliabilitiescannotexceedassetsinmarketvalue.

6. Forasuccessfulcompanythatisrapidlyexpanding,forexample,capitaloutlayswillbelarge,possiblyleadingtonegativecashflowfromassets.Ingeneral,whatmattersiswhetherthemoneyisspentwisely,notwhethercashflowfromassetsispositiveornegative.

7. It’sprobablynotagoodsignforanestablishedcompanytohavenegativecashflowfromoperations,butitwouldbefairlyordinaryforastart-up,soitdepends.

8. Forexample,ifacompanyweretobecomemoreefficientininventorymanagement,theamountofinventoryneededwoulddecline.Thesamemightbetrueifthecompanybecomesbetteratcollectingitsreceivables.Ingeneral,anythingthatleadstoadeclineinendingNWCrelativetobeginningwouldhavethiseffect.Negativenetcapitalspendingwouldmeanmorelong-livedassetswereliquidatedthanpurchased.

9. Ifacompanyraisesmoremoneyfromsellingstockthanitpaysindividendsinaparticularperiod,itscashflowtostockholderswillbenegative.Ifacompanyborrowsmorethanitpaysininterestandprincipal,itscashflowtocreditorswillbenegative.

10. Theadjustmentsdiscussedwerepurelyaccountingchanges;theyhadnocashflowormarketvalueconsequencesunlessthenewaccountinginformationcausedstockholderstorevaluethederivatives.

SolutionstoQuestionsandProblems

NOTE:Allend-of-chapterproblemsweresolvedusingaspreadsheet.Manyproblemsrequiremultiplesteps.Duetospaceandreadabilityconstraints,whentheseintermediatestepsareincludedinthissolutionsmanual,roundingmayappeartohaveoccurred.However,thefinalanswerforeachproblemisfoundwithoutroundingduringanystepintheproblem.

Basic

1. Tofindowners’equity,wemustconstructabalancesheetasfollows:

BalanceSheet

CA $5,300 CL $3,900

NFA 26,000 LTD 14,200

OE ??

TA $31,300 TL&OE $31,300

Weknowthattotalliabilitiesandowners’equity(TL&OE)mustequaltotalassetsof$31,300.WealsoknowthatTL&OEisequaltocurrentliabilitiespluslong-termdebtplusowner’sequity,soowner’sequityis:

OE=$31,300–14,200–3,900=$13,200

NWC=CA–CL=$5,300–3,900=$1,400

2. Theincomestatementforthecompanyis:

IncomeStatement

Sales $493,000

Costs 210,000

Depreciation 35,000

EBIT $248,000

Interest 19,000

EBT $229,000

Taxes 80,150

Netincome $148,850

Oneequationfornetincomeis:

Netincome=Dividends+Additiontoretainedearnings

Rearranging,weget:

Additiontoretainedearnings=Netincome–Dividends

Additiontoretainedearnings=$148,850–50,000

Additiontoretainedearnings=$98,850

3. Tofindthebookvalueofcurrentassets,weuse:NWC=CA–CL.Rearrangingtosolveforcurrentassets,weget:

CA=NWC+CL=$800,000+2,100,000=$2,900,000

Themarketvalueofcurrentassetsandnetfixedassetsisgiven,so:

BookvalueCA =$2,900,000 MarketvalueCA =$2,800,000

BookvalueNFA =$5,000,000 MarketvalueNFA =$6,300,000

Bookvalueassets =$7,900,000 Marketvalueassets =$9,100,000

4. Taxes=0.15($50K)+0.25($25K)+0.34($25K)+0.39($246K–100K)

Taxes=$79,190

Theaveragetaxrateisthetotaltaxpaiddividedbynetincome,so:

Averagetaxrate=$79,190/$246,000

Averagetaxrate=32.19%

Themarginaltaxrateisthetaxrateonthenext$1ofearnings,sothemarginaltaxrate=39%.

5. TocalculateOCF,wefirstneedtheincomestatement:

IncomeStatement

Sales $14,900

Costs 5,800

Depreciation 1,300

EBIT $7,800

Interest 780

Taxableincome $7,020

Taxes 2,808

Netincome $4,212

OCF=EBIT+Depreciation–Taxes

OCF=$7,800+1,300–2,808

OCF=$6,292

6. Netcapitalspending=NFAend–NFAbeg+Depreciation

Netcapitalspending=$1,730,000–1,650,000+284,000

Netcapitalspending=$364,000

7. Thelong-termdebtaccountwillincreaseby$10million,theamountofthenewlong-termdebtissue.Sincethecompanysold10millionnewsharesofstockwitha$1parvalue,thecommonstockaccountwillincreaseby$10million.Thecapitalsurplusaccountwillincreaseby$33million,thevalueofthenewstocksoldaboveitsparvalue.Sincethecompanyhadanetincomeof$9million,andpaid$2millionindividends,theadditiontoretainedearningswas$7million,whichwillincreasetheaccumulatedretainedearningsaccount.So,thenewlong-termdebtandstockholders’equityportionofthebalancesheetwillbe:

Long-termdebt

$82,000,000

Totallong-termdebt

$82,000,000

Shareholdersequity

Preferredstock

$9,000,000

Commonstock($1parvalue)

30,000,000

Accumulatedretainedearnings

104,000,000

Capitalsurplus

76,000,000

Totalequity

$219,000,000

TotalLiabilities&Equity

$301,000,000

8. Cashflowtocreditors=Interestpaid–Netnewborrowing

Cashflowtocreditors=$118,000–(LTDend–LTDbeg)

Cashflowtocreditors=$118,000–($1,390,000–1,340,000)

Cashflowtocreditors=$118,000–50,000

Cashflowtocreditors=$68,000

9. Cashflowtostockholders=Dividendspaid–Netnewequity

Cashflowtostockholders=$385,000–[(Commonend+APISend)–(Commonbeg+APISbeg)]

Cashflowtostockholders=$385,000–[($450,000+3,050,000)–($430,000+2,600,000)]

Cashflowtostockholders=$385,000–($3,500,000–3,030,000)

Cashflowtostockholders=–$85,000

Note,APISistheadditionalpaid-insurplus.

10. Cashflowfromassets =Cashflowtocreditors+Cashflowtostockholders =$68,000–85,000

=–$17,000

Cashflowfromassets =–$17,000=OCF–ChangeinNWC–Netcapitalspending

–$17,000 =OCF–(–$69,000)–875,000

Operatingcashflow =–$17,000–69,000+875,000

Operatingcashflow =$789,000

Intermediate

11. a. Theaccountingstatementofcashflowsexplainsthechangeincashduringtheyear.Theaccountingstatementofcashflowswillbe:

Statementofcashflows

Operations

Netincome

$105

Depreciation

90

Changesinothercurrentassets

(55)

Accountspayable

(10)

Totalcashflowfromoperations

$170

Investingactivities

Acquisitionoffixedassets

$(140)

Totalcashflowfrominvestingactivities

$(140)

Financingactivities

Proceedsoflong-termdebt

$30

Dividends

(45)

Totalcashflowfromfinancingactivities

($15)

Changeincash(onbalancesheet)

$15

b. ChangeinNWC =NWCend–NWCbeg

=(CAend–CLend)–(CAbeg–CLbeg)

=[($50+155)–85]–[($35+140)–95)

=$120–80

=$40

c. Tofindthecashflowgeneratedbythefirm’sassets,weneedtheoperatingcashflow,andthecapitalspending.So,calculatingeachofthese,wefind:

Operatingcashflow

Netincome

$105

Depreciation

90

Operatingcashflow

$195

NotethatwecancalculateOCFinthismannersincetherearenotaxes.

Capitalspending

Endingfixedassets

$340

Beginningfixedassets

(290)

Depreciation

90

Capitalspending

$140

Nowwecancalculatethecashflowgeneratedbythefirm’sassets,whichis:

Cashflowfromassets

Operatingcashflow

$195

Capitalspending

(140)

ChangeinNWC

(40)

Cashflowfromassets

$15

12. Withtheinformationprovided,thecashflowsfromthefirmarethecapitalspendingandthechangeinnetworkingcapital,so:

Cashflowsfromthefirm

Capitalspending

$(15,000)

AdditionstoNWC

(1,500)

Cashflowsfromthefirm

$(16,500)

Andthecashflowstotheinvestorsofthefirmare:

Cashflowstoinvestorsofthefirm

Saleoflong-termdebt

(19,000)

Saleofcommonstock

(3,000)

Dividendspaid

19,500

Cashflowstoinvestorsofthefirm

$(2,500)

13. a. Theinterestexpenseforthecompanyistheamountofdebttimestheinterestrateonthedebt.So,theincomestatementforthecompanyis:

IncomeStatement

Sales $1,200,000

Costofgoodssold 450,000

Sellingcosts 225,000

Depreciation 110,000

EBIT $415,000

Interest 81,000

Taxableincome $334,000

Taxes 116,900

Netincome $217,100

b. Andtheoperatingcashflowis:

OCF=EBIT+Depreciation–Taxes

OCF=$415,000+110,000–116,900

OCF=$408,100

14. TofindtheOCF,wefirstcalculatenetincome.

IncomeStatement

Sales $167,000

Costs 91,000

Depreciation 8,000

Otherexpenses 5,400

EBIT $62,600

Interest 11,000

Taxableincome $51,600

Taxes 18,060

Netincome $33,540

Dividends $9,500

AdditionstoRE $24,040

a. OCF=EBIT+Depreciation–Taxes

OCF=$62,600+8,000–18,060

OCF=$52,540

b. CFC=Interest–NetnewLTD

CFC=$11,000–(–$7,100)

CFC=$18,100

Notethatthenetnewlong-termdebtisnegativebecausethecompanyrepaidpartofitslong-

termdebt.

c. CFS=Dividends–Netnewequity

CFS=$9,500–7,250

CFS=$2,250

d. WeknowthatCFA=CFC+CFS,so:

CFA=$18,100+2,250=$20,350

CFAisalsoequaltoOCF–Netcapitalspending–ChangeinNWC.WealreadyknowOCF.Netcapitalspendingisequalto:

Netcapitalspending=IncreaseinNFA+Depreciation

Netcapitalspending=$22,400+8,000

Netcapitalspending=$30,400

Nowwecanuse:

CFA=OCF–Netcapitalspending–ChangeinNWC

$20,350=$52,540–30,400–ChangeinNWC.

SolvingforthechangeinNWCgives$1,790,meaningthecompanyincreaseditsNWCby$1,790.

15. Thesolutiontothisquestionworkstheincomestatementbackwards.Startingatthebottom:

Netincome=Dividends+Additiontoret.earnings

Netincome=$1,530+5,300

Netincome=$6,830

Now,lookingattheincomestatement:

EBT–(EBT×Taxrate)=Netincome

RecognizethatEBT×taxrateissimplythecalculationfortaxes.SolvingthisforEBTyields:

EBT=NI/(1–Taxrate)

EBT=$6,830/(1–0.65)

EBT=$10,507.69

Nowwecancalculate:

EBIT=EBT+Interest

EBIT=$10,507.69+1,900

EBIT=$12,407.69

Thelaststepistouse:

EBIT=Sales–Costs–Depreciation

$12,407.69=$43,000–27,500–Depreciation

Depreciation=$3,092.31

Solvingfordepreciation,wefindthatdepreciation=$3,092.31

16. Thebalancesheetforthecompanylookslikethis:

BalanceSheet

Cash $183,000 Accountspayable $465,000

Accountsreceivable 138,000 Notespayable 145,000

Inventory 297,000 Currentliabilities $610,000

Currentassets $618,000 Long-termdebt 1,550,000

Totalliabilities $2,160,000 Tangiblenetfixedassets 3,200,000

Intangiblenetfixedassets 695,000 Commonstock ??

Accumulatedret.earnings 1,960,000

Totalassets $4,513,000 Totalliab.&owners’equity $4,513,000

Totalliabilitiesandowners’equityis:

TL&OE=Totaldebt+Commonstock+Accumulatedretainedearnings

Solvingforthisequationforequitygivesus:

Commonstock=$4,513,000–1,960,000–2,160,000

Commonstock=$393,000

17. Themarketvalueofshareholders’equitycannotbenegative.Anegativemarketvalueinthiscasewouldimplythatthecompanywouldpayyoutoownthestock.Themarketvalueofshareholders’equitycanbestatedas:Shareholders’equity=Max[(TA–TL),0].So,ifTAis$9,700,equityisequalto$800,andifTAis$6,800,equityisequalto$0.Weshouldnoteherethatwhilethemarketvalueofequitycannotbenegative,thebookvalueofshareholders’equitycanbenegative.

18. a. TaxesGrowth =0.15($50K)+0.25($25K)+0.34($3K)=$14,770

TaxesIncome =0.15($50K)+0.25($25K)+0.34($25K)+0.39($235K)+0.34($7.465M)

=$2,652,000

b. Eachfirmhasamarginaltaxrateof34%onthenext$10,000oftaxableincome,despitetheirdifferentaveragetaxrates,sobothfirmswillpayanadditional$3,400intaxes.

19. IncomeStatement

Sales $740,000

COGS 610,000

A&Sexpenses 100,000

Depreciation 140,000

EBIT ($115,000)

Interest 70,000

Taxableincome ($185,000)

Taxes(35%) 0

a. Netincome ($185,000)

b. OCF=EBIT+Depreciation–Taxes

OCF=($115,000)+140,000–0

OCF=$25,000

c. Netincomewasnegativebecauseofthetaxdeductibilityofdepreciationandinterestexpense.However,theactualcashflowfromoperationswaspositivebecausedepreciationisanon-cashexpenseandinterestisafinancingexpense,notanoperatingexpense.

20. Afirmcanstillpayoutdividendsifnetincomeisnegative;itjusthastobesurethereissufficientcashflowtomakethedividendpayments.

ChangeinNWC=Netcapitalspending=Netnewequity=0.(Given)

Cashflowfromassets=OCF–ChangeinNWC–Netcapitalspending

Cashflowfromassets=$25,000–0–0=$25,000

Cashflowtostockholders=Dividends–Netnewequity

Cashflowtostockholders=$30,000–0=$30,000

Cashflowtocreditors=Cashflowfromassets–Cashflowtostockholders

Cashflowtocreditors=$25,000–30,000

Cashflowtocreditors=–$5,000

Cashflowtocreditorsisalso:

Cashflowtocreditors=Interest–NetnewLTD

So:

NetnewLTD=Interest–Cashflowtocreditors

NetnewLTD=$70,000–(–5,000)

NetnewLTD=$75,000

21. a. Theincomestatementis:

IncomeStatement

Sales

$15,300

Costofgoodsold

10,900

Depreciation

2,100

EBIT

$2,300

Interest

520

Taxableincome

$1,780

Taxes

712

Netincome

$1,068

b. OCF =EBIT+Depreciation–Taxes

OCF =$2,300+2,100–712

OCF =$3,688

c. ChangeinNWC =NWCend–NWCbeg

=(CAend–CLend)–(CAbeg–CLbeg)

=($3,950–1,950)–($3,400–1,900)

=$2,000–1,500=$500

Netcapitalspending =NFAend–NFAbeg+Depreciation

=$12,900–11,800+2,100

=$3,200

CFA =OCF–ChangeinNWC–Netcapitalspending

=$3,688–500–3,200

=–$12

Thecashflowfromassetscanbepositiveornegative,sinceitrepresentswhetherthefirmraisedfundsordistributedfundsonanetbasis.Inthisproblem,eventhoughnetincomeandOCFarepositive,thefirminvestedheavilyinbothfixedassetsandnetworkingcapital;ithadtoraiseanet$12infundsfromitsstockholdersandcreditorstomaketheseinvestments.

d. Cashflowtocreditors =Interest–NetnewLTD

=$520–0

=$520

Cashflowtostockholders =Cashflowfromassets–Cashflowtocreditors

=–$12–520

=–$532

Wecanalsocalculatethecashflowtostockholdersas:

Cashflowtostockholders=Dividends–Netnewequity

Solvingfornetnewequity,weget:

Netnewequity =$500–(–532)

=$1,032

Thefirmhadpositiveearningsinanaccountingsense(NI>0)andhadpositivecashflowfromoperations.Thefirminvested$500innewnetworkingcapitaland$3,200innewfixedassets.Thefirmhadtoraise$12fromitsstakeholderstosupportthisnewinvestment.Itaccomplishedthisbyraising$1,032intheformofnewequity.Afterpayingout$500ofthisintheformofdividendstoshareholdersand$520intheformofinteresttocreditors,$12waslefttomeetthefirm’scashflowneedsforinvestment.

22. a. Totalassets2009 =$780+3,480=$4,260

Totalliabilities2009 =$318+1,800=$2,118

Owners’equity2009 =$4,260–2,118=$2,142

Totalassets2010 =$846+4,080=$4,926

Totalliabilities2010 =$348+2,064=$2,412

Owners’equity2010 =$4,926–2,412=$2,514

b. NWC2009 =CA09–CL09=$780–318=$462

NWC2010 =CA10–CL10=$846–348=$498

ChangeinNWC =NWC10–NWC09=$498–462=$36

c. Wecancalculatenetcapitalspendingas:

Netcapitalspending=Netfixedassets2010–Netfixedassets2009+Depreciation

Netcapitalspending=$4,080–3,480+960

Netcapitalspending=$1,560

So,thecompanyhadanetcapitalspendingcashflowof$1,560.Wealsoknowthatnetcapitalspendingis:

Netcapitalspending =Fixedassetsbought–Fixedassetssold

$1,560 =$1,800–Fixedassetssold

Fixedassetssold =$1,800–1,560=$240

Tocalculatethecashflowfromassets,wemustfirstcalculatetheoperatingcashflow.Theoperatingcashflowiscalculatedasfollows(youcanalsoprepareatraditionalincomestatement):

EBIT=Sales–Costs–Depreciation

EBIT=$10,320–4,980–960

EBIT=$4,380

EBT=EBIT–Interest

EBT=$4,380–259

EBT=$4,121

Taxes=EBT.35

Taxes=$4,121.35

Taxes=$1,442

OCF=EBIT+Depreciation–Taxes

OCF=$4,380+960–1,442

OCF=$3,898

Cashflowfromassets=OCF–ChangeinNWC–Netcapitalspending.

Cashflowfromassets=$3,898–36–1,560

Cashflowfromassets=$2,302

d. Netnewborrowing=LTD10–LTD09

Netnewborrowing=$2,064–1,800

Netnewborrowing=$264

Cashflowtocreditors=Interest–NetnewLTD

Cashflowtocreditors=$259–264

Cashflowtocreditors=–$5

Netnewborrowing=$264=Debtissued–Debtretired

Debtretired=$360–264=$96

23.

BalancesheetasofDec.31,2009

Cash

$2,739

Accountspayable

$2,877

Accountsreceivable

3,626

Notespayable

529

Inventory

6,447

Currentliabilities

$3,406

Currentassets

$12,812

Long-termdebt

$9,173

Netfixedassets

$22,970

Owners'equity

$23,203

Totalassets

$35,782

Totalliab.&equity

$35,782

BalancesheetasofDec.31,2010

Cash

$2,802

Accountspayable

$2,790

Accountsreceivable

4,085

Notespayable

497

Inventory

6,625

Currentliabilities

$3,287

Currentassets

$13,512

Long-termdebt

$10,702

Netfixedassets

$23,518

Owners'equity

$23,041

Totalassets

$37,030

Totalliab.&equity

$37,030

2009IncomeStatement 2010IncomeStatement

Sales

$5,223.00

Sales

$5,606.00

COGS

1,797.00

COGS

2,040.00

Otherexpenses

426.00

Otherexpenses

356.00

Depreciation

750.00

Depreciation

751.00

EBIT

$2,250.00

EBIT

$2,459.00

Interest

350.00

Interest

402.00

EBT

$1,900.00

EBT

$2,057.00

Taxes

646.00

Taxes

699.38

Netincome

$1,254.00

Netincome

$1,357.62

Dividends

$637.00

Dividends

$701.00

AdditionstoRE

617.00

AdditionstoRE

656.62

24. OCF=EBIT+Depreciation–Taxes

OCF=$2,459+751–699.38

OCF=$2,510.62

ChangeinNWC=NWCend–NWCbeg=(CA–CL)end–(CA–CL)beg

ChangeinNWC=($13,512–3,287)–($12,812–3,406)

ChangeinNWC=$819

Netcapitalspending=NFAend–NFAbeg+Depreciation

Netcapitalspending=$23,518–22,970+751

Netcapitalspending=$1,299

Cashflowfromassets=OCF–ChangeinNWC–Netcapitalspending

Cashflowfromassets=$2,510.62–819–1,299

Cashflowfromassets=$396.62

Cashflowtocreditors=Interest–NetnewLTD

NetnewLTD=LTDend–LTDbeg

Cashflowtocreditors=$402–($10,702–9,173)

Cashflowtocreditors=–$1,127

Netnewequity=Commonstockend–Commonstockbeg

Commonstock+Retainedearnings=Totalowners’equity