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a.
To compute: The income statement and
Introduction: Income Statement’ shows the revenue earned and expenses incurred over a period of time. It is used to compute the net income for a particular period.
a.
Explanation of Solution
The income statement for the company has been prepared:
Working note: Preparation of income statement and computation of net income has been shown below:
The balance sheet for the company has been prepared:
Working note: Preparation of balance sheet has been shown below:
b.
To compute: Create a statement of cash flows for 2016.
Introduction: A cash flow statement shows the aggregate data regarding all the
b.
Explanation of Solution
The cash flow statement for the company has been prepared:
Working note: Preparation of cash flow statement and computation of net cash flow has been shown below:
c.
To show: Cash flow statement using outline feature.
Introduction: A cash flow statement shows the aggregate data regarding all the cash inflows and outflows of a company. It considers only cash transactions, any non-cash transaction is mentioned as a footnote.
c.
Explanation of Solution
Cash flow statement can be shown using outline feature as:
Steps to perform outline:
- Select the entire particulars column.
- Go to ‘Data’ tab.
- Click on sub-total.
- Select ‘Count’ as ‘Use function’.
- Click on ok.
Working note: The cash flow statement for the company has been prepared.
d.
To compute: If sales were $400000 instead of $3,69,300 in 2016 then compute the net income &
Introduction: Income Statement’ shows the revenue earned and expenses incurred over a period of time. It is used to compute the net income for a particular period.
d.
Explanation of Solution
The revised net income could be calculated by changing the net sales figure for 2016:
Retained earnings would change automatically as shown below:
Working notes:
Calculation of net income:
Computation of retained earnings:
If sales were $400000 instead of $3,69,300 in 2016 then net income is $33,405& retained earnings is $68,605.
e.
To compute: If tax rate was 35% instead of 40% in 2016 then compute the net income & retained earnings.
Introduction: Income Statement’ shows the revenue earned and expenses incurred over a period of time. It is used to compute the net income for a particular period.
e.
Explanation of Solution
The revised net income could be calculated by changing tax rate figure for 2016:
Calculated revised retained earnings:
Computation of revised net income:
Computation of retained earnings:
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Chapter 2 Solutions
EBK 3N3-EBK: FINANCIAL ANALYSIS WITH MI
- Moose Enterprises finds it is necessary to determine its marginal cost of capital. Moose’s current capital structure calls for 50 percent debt, 30 percent preferred stock, and 20 percent common equity. Initially, common equity will be in the form of retained earnings (Ke) and then new common stock (Kn). The costs of the various sources of financing are as follows: debt, 9.6 percent; preferred stock, 9 percent; retained earnings, 10 percent; and new common stock, 11.2 percent. a. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings, Ke.) b. If the firm has $18 million in retained earnings, at what size capital structure will the firm run out of retained earnings? c. What will the marginal cost of capital be immediately after that point? (Equity will remain at 20 percent of the capital structure, but will all be in the form of new common stock, Kn.) d. The 9.6 percent cost of debt referred to earlier…arrow_forward7. Berkeley Farms wants to determine the minimum cost of capital point for the firm. Assume it is considering the following financial plans: Cost (aftertax) Weights Plan A Debt .................................. 4.0% 30% Preferred stock .................. 8.0 15 Common equity ................. 12.0 55 Plan B Debt .................................. 4.5% 40% Preferred stock .................. 8.5 15 Common equity ................. 13.0 45 Plan C Debt .................................. 5.0% 45% Preferred stock .................. 18.7 15 Common equity ................. 12.8 40 Plan D Debt .................................. 12.0% 50% Preferred stock .................. 19.2 15 Common equity ................. 14.5 35 a. Which of the four plans has the lowest weighted average cost of capital? Use the Kd (cost of debt) = Y(1 - T), Kp (Cost of preferred stock) = Dp/Pp - F, Ke = D1/P0 + g formulas or I will not understand.arrow_forwardNeed use the Kd (cost of debt) = Y(1 - T), Kp (Cost of preferred stock) = Dp/Pp - F, Ke = D1/P0 + g formulas or I will not understand. Delta Corporation has the following capital structure: Cost Weighted (after-tax) Weights Cost Debt 8.1% 35% 2.84% Preferred stock (Kp) 9.6 5 .48 Common equity (Ke) (retained earnings) 10.1 60 6.06 Weighted average cost of capital (Ka) 9.38% a. If the firm has $18…arrow_forward
- Delta Corporation has the following capital structure: Cost Weighted (after-tax) Weights Cost Debt 8.1% 35% 2.84% Preferred stock (Kp) 9.6 5 .48 Common equity (Ke) (retained earnings) 10.1 60 6.06 Weighted average cost of capital (Ka) 9.38% a. If the firm has $18 million in retained earnings, at what size capital structure will the firm run out of retained earnings? b. The 8.1 percent cost of…arrow_forwardDillon Enterprises has the following capDillon Enterprises has the following capital structure. Debt ........................ 40% Common equity ....... 60 The after-tax cost of debt is 6 percent, and the cost of common equity (in the form of retained earnings) is 13 percent. What is the firm’s weighted average cost of capital? a. An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the after-tax cost of debt is 7 percent, and the cost of common equity (in the form of retained earnings) is 15 percent. Recalculate the firm’s weighted average cost of capital. b. Which plan is optimal in terms of minimizing the weighted average cost of capital?arrow_forwardCompute Ke and Kn under the following circumstances: a. D1= $5, P0=$70, g=8%, F=$7 b. D1=$0.22, P0=$28, g=7%, F=2.50 c. E1 (earnings at the end of period one) = $7, payout ratio equals 40 percent, P0= $30, g=6%, F=$2,20. Note: D1 is the earnings times the payout rate. d. D0 (dividend at the beginning of the first period) = $6, growth rate for dividends and earnings (g)=7%, P0=$60, F=$3. You will need to calculate D1 (the dividend after the first period).arrow_forward
- Terrier Company is in a 45 percent tax bracket and has a bond outstanding that yields 11 percent to maturity. a. What is Terrier's after-tax cost of debt? b. Assume that the yield on the bond goes down by 1 percentage point, and due to tax reform, the corporate tax falls to 30 percent. What is Terrier's new aftertax cost of debt? c. Has the after-tax cost of debt gone up or down from part a to part b? Explain why.arrow_forwardThe Squeaks Cat Rescue, which is tax-exempt, issued debt last year at 9 percent to help finance a new animal shelter in Rocklin. a. If the rescue borrowed money this year, what would the after-tax cost of debt be, based on its cost last year and the 25 percent increase? b. If the receipts of the rescue were found to be taxable by the IRS (at a rate of 25 percent because of involvement in political activities), what would the after-tax cost of debt be?arrow_forwardNo chatgptPlease don't answer i will give unhelpful all expert giving wrong answer he is giving answer with using incorrect values.arrow_forward
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