ESSENTIALS CORPORATE FINANCE + CNCT A.
ESSENTIALS CORPORATE FINANCE + CNCT A.
9th Edition
ISBN: 9781259968723
Author: Ross
Publisher: MCG CUSTOM
Question
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Chapter 2, Problem 22QP

a)

Summary Introduction

To calculate: The shareholders’ equity for 2016 and 2015.

Introduction:

Cash flow refers to the difference between the cash that comes into the business and the cash that goes out of the business. The following are the different types of cash flows in a corporation:

  • Cash flow from assets:

It refers to difference between the revenues from the sale of assets and the money invested in purchasing the assets.

  • Cash flow to creditors:

It refers to the interest paid to the creditors minus the net fresh debt borrowed by the company.

  • Cash flow to stockholders:

It refers to the dividend paid to the shareholders of the company minus the fresh equity raised by the company.

  • Operating cash flow:

It refers to the cash flow from operating activities of the firm.

a)

Expert Solution
Check Mark

Answer to Problem 22QP

The stockholders’ equity for 2015 is $7,273. The stockholders’ equity for 2016 is $6,311.

Explanation of Solution

Given information:

The current assets are $2,718, the net fixed assets are $12,602, the current liabilities are $1,174, and the long-term debt is $6,873 for the year 2015. The current assets are $2,881, the net fixed assets are $13,175, the current liabilities are $1,726, and the long-term debt is $8,019 for the year 2016.

Formulae:

Total assets=Current assetsNet fixed assets

Total liabilities=Current liabilitiesLong term debt

Stockholders equity=Total assetsTotal liabilities

Compute the total assets for 2015:

Total assets=Current assetsNet fixed assets=$2,718+$12,602=$15,320

Hence, the total assets for 2015 is $15,320.

Compute the total liabilities for 2015:

Total liabilities=Current liabilitiesLong term debt=$1,174+$6,873=$8,047

Hence, the total liabilities for 2015 is $8,047.

Compute the stockholders’ equity for 2015:

Stockholders equity=Total assetsTotal liabilities=$15,320$8,047=$7,273

Hence, the stockholders’ equity for 2015 is $7,273.

Compute the total assets for 2016:

Total assets=Current assetsNet fixed assets=$2,881+$13,175=$16,056

Hence, the total assets for 2016 is $16,056.

Compute the total liabilities for 2016:

Total liabilities=Current liabilitiesLong term debt=$1,726+$8,019=$9,745

Hence, the total liabilities for 2016 is $9,745.

Compute the stockholders’ equity for 2016:

Stockholders equity=Total assetsTotal liabilities=$16,056$9,745=$6,311

Hence, the stockholders’ equity for 2016 is $6,311.

b)

Summary Introduction

To calculate: The change in net working capital for 2016.

Introduction:

Cash flow refers to the difference between the cash that comes into the business and the cash that goes out of the business. The following are the different types of cash flows in a corporation:

  • Cash flow from assets:

    It refers to difference between the revenues from the sale of assets and the money invested in purchasing the assets.

  • Cash flow to creditors:

    It refers to the interest paid to the creditors minus the net fresh debt borrowed by the company.

  • Cash flow to stockholders:

    It refers to the dividend paid to the shareholders of the company minus the fresh equity raised by the company.

  • Operating cash flow:

    It refers to the cash flow from operating activities of the firm.

b)

Expert Solution
Check Mark

Answer to Problem 22QP

The change in net working capital for 2016 is ($389).

Explanation of Solution

Given information:

The current assets are $2,718 and the current liabilities are $1,174for the year 2015. The current assets are $2,881 and the current liabilities are $1,726 for the year 2016.

Formulae:

Ending net working capital=Ending current assetsEnding current liabilities

Beginning net working capital=Beginning current assetsBeginning current liabilities

Change in net working capital=(Ending net working capitalBeginning net working capital)

Compute the ending net working capital:

Ending net working capital=Ending current assetsEnding current liabilities=$2,881$1,726=$1,155

Hence, the ending net working capital is $1,155.

Compute the beginning net working capital:

Beginning net working capital=Beginning current assetsBeginning current liabilities=$2,718$1,174=$1,544

Hence, the beginning net working capital is $1,544.

Compute the change in net working capital:

Change in net working capital=(Ending net working capitalBeginning net working capital)=$1,155$1,544=($389)

Hence, the change in net working capital is ($389).

c)

Summary Introduction

To calculate: The cash flow from assets for 2016, and the fixed assets sold in 2016.

Introduction:

Cash flow refers to the difference between the cash that comes into the business and the cash that goes out of the business. The following are the different types of cash flows in a corporation:

  • Cash flow from assets:

    It refers to difference between the revenues from the sale of assets and the money invested in purchasing the assets.

  • Cash flow to creditors:

    It refers to the interest paid to the creditors minus the net fresh debt borrowed by the company.

  • Cash flow to stockholders:

    It refers to the dividend paid to the shareholders of the company minus the fresh equity raised by the company.

  • Operating cash flow:

    It refers to the cash flow from operating activities of the firm.

c)

Expert Solution
Check Mark

Answer to Problem 22QP

The cash flow from assets is $10,239. The company sold $3,153 worth of fixed assets.

Explanation of Solution

Given information:

The company had sales of $40,664. The costs of goods sold were $20,393. The company charged $3,434 as depreciation. It had to pay interest expenses amounting to $938. The tax rate applicable is 40 percent. The change in net working capital is ($389). The net fixed assets are $12,602 for the year 2015, and the net fixed assets are $13,175 for the year 2016. The company purchased $7,160 worth of fixed assets.

Formulae:

Net capital spending=Fixed assets boughtFixed assets sold

Cash flow from assets=(Operatingcash flow)(Change in networking capital)(Net capitalspending)

Compute the net income:

Company P
Income statement
Particulars Amount Amount
Net sales $40,664
Less:
Costs $20,393
Depreciation $3,434 $23,827
Earnings before interest and taxes $16,837
Less: Interest paid $938
Taxable income $15,899
Less: Taxes ($15,899×40%) $6,360
Net income $9,539

Hence, the net income is $9,539.

Compute the operating cash flow:

Company Q
Operating cash flow
Particulars Amount
Earnings before interest and taxes $16,837
Add: Depreciation $3,434
$20,271
Less: Taxes $6,360
Operating cash flow $13,911

Hence, the operating cash flow is $13,911.

Compute the net capital spending:

Company Q
Net capital spending
Particulars Amount
Ending net fixed assets $13,175
Less: Beginning net fixed assets $12,602
$573
Add: Depreciation $3,434
Net capital spending $4,007

Hence, the net capital spending is $4,007.

Compute the cash flow from assets:

The operating cash flow is $13,911. The change in net working capital is ($389), and the net capital spending is $4,007.

Cash flow from assets=(Operatingcash flow)(Change in networking capital)(Net capitalspending)=$13,911($389)$4,007=$10,293

Hence, the cash flow from assets is $10,293.

Compute the fixed assets sold:

Net capital spending=Fixed assets boughtFixed assets sold$4,007=$7,160Fixed assets soldFixed assets sold=$7,160$4,007=$3,153

Hence, the value of fixed assets sold is $3,153.

d)

Summary Introduction

To calculate: The cash flow to creditors, and the amount of long-term debt paid off.

Introduction:

Cash flow refers to the difference between the cash that comes into the business and the cash that goes out of the business. The following are the different types of cash flows in a corporation:

  • Cash flow from assets:

    It refers to difference between the revenues from the sale of assets and the money invested in purchasing the assets.

  • Cash flow to creditors:

    It refers to the interest paid to the creditors minus the net fresh debt borrowed by the company.

  • Cash flow to stockholders:

    It refers to the dividend paid to the shareholders of the company minus the fresh equity raised by the company.

  • Operating cash flow:

    It refers to the cash flow from operating activities of the firm.

d)

Expert Solution
Check Mark

Answer to Problem 22QP

The cash flow to creditors is ($208). The company paid off $1,009 worth of long-term debt.

Explanation of Solution

Given information:

The long-term debt is $6,873 for the year 2015, and the long-term debt is $8,019 for the year 2016. The raised $2,155 in new long-term debt. The company paid interest amounting to $938.

Formulae:

Net new borrowing=Long-term debt at the endLong-term debt at the beginning

Cash flow to creditors=Interest paidNet new borrowing

Compute the net new borrowing:

Net new borrowing=Long-term debt at the endLong-term debt at the beginning=$8,019$6,873$1,146

Hence, the net new borrowing is $1,146.

Compute the cash flow to creditors:

Cash flow to creditors=Interest paidNet new borrowing=$938$1,146($208)

Hence, the cash flow to creditors is ($208).

Compute the debt paid off:

Net new borrowing=Debt raisedDebt paid off$1,146=$2,155Debt paid offDebt paid off= $2,155$1,146=$1,009

Hence, the value of debt paid off is $1,009.

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Chapter 2 Solutions

ESSENTIALS CORPORATE FINANCE + CNCT A.

Ch. 2.4 - Prob. 2.4BCQCh. 2.4 - Why is interest paid not a component of operating...Ch. 2 - What is the relationship between current assets...Ch. 2 - What is the purpose of the income statement?Ch. 2 - Prob. 2.3CCh. 2 - Prob. 2.4CCh. 2 - Liquidity. What does liquidity measure? Explain...Ch. 2 - Accounting and Cash Flows. Why is it that the...Ch. 2 - Book Values versus Market Values. In preparing a...Ch. 2 - Prob. 4CTCRCh. 2 - Prob. 5CTCRCh. 2 - Prob. 6CTCRCh. 2 - Prob. 7CTCRCh. 2 - Net Working Capital and Capital Spending. Could a...Ch. 2 - Prob. 9CTCRCh. 2 - Firm Values. Referring back to the examples used...Ch. 2 - Building a Balance Sheet. Bear Tracks, Inc., has...Ch. 2 - Building an Income Statement. Pharrell, Inc., has...Ch. 2 - Dividends and Retained Earnings. Suppose the firm...Ch. 2 - Per-Share Earnings and Dividends. Suppose the firm...Ch. 2 - Prob. 5QPCh. 2 - Tax Rates. In Problem 5, what is the average tax...Ch. 2 - Calculating OCF. Hailey, Inc., has sales of...Ch. 2 - Prob. 8QPCh. 2 - Calculating Additions to NWC. The December 31,...Ch. 2 - Cash Flow to Creditors. The December 31, 2015,...Ch. 2 - Cash Flow to Stockholders. The December 31, 2015,...Ch. 2 - Prob. 12QPCh. 2 - Market Values and Book Values. Klingon Widgets,...Ch. 2 - Prob. 14QPCh. 2 - Using Income Statements. Given the following...Ch. 2 - Prob. 16QPCh. 2 - Prob. 17QPCh. 2 - Prob. 18QPCh. 2 - Net Income and OCF. During the year, Belyk Paving...Ch. 2 - Prob. 20QPCh. 2 - Prob. 21QPCh. 2 - Prob. 22QPCh. 2 - Prob. 23QPCh. 2 - Net Fixed Assets and Depreciation. On the balance...Ch. 2 - Tax Rates. Refer to the corporate marginal tax...Ch. 2 - Prob. 1CCCh. 2 - Prob. 2CC
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