a.
To compute: The net operating working capital of Company B.
Financial Statements: A part of annual report that is attributed to the financials of the company for an accounting period is called financial statements. These include income statement, statement of
Net Operating Working Capital: The difference of current assets and current liabilities is called working capital. When only accounts payable and accruals are considered instead of total current liabilities, the difference is called net operating working capital.
a.
Explanation of Solution
Given (for 2014),
Accounts payable are $10,800.
Accruals are $7,600.
Current assets are $72,125.
Formula to compute net operating working capital,
Substitute $10,800 for accounts payable, $7,600 for accruals and $72,125 for current assets.
Given (for 2013),
Accounts payable are $9,000.
Accruals are $6,000.
Current assets are $59,000.
Formula to compute net operating working capital,
Substitute $9,000 for accounts payable, $6,000 for accruals and $59,000 for current assets.
So, Company B has net operating working capital of $53,725 and $44,000 in 2014 and 2013, respectively.
b.
To compute: The
Free Cash Flow: The cash generated over and above required by business operations and capital expenditure is called free cash flow. Statement of cash flow reports the cash flow generated or consumed by the business.
b.
Explanation of Solution
Cash flow statement to show free cash flow:
| Particulars |
Amount ($) |
| Operating Activities | |
| Net income | 22,350 |
| 5,000 | |
| Increase in accounts receivable | (5,000) |
| Increase in inventories | (7,125) |
| Increase in accounts payable | 1,800 |
| Increase in accruals | 1,600 |
| Net cash provided by operating activities | 18,625 |
| Long-Term Investing Activities | |
| Plant and equipment increased | (8,000) |
| Net cash used in investing activities | (8,000) |
| Financing Activities | |
| Increase in notes payable | 1,550 |
| Dividends Paid | (11,175) |
| Net cash used in financing activities | (9,625) |
| Net increase in cash | 1,000 |
| Cash at the beginning of the year | 13,000 |
| Cash at the end of the year | 14,000 |
Table (1)
So, Company B’s free cash flow for 2014 is $1,000.
c.
To prepare: The statement of
Statement of Stockholders’ Equity: Statement of stockholders’ equity shows the opening and closing balance of stockholder’s equity with the changes occurred during the accounting period.
c.
Explanation of Solution
Statement of stockholders’ equity:
| Shares | Amount |
Retained Earnings |
Total Stockholders’ Equity |
|
| Balances, December 31, 2013 | 5,000 | 50,000 | 20,850 | 70,850 |
| 2014 Net income | 22,350 | |||
| Cash dividends | (11,175) | |||
| Additional to retained earnings | 11,175 | |||
| Balances, December 31, 2014 | 82,025 |
So, Company B has stockholders’ equity of $82,025 at the end of year 2014.
d.
To compute: The economic value added for Company B.
Economic Value Added (EVA): It is a measure along with market value added, to evaluate management’s performance. It considers the
d.
Explanation of Solution
Given,
Net operating income is $39,000.
Income tax rate is 40%.
Total invested capital $97,025.
After tax percentage cost of capital is 10%.
Formula to compute economic value added,
Substitute $39,000 for operating income, 40% for tax rate, $97,025 for invested capital and 10% for after tax percentage cost of capital.
Working note:
Calculation of total invested capital,
So, the economic value added is $13,697.5.
e.
To compute: The market value added for Company B.
Market Value Added: The measure to evaluate management’s performance in a company’s operations and growth, market value added considers the market value of company’s outstanding shares. It reports the market value over and above the book value of those outstanding shares.
e.
Explanation of Solution
Given,
Book value of common equity is $50,000.
Stock price is $20 per share.
Number of shares outstanding are 5,000.
Formula to compute market value added,
Substitute $50,000 for common book value of equity, $20 for stock price and 5,000 for number of shares outstanding.
So, the market value added is $50,000.
To determine: The dividends paid by Company N.
Statement of Stockholders’ Equity: Statement of stockholders’ equity reports the opening and closing balance of stockholder’s equity with the changes incurred during the accounting period.
Explanation of Solution
Statement of retained earnings for Company N:
| Accounts Title |
Amount ($) |
| Beginning Balance | 780,000,000 |
| Add: Net Income | 50,000,000 |
| Retained Earnings Available | 830,000,000 |
| Less: Dividends | (20,000,000) |
| Ending Balance | 810,000,000 |
Table (2)
Working note:
So, the amount of dividends paid is $20,000,000.
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Chapter 3 Solutions
Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
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