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.
Answer to Problem 14P
The Company B has net operating working capital of $53,725 and $44,000 in 2015 and 2014, respectively
Explanation of Solution
Solution:
Given (for 2015),
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 2014),
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.
Therefore the Company B has net operating working capital of $53,725 and $44,000 in 2015 and 2014, 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.
Answer to Problem 14P
The free cash flow in 2015 for Company B is $11,175.
Explanation of Solution
Determine the capital expenditure
Therefore the capital expenditure is $8,000
Determine the free cash flow for 2015
Therefore the free cash flow in 2015 for Company B is $11,175.
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.
Answer to Problem 14P
Company B has stockholders’ equity of $82,025 at the end of year 2015.
Explanation of Solution
Statement of stockholders’ equity:
| Shares | Amount |
Retained Earnings |
Total Stockholders’ Equity | |
| Balances, December 31, 2014 | 5,000 | 50,000 | 20,850 | 70,850 |
| Net income, 2015 | 22,350 | |||
| Cash dividends | (11,175) | |||
| Additional to retained earnings | 11,175 | |||
| Balances, December 31, 2015 | 82,025 |
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.
Answer to Problem 14P
The economic value added for Company B is $13,027.50.
Explanation of Solution
Given,
Net operating income is $39,000.
Income tax rate is 40%.
Total invested capital $103,725.
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.
Therefore the economic value added for Company B is $13,027.50.
Working note:
Calculation of total invested capital,
e.
To compute: The market value added for Company B in 2015.
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.
Answer to Problem 14P
The market value added for Company B in 2015 is $17,975.
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.
Therefore the market value added for Company B in 2015 is $17,975.
Want to see more full solutions like this?
Chapter 3 Solutions
Fundamentals Of Financial Management
- Please givearrow_forwardNeed answer the finance questionarrow_forwardFind in the Selected Financial Data or calculate, the following data: Dividends per share declared in 2017. Capital expenditures in 2016. Year total equity grew by the greatest amount over the previous year. Change in total debt from 2013 to 2017.arrow_forward
- Profitability and Asset Management Ratios You are thinking of investing in Nikki T's, Inc. You have only the following information on the firm at year-end 2015: net income is $250,000, total debt is $2.5 million, and debt ratio is 55 percent. What is Nikki T's ROE for 2015?arrow_forwarda. Sales for 2018 were $455,150,000, and EBITDA was 15% of sales. Furthermore, depreciationand amortization were 11% of net fixed assets, interest was $8,575,000, thecorporate tax rate was 40%, and Laiho pays 40% of its net income as dividends. Giventhis information, construct the firm’s 2018 income statement.b. Construct the statement of stockholders’ equity for the year ending December 31, 2018,and the 2018 statement of cash flows.c. Calculate 2017 and 2018 net operating working capital (NOWC) and 2018 free cashflow (FCF). Assume the firm has no excess cash.d. If Laiho increased its dividend payout ratio, what effect would this have on corporatetaxes paid? What effect would this have on taxes paid by the company’s shareholders?e. Assume that the firm’s after-tax cost of capital is 10.5%. What is the firm’s 2018 EVA?f. Assume that the firm’s stock price is $22 per share and that at year-end 2018 the firmhas 10 million shares outstanding. What is the firm’s MVA at year-end 2018?arrow_forwardGiven the historical income statement of Mega Trade Inc., how much would be added to the company's retained earning for the year 2016 (in millions)? Income Statement ($ Million) Income Statement ( $ Million) Year End 2015 2016 2017 2019 Sales 1, 234,90 1,251.40 1,300.40 1,334.40 Cost of Sales -679.1 -659 -681.3 -667 Gross Operating Income Selling & Administration -339.7 -348.6 -351.2 -373.3 Depreciation -47.5 -52 -55.9 -75.2 Other Income / Expenses 11.8 7.6 7 8.2 Earnings Before Interest and Taxes Interest Income 1.3 1.4 1.7 2 Interest Expense -16.2 -15.1 -20.5 -23.7 Pre Tax Income Income Taxes -56.8 -64.2 -67.5 -72.6 Net Income Dividends -38.3 -38.7 -39.8 -40.1arrow_forward
- Using the information in the following table, calculate this company's: Net Income $49,300 Beginning Total Assets Beginning Stockholders' Equity Payout Ratio $399,700 $249,800 0% a. Internal growth rate. b. Sustainable growth rate. c. Sustainable growth rate if it pays out 45% of its net income as a dividend. The Tax Cuts and Jobs Act of 2017 temporarily allows 100% bonus depreciation (effectively expensing capital expenditures). However, we will still include depreciation forecasting in this chapter and in these problems in anticipation of the return of standard depreciation practices during your career.arrow_forwardPrevious Nex You are a financial Manager of Chevron Corp You need to assess the effectiveness of working capital management.of the company for 2018 using the following data What is th 2018 Payable turnover? 2017 Accoun Receivable 15 353 000 2018 Account Receivable 15,050 000 2017 Inventory = 5 585 000 2018 Inventory = 5 704.000 2017 Accounts Payable = 14 565.000 2018 Accounts Payable = 13 953 000 2017 Sales = 134 674 000 2018 Sales = 158 902.000 2017 Cost of Sales = 96 114.000 2018 Cost of Sales = 113 997 000 2017 Purchases = 95 114 000 2018 Purchases 123 435.000arrow_forwardRequirement: Use the 2015 data for Prince Company. Assume a stock price of $28 per share. Compute the ratios. Prince Company paid $7,000 out in dividends for the year. Show how you can figure out that the company paid $7,000 out in dividends for the year. 2015 2014 Income Statement Sales revenue 190,000 167,000 Cost of goods sold 112,000 100,000 Gross profit 78,000 67,000 Operating expenses and interest expenses 56,000 53,000 Pretax income 22,000 14,000 Income tax 8,000 4,000 Net income 14,000 10,000 Balance Sheet Cash 4,000 7,000 Accounts receivable (net) 14,000 18,000 Inventory 40,000 34,000 Operational assets (net) 45,000 38,000 Total assets 103,000 97,000 Current liabilities (no interest) 16,000 17,000 Long-term liabilities (10% interest) 45,000 45,000 Common stock (par $5) 30,000…arrow_forward
- Cash flow from assets. Use the data from the following financial statements in the popup window, The company paid interest expense of $19,000 for 2017 and had an overall tax rate of 40% for 2017. Find the cash flow from assets for 2017, and break it into its three parts: operating cash flow, capital spending, and change in net working capital. The operating cash flow is $ (Round to the nearest dollar.) Data table Sales revenue $349,800 Cost of goods sold $142,000 Fixed costs $42,900 Selling, general, and administrative expenses Depreciation $28,100 $45,900 (Click on the following icon in order to copy its contents into a spreadsheet.) Partial Balance Sheet 12/31/2016 ASSETS Cash Accounts receivable Inventories LIABILITIES $16,100 Notes payable $13,800 $27,800 Accounts payable $19,100 $47,900 Long-term debt $189,800 Fixed assets $368,100 OWNERS' EQUITY Accumulated depreciation $142,100 Retained earnings Intangible assets $82,000 Common stock $131,800 (Click on the following icon in…arrow_forwarda. What was net operating working capital for 2017 and 2018? Assume the firm has noexcess cash.b. What was the 2018 free cash flow?c. How would you explain the large increase in 2018 dividends?3-18 PERSONAL TA XES Mary Jarvis is a single individual who is workingarrow_forwardlook at the image to help me solve the problemarrow_forward
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Fundamentals Of Financial Management, Concise Edi...FinanceISBN:9781337902571Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning