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    Chapter 2

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    jinny6061
    The document contains multiple accounting problems involving calculating various financial metrics such as book value of assets, net income, cash flow to creditors/stockholders, net capital spending, and change in net working capital. For the first problem, the book value of Klingon Widgets' total assets is $6,979,000 and the market value is $8,310,000. For the second problem, Billy's Exterminators' net income is $158,600.

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    Chapter 2

    Uploaded by

    jinny6061
    620 views17 pages
    The document contains multiple accounting problems involving calculating various financial metrics such as book value of assets, net income, cash flow to creditors/stockholders, net capital spending, and change in net working capital. For the first problem, the book value of Klingon Widgets' total assets is $6,979,000 and the market value is $8,310,000. For the second problem, Billy's Exterminators' net income is $158,600.

    Original Description:

    Business Fiannce

    Original Title

    Chapter 2(1)

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    © Attribution Non-Commercial (BY-NC)

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    The document contains multiple accounting problems involving calculating various financial metrics such as book value of assets, net income, cash flow to creditors/stockholders, net capital spending, and change in net working capital. For the first problem, the book value of Klingon Widgets' total assets is $6,979,000 and the market value is $8,310,000. For the second problem, Billy's Exterminators' net income is $158,600.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    620 views17 pages

    Chapter 2

    Uploaded by

    jinny6061
    The document contains multiple accounting problems involving calculating various financial metrics such as book value of assets, net income, cash flow to creditors/stockholders, net capital spending, and change in net working capital. For the first problem, the book value of Klingon Widgets' total assets is $6,979,000 and the market value is $8,310,000. For the second problem, Billy's Exterminators' net income is $158,600.

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    You are on page 1of 17

    Chapter 2

    Problems

    Klingon Widgets, Inc., purchased new cloaking machinery four years ago for $8 million. The machinery can be sold to the Romulans today for $7.3 million. Klingons current balance sheet shows net fixed assets of $6 million, current liabilities of $760,000, and net working capital of $219,000. If all the current assets were liquidated today, the company would receive $1.01 million cash. What is the book value of Klingons total assets today? What is the market value?

    CA = NWC + CL = $219,000 + 760,000 = $979,000


    Book value CA Book value NFA $ 979,000 6,000,000 Market value CA Market value NFA $

    1,010,000
    7,300,000

    Book value assets

    6,979,000

    Market value assets $

    8,310,000

    Billys Exterminators, Inc., has sales of $592,000, costs of $284,000, depreciation expense of $36,000, interest expense of $28,000, and a tax rate of 35 percent. What is the net income?

    Income Statement

    Sales
    Costs Depreciation EBIT

    592,000
    284,000 36,000

    272,000

    Interest
    EBT Taxes (35%) Net income $ $

    28,000
    244,000 85,400 158,600

    Corporation Growth has $86,000 in taxable income, and Corporation Income has $8,600,000 in taxable income. Use the tax rates from the table given below:

    a What is the tax bill for each firm? . Suppose both firms have identified a new project that will increase taxable income by $13,000. How much in additional taxes will each firm pay

    a. $ 17490 and $ 2924000 b. $ 4420

    Cash flow to creditors


    The 2010 balance sheet of Marias Tennis Shop, Inc., showed long-term debt of $2.5 million, and the 2011 balance sheet showed long-term debt of $2.65 million. The 2011 income statement showed an interest expense of $100,000. What is the cash flow to creditors?

    Cash flow to creditors = Interest paid Net new borrowing Cash flow to creditors = Interest paid (LTDend LTDbeg) Cash flow to creditors = $100,000 ($2,650,000 2,500,000) Cash flow to creditors = $50,000

    Cash flow to stockholders


    The 2010 balance sheet of The Sports Store showed $800,000 in the common stock account and $6.7 million in the additional paid-in surplus account. The 2011 balance sheet showed $872,000 and $8 million in the same two accounts, respectively. The company paid out $600,000 in cash dividends during 2011. What is the cash flow to stockholders for 2011?

    Answer
    Cash flow to stockholders = $600,000 [($872,000 + $8,000,000) - ($800,000 + $6,700,000) = -$772,000

    During 2010, Raines Umbrella Corp. had sales of $740,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $450,000, $110,000, and $150,000, respectively. In addition, the company had an interest expense of $88,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.) a What is Rainess net income for 2010? .

    b What is its operating cash flow? .

    Income Statement Sales COGS A&S expenses Depreciation EBIT Interest $ $ $ 740,000 450,000 110,000 150,000 30,000 88,000

    Taxable income

    58,000

    Taxes (35%)
    $

    Net income (loss)

    58,000

    OCF = EBIT + Depreciation Taxes = $30,000 + 150,000 0 = $180,000

    Net Capital Spending


    The Blue Bonnet's 2010 balance sheet showed net fixed assets of $2.2 million, and the 2011 balance sheet showed net fixed assets of $2.6 million. The company's income statement showed a depreciation expense of $900,000. What was the amount of the net capital spending for 2011?

    Answer
    Net capital spending = $2,600,000 - $2,200,000 + $900,000 = $1,300,000

    The 2010 balance sheet of Greystone, Inc., showed current assets of $3,190 and current liabilities of $1,480. The 2011 balance sheet showed current assets of $3,240 and current liabilities of $1,670. What is the change in net working capital?

    Change in NWC = NWCend NWCbeg Change in NWC = (CAend CLend) (CAbeg CLbeg) Change in NWC = ($3,240 1,670) ($3,190 1,480) Change in NWC = $1,570 1,710 = $140

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