1. Fill question marks: Balance sheet to December 31, 2015 Total assets Current
ID: 2602079 • Letter: 1
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1. Fill question marks: Balance sheet to December 31, 2015 Total assets Current assets Inventories Account receivables Cash ? Total capital 920 Short-term liabilities 500 Note payable 300 Lone-term Wabilities 300 Long. ? Loans Buildin Accumulated depreciation for Buildi Net: Buildin Land Owner's E 1700 Common stock 250 Preferred stock 2320 1000 800 ? Retained Earnings 6001 Profit 344 Income statement December 31, 2016 Sales Cost of goods sold Salaries Administrative costs 2000 600 200 $00 150 100 ciation 20 interest(5%) Taxes (20 %) lance sheet to December 31,2016 Total assets Current assets Inventories Account receivables Cash Long-term assets ?Total capital 760 Short-term liabilities 100 550 Note payable100 ?Long-term liabilities 60 Loans ? Owner's Equity 22101 1000 1700 Common stock Building Preferred stock 740 Accumulated depreciation for Building ? Retained Earnings Net: Buildin Land 600 Profit Evaluate: put together the cash flow statement by indirect methodology If the firm cr the return on capital Calculate WACC works what is the effect of the financial leverage? what is the tax shield of paid interest How the net working capital was changed? It's If the company would like to borrow new debt for 400, do period? a) b) eates economic value (economic value added), if you know that the owner's requirements are 12% of c) d) e) compan y with the financial leverage effectively? healthy? (evaluate according to liquidity and asset ut es the company have enough money in the end of g) h)Explanation / Answer
Income statement December 31, 2016 Sales 2000 Costof goods sold 600 Salaries 200 Administrative Costs 500 Energy 150 Depreciation 100 Operating Income 450 Interest (5%) 20 Net Income (pretax) 430 Taxes (20%) 86 Net Income 344 Balance Sheet to December 31, 2015 Total Asset 2970 Total Capital 2970 Current assets 920 Short term liabilities 150 Inventories 500 Note payable 150 Accounts receivable 300 Long term liabilities 500 Cash 120 Loans 500 Long term assets 2050 Owner's equity 2320 Building 1700 Common stock 1000 Acc. Depreciation for Building 250 Preferred Stock 800 Net: Building 1450 Retained Earnings 176 Land 600 Profit 344 Balance Sheet to December 31, 2016 Total Asset 2710 Total Capital 2710 Current assets 760 Short term liabilities 100 Inventories 550 Note payable 100 Accounts receivable 150 Long term liabilities 500 Cash 60 Loans 500 Long term assets 1950 Owner's equity 2210 Building 1700 Common stock 1000 Acc. Depreciation for Building 350 Preferred Stock 740 Net: Building 1350 Retained Earnings 126 Land 600 Profit 344 a. Cashflow statement by indirect methodology Cashflow from operating activities Net Income 344 Adjustment: Increase in inventories -50 Decrease in accounts receivable 150 Decrease in short term liabilities -50 50 Cash generated from operations 394 Cashflow from Financing activities Preferred Stock -60 Dividend paid -394 Net cash used in Financing activities -454 Net increase in Cash -60 Cash at the beginning of the period 120 Cash at the end of the period 60 c. WACC WACC = r(E) x w(E) + r(D) x (1-t) x w(D) Where r(E)= cost of equity i.e. required rate of return on common stock r(D)= cost of debt w(E)= weight of equity in company's total capital w(D)=weight of debt in caompany's total capital t= tax rate WACC = 12% x 66.67% + 5% x 0.80 x 33.33% = 9.3336 d. The company is working effectively with Financial leverage, as the debt to capitalization ratio is less then 0.5 e. The effect of financial leverage is the company funding its asset from debt or equity, how much is the risk associated with it. An ideal financial leverage will increase return from equity. f.Since the interest paid is an expense deductable from income, it will reduce the taxable income thus tax payment. g. Net working capital changed with change in Current assets and Liabilities. Asset utilization = Sales/Average total assets = 2000/840 = 2.38 h. The company can borrow the new debt for 400. Working Note: Dividend Paid = Retained earning in the beginning + Net profit - Retained earning in the end = 176+344-126 = 394
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