Financial Management Decision Process Problems

LO 2 4.

Per-Share Earnings and Dividends. Suppose the firm in Problem 3 had 40,000 shares of common stock outstanding. What is the earnings per share, or EPS, figure? What is the dividends per share figure?

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LO 1 5.Market Values and Book Values. Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $4 million. The machinery can be sold to the Romulans today for $6.2 million. Klingon’s current balance sheet shows net fixed assets of $2.8 million, current liabilities of $710,000, and net working capital of $130,000. If all the current assets were liquidated today, the company would receive $825,000 cash. What is the book value of Klingon’s assets today? What is the market value?

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LO 3 7.

Tax Rates. In Problem 6, what is the average tax rate? What is the marginal tax rate?

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Lo4 14Calculating Total Cash Flows. Sheffield Co. shows the following information on its 2010 income statement: sales = $153,000; costs = $81,900; other expenses = $5,200; depreciation expense = $10,900; interest expense = $8,400; taxes = $16,330; dividends = $7,200. In addition, you’re told that the firm issued $2,600 in new equity during 2010, and redeemed $3,900 in outstanding long-term debt.

b. The cash flow to creditors is the interest paid, minus any new borrowing. Since the company redeemed long-term debt, the net new borrowing is negative. So, the cash flow to creditors is:

c. The cash flow to stockholders is the dividends paid minus any new equity. So, the cash flow to stockholders is:

d. In this case, to find the addition to NWC, we need to find the cash flow from assets. We can then use the cash flow from assets equation to find the change in NWC. We know that cash flow from assets is equal to cash flow to creditors plus cash flow to stockholders. So, cash flow from assets is:
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LO 1 16. Preparing a Balance Sheet. Prepare a balance sheet for Alaskan Orange Corp. as of December 31, 2010, based on the following information: cash = $193,000; patents and copyrights = $847,000; accounts payable = $296,000; accounts receivable = $253,000; tangible net fixed assets = $5,100,000; inventory = $538,000; notes payable = $189,000; accumulated retained earnings = $4,586,000; long-term debt = $1,250,000.

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LO 3 18. Marginal versus Average Tax Rates. (Refer to Table 2.3.) Corporation Growth has $89,000 in taxable income, and Corporation Income has $8,900,000 in taxable income.

a.     Using Table 2.3, we can see the marginal tax schedule. For Corporation Growth, the first $50,000 of income is taxed at 15%, the next $25,000 is taxed at 25%, and the next $14,000 is taxed at 34%. So, the total taxes for the company will be:

          b.  The marginal tax rate is the tax rate on the next $1 of earnings. Each firm has a marginal tax rate of 34% on the next $10,000 of taxable income, despite their different average tax rates, so both firms will pay an additional $3,400 in taxes.

LO 4 21. Calculating Cash Flows. Titan Football Manufacturing had the following operating results for 2010: sales = $19,780; cost of goods sold = $13,980; depreciation expense = $2,370; interest expense = $345; dividends paid = $550. At the beginning of the year, net fixed assets were $13,800, current assets were $2,940, and current liabilities were $2,070. At the end of the year, net fixed assets were $16,340, current assets were $3,280, and current liabilities were $2,160. The tax rate for 2010 was 35 percent.

 (b)     Operating cash flow          

 (c)     Cash flow from assets    

(d)  Cash flow to creditors $ 2,070 incase no new debt was issued.  Cash flow to stock holders was $550.