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TEXT(S):
1. Fundamentals of Corporate Finance; 13th Edition by Ross, Westerfield, and Jordan. ISBN10:
9781264250073 | ISBN13: 9781260772395 Mcgraw Hill Irwin
Lesson 1 Homework
100 Points
1. What are the three types of financial management decisions? For each type of decision, give
an example of a business transaction that would be relevant.
2. What does liquidity measure? Explain the trade-off a firm faces between high liquidity and
low liquidity levels.
Example Question for Q3: Calculating Total Cash Flows: Square Hammer Corp. shows the following
information on its 2018 income statement: Sales = $305,000; Costs = $176,000; Other expenses =
$8,900; Depreciation expense = $18,700; Interest expense = $12,900; Taxes = $23,345; Dividends =
$19,500. In addition, you’re told that the firm issued $6,400 in new equity during 2018 and redeemed
$4,900 in outstanding long-term debt.
What is the 2018 operating cash flow?
What is the 2018 cash flow to creditors?
What is the 2018 cash flow to stockholders?
If net fixed assets increased by $46,000 during the year, what was the addition to NWC?
Answer: (Please see Excel Sheet as well for better understanding on calculation)
To find the OCF, we first calculate net income.
Income Statement
Sales $305,000
Costs 176,000
Other expenses 8,900
Depreciation 18,700
EBIT $101,400
Interest 12,900
Taxable income $88,500
Taxes 23,345
Net income $ 65,155
Dividends $19,500
Additions to RE $45,655
a. OCF = EBIT + Depreciation – Taxes = $101,400 + 18,700 – 23,345 = $96,755
b. CFC = Interest – Net new LTD = $12,900 – (–4,900) = $17,800
Note that the net new long-term debt is negative because the company repaid part of its long-
term debt.
c. CFS = Dividends – Net new equity = $19,500 – 6,400 = $13,100
d. We know that CFA = CFC + CFS, so:
CFA = $17,800 + 13,100 = $30,900
CFA is also equal to OCF – Net capital spending – Change in NWC. We already know OCF. Net capital
spending is equal to:
Net capital spending = Increase in NFA + Depreciation = $46,000 + 18,700 = $64,700
Now we can use:
CFA = OCF – Net capital spending – Change in NWC
$30,900 = $96,755 – 64,700 – Change in NWC
Change in NWC = $1,155
This means that the company increased its NWC by $1,155.
Question 3: Calculating Total Cash Flows: Double Corp. shows the following information on its 2019
income statement: Sales = $415,000; Costs = $176,000; Other expenses = $9,900; Depreciation
expense = $28,700; Interest expense = $12,900; Taxes = $23,345; Dividends = $29,500. In addition,
you’re told that the firm issued $6,400 in new equity during 2019 and redeemed $4,900 in outstanding
long-term debt.
What is the 2019 operating cash flow?
What is the 2019 cash flow to creditors?
What is the 2019 cash flow to stockholders?
If net fixed assets increased by $46,000 during the year, what was the addition to NWC?
Please answer based on above example. You may like to use the excel sheet to get the answer.
Example Question for Q 4: Using Income Statements : Given the following information for Bowie Pizza
Co., calculate the depreciation expense: Sales = $64,000; Costs = $30,700; Addition to retained
earnings = $5,700; Dividends paid = $1,980; Interest expense = $4,400; Tax rate = 22 percent.
Answer: (Please see Excel Sheet as well for better understanding on calculation)
The solution to this question works the income statement backwards. Starting at the bottom:
Net income = Dividends + Addition to retained earnings = $1,980 + 5,700 = $7,680
Now, looking at the income statement:
EBT – EBT × Tax rate = Net income
Recognize that EBT × Tax rate is the calculation for taxes. Solving this for EBT yields:
EBT = NI/(1 – Tax rate) = $7,680/(1 – .22) = $9,846
Now you can calculate:
EBIT = EBT + Interest = $9,846 + 4,400 = $14,246
The last step is to use:
EBIT = Sales – Costs – Depreciation
$14,246 = $64,000 – 30,700 – Depreciation
Depreciation = $19,054
Question 4: Using Income Statements: Given the following information for Teller Co., calculate the
depreciation expense: Sales = $80,000; Costs = $45,000; Addition to retained earnings = $7,000;
Dividends paid = $1,980; Interest expense = $4,400; Tax rate = 24 percent.
Please answer based on above example. You may like to use the excel sheet to get the answer.
Example Question for Q5: Preparing a Balance Sheet: Prepare a 2018 balance sheet for Rogers Corp.
based on the following information: Cash = $127,000; Patents and copyrights = $660,000; Accounts
payable = $210,000; Accounts receivable = $115,000; Tangible net fixed assets = $1,610,000; Inventory
= $286,000; Notes payable = $155,000; Accumulated retained earnings = $1,368,000; Long-term debt =
$830,000.
Answer: (Please see Excel Sheet as well for better understanding on calculation)
The balance sheet for the company looks like this:
Balance Sheet
Cash $ 127,000 Accounts payable $ 210,000
Accounts receivable 115,000 Notes payable 155,000
Inventory 286,000 Current liabilities $ 365,000
Current assets $ 528,000 Long-term debt 830,000
Total liabilities $1,195,000
Tangible net fixed assets $1,610,000
Intangible net fixed assets 660,000 Common stock ??
Accumulated ret. earnings 1,368,000
Total assets $2,798,000 Total liab. & owners’ equity $2,798,000
Total liabilities and owners’ equity is:
TL & OE = CL + LTD + Common stock + Retained earnings
Solving this equation for common stock gives us:
Common stock = $2,798,000 – 1,195,000 – 1,368,000 = $235,000
Question 5: Preparing a Balance Sheet: Prepare a 2019 balance sheet for Dunlop Corp. based on the
following information: Cash = $125,000; Patents and copyrights = $680,000; Accounts payable =
$210,000; Accounts receivable = $115,000; Tangible net fixed assets = $1,800,000; Inventory =
$286,000; Notes payable = $155,000; Accumulated retained earnings = $1,400,000; Long-term debt =
$800,000.
Please answer based on above example. You may like to use the excel sheet to get the answer.
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