Waris 01-322221-024 Assignment # 1 - CF 09-03-2023

1 . Market Values and Book Values : Klingon Widgets, Inc., purchased new cloaking machinery three
years ago for $6 million. The machinery can be sold to the Romulans today for $5.4 million. Klingon’s
current balance sheet shows net fixed assets of $3.5 million, current liabilities of $945,000, and net
working capital of $275,000. If the current assets and current liabilities were liquidated today, the
company would receive a total of $1.25 million cash. What is the book value of Klingon’s total assets
today? What is the sum of the market value of NWC and the market value of fixed assets?

a. Net working capital (NWC) = Current assets - Current liabilities

275,000 = Current assets - 945,000

Current assets = $1,220,000

Book value of total assets = Book value of current assets + Book value of net fixed assets

= 1,220,000 + 3,500,000

= $4,720,000

b. All of the information necessary to calculate the market value of assets is given.

Market value of assets = Market value of current assets + Market value of fixed assets

= 1,250,000 + 5,400,000

= $6,650,000

1 . Nightwish Corp. shows the following information on its 2021 income statement: Sales =
$336,000; Costs = $194,700; Other expenses = $9,800; Depreciation expense = $20,600; Interest
expense = $14,200; Taxes = $21,275; Dividends = $21,450. In
addition, you’re told that the firm issued $7,100 in new equity during 2021 and redeemed $5,400 in
outstanding long-term debt.

a. What is the 2021 operating cash flow?

b. What is the 2021 cash flow to creditors?
c. What is the 2021 cash flow to stockholders?
d. If net fixed assets increased by $53,200 during the year, what was the addition to NWC?
Waris 01-322221-024 Assignment # 1 - CF 09-03-2023

A.
EBIT = SALES - COST - OTHER EXP. - DEP.
EBIT = 336,000 – 194,700 – 9,800 – 20,600
EBIT = $110,900

OCF = EBIT + Depreciation - Taxes

OCF = $110,900 + 20,600 - 21,275
OCF = $110,225

B.
Cash flow to creditors = Interest paid - Net new borrowing
Cash flow to creditors = $14,200- (-$5,400)
Cash flow to creditors = $19,600

C.
Cash flow to stockholders = Dividends paid - Net new equity
Cash flow to stockholders = $21,450 - 7,100
Cash flow to stockholders = $14,350

D.
Cash flow from assets = Cash flow to creditors + Cash flow to stockholders
Cash flow from assets = $19,600 + 14,350
Cash flow from assets = $33,950
Net capital spending = Depreciation + Increase in fixed assets
Net capital spending = $20,600 + 53,200
Net capital spending = $73,800
Cash flow from assets = OCF - Change in NWC - Net capital spending
$33,950 = $110,225 - Change in NWC - $73,800
Change in NWC = $2,475

1 . Given the following information for Troiano Pizza Co.,

calculate the depreciation expense: Sales = $76,800; Costs = $36,900; Addition to retained
earnings = $6,800; Dividends paid = $2,370; Interest expense = $5,300; Tax rate = 22
percent.

Net income = Addition to retained earnings + Dividends

NI = $6,800 + 2,370
NI = $9,170

Net income = Taxable income - (Taxable income)(Tax rate)

Net income = Taxable income(1 - Tax rate)
Waris 01-322221-024 Assignment # 1 - CF 09-03-2023

We can rearrange this equation and solve for the taxable income as:

EBT = Net income / (1 - Tax rate)

EBT = $9,170 / (1 - .22)
EBT= $11,756

EBT = Sales - Costs – Depreciation – Interest

$11,756 = $76,800 - 36,900 – Depreciation – 5,300
Depreciation = $22,844

1 . Preparing a Balance Sheet [ LO1] Prepare a 2021 balance sheet for Willis Corp. based on the
following information: Cash = $165,000; Patents and copyrights = $858,000; Accounts payable =
$273,000; Accounts receivable = $149,000; Tangible net fixed assets = $2,093,000; Inventory = $372,000;
Notes payable = $201,500; Accumulated retained earnings = $1,778,000; Long-term debt = $1,079,000.

Willis Corp.
Balance Sheet
As of December 31, 2021

Assets
Cash $ 165,000
Accounts Receivable 149,000
Inventory 372,000
Patents and copyrights 858,000
Tangible net fixed assets 2,093,000
Total Assets $3,637,000

Liabilities and Equity

Accounts payable $ 273,000
Notes payable 201,500
Long term debt 1,079,000
Total Liabilities 1,553,500

Accumulated retained earnings 1,778,000

Total Equity 2,083,500

Total Liabilities and Equity $3,637,000

Waris 01-322221-024 Assignment # 1 - CF 09-03-2023

16. Polska, Inc., is obligated to pay its creditors $10,300 during the year.
a. What is the market value of the shareholders’ equity if assets have a market value of $11,600?
b. What if assets equal $9,400?

We can use the following formula to calculate the market value of the shareholders' equity:

Market value of shareholders' equity = Market value of assets - Total liabilities

If the assets have a market value of $11,600 and the company is obligated to pay its
creditors $10,300 during the year, then the total liabilities are $10,300.

Using the formula above, we can calculate the market value of the shareholders' equity:

Market value of shareholders' equity = $11,600 - $10,300

Market value of shareholders' equity = $1,300

Alternatively, if the assets are equal to $9,400 and the company is still obligated to pay its
creditors $10,300 during the year, then the company has negative equity:

Market value of shareholders' equity = Market value of assets - Total liabilities

Market value of shareholders' equity = $9,400 - $10,300

Market value of shareholders' equity = -$900

In this case, the market value of the shareholders' equity is negative $900, indicating that the
company owes more than it owns, which is a concerning financial situation.
17. During 2021, Raines Umbrella Corp. had sales of $865,000. Cost of goods
sold, administrative and selling expenses, and depreciation expenses were $535,000, $125,000, and
$170,000, respectively. In addition, the company had an interest expense of $90,000 and a tax rate of 25
percent. (Ignore any tax loss carryforward provisions and assume interest expense is fully deductible.)
a What is the company’s net income for 2021?
b What is its operating cash flow?
c Explain your results in parts (a) and (b).

a. Operating income:
EBIT = Sales - Cost of goods sold - Administrative and selling expenses - Depreciation expenses
EBIT= $865,000 - $535,000 - $125,000 - $170,000
EBIT= $35,000

EBT (Earnings before interest and taxes) = Operating income - Interest expense
EBT = $35,000 - $90,000
EBT = -$55,000
Net Income = -55,000
Waris 01-322221-024 Assignment # 1 - CF 09-03-2023

b. OCF = EBIT + Depreciation - Taxes

OCF = 35,000 + 170,000 – 0 = 205,000

c. Net income was negative because of the tax deductibility of depreciation and
interest expense. However, the actual cash flow from operations was positive
because depreciation is a non-cash expense and interest is a financing expense,
not an operating expense.

1 . In Problem 17, suppose Raines Umbrella Corp. paid out $128,000 in cash dividends. Is this possible? If
net capital spending and net working capital were both zero, and if no new stock was issued during the
year, what do you know about the firm’s long-term debt account?

A firm can still pay out dividends if net income is negative; it just has to be sure there is sufficient cash
flow to make the dividend payments.

Change in NWC = Net capital spending = Net new equity = 0. (Given)

Cash flow from assets = OCF - Change in NWC - Net capital spending
Cash flow from assets = $205,000 - 0 - 0 = $205,000
Cash flow to stockholders = Dividends - Net new equity = $128,000 - 0 = $128,000
Cash flow to creditors = Cash flow from assets - Cash flow to stockholders
Cash flow to creditors = $205,000 - 128,000 = $77,000
Cash flow to creditors = Interest - Net new LTD
Net new LTD = Interest - Cash flow to creditors = $90,000 - 77,000 = $13,000

1 . Martinez Industries had the following operating results for 2021: Sales = $38,072; Cost of goods sold =
$27,168; Depreciation expense = $6,759; Interest expense = $3,050; Dividends paid = $2,170. At the
beginning of the year, net fixed assets were $22,790, current assets were$8,025, and current liabilities
were $4,511. At the end of the year, net fixed assets were $28,053, current assets were $9,904, and
current liabilities were $5,261. The tax rate for 2021 was 22 percent.

a. What is net income for 2021?

b. What is the operating cash flow for 2021?
c. What is the cash flow from assets for 2021? Is this possible? Explain.
d. If no new debt was issued during the year, what is the cash flow to creditors? What is the cash flow to
stockholders? Explain and interpret the positive and negative signs of your answers in parts (a)
through (d).
Waris 01-322221-024 Assignment # 1 - CF 09-03-2023

a.
EBIT = Sale – COGS – Depreciation
EBIT = 38,072 – 27,168 – 6,759
EBIT = $ 4,145

EBT = EBIT – Interest

EBT = 4,145 – 3050
EBT = 1,095

Net Income = EBT - (EBT*0.22)

Net income = $ 854

b. OCF = EBIT + Depreciation - Taxes

= $4,145 + 6,759 – 240.9 = $10,663

c. Change in NWC = NWCend - NWCbeg

= (CAend - CLend) - (CAbeg - CLbeg)
= ($9,904 - 5,261) - ($8,025 - 4,511)
= 4,643 - $3,514 - = $ 1,129

Net capital spending = NFAend - NFAbeg + Depreciation

= $28,053 – 22,790 + 6,759 = $12,022

CFA = OCF - Change in NWC - Net capital spending

= $10,663 +1,129 - 12,022 = -$2,488

The cash flow from assets can be positive or negative, since it represents whether the
firm raised funds or distributed funds on a net basis. In this problem, even though net
income and OCF are positive, the firm invested heavily in both fixed assets and net
working capital; it had a net of $10,296 in funds to make investments.

d. Cash flow to creditors = Interest - Net new LTD = $3,050 - 0 = $3,050

Cash flow to stockholders = Cash flow from assets - Cash flow to creditors
= -$2,488 - 3,050 = -$5,538
The firm had positive earnings in an accounting sense (NI > 0) and had positive cash
flow from operations. The firm invested $1,129 in new net working capital and $12,022
in new fixed assets. The firm had to raise $2,488 from its stakeholders to support this
new investment. It accomplished this by raising $7,708 in the form of new equity. After
paying out $2,170 of this in the form of dividends to shareholders and $3,050 in the form
of interest to creditors, $2,488 was left to meet the firm’s cash flow needs for investment.
Waris 01-322221-024 Assignment # 1 - CF 09-03-2023

Consider the following abbreviated financial statements for Parrothead Enterprises

.

PARROTHEAD ENTERPRISES
2020 and 2021 Partial Balance Sheets

Assets Liabilities and Own

2020 2021 2020 2021

Current assets $1,327 $1,438 Current liabilities $ 530 $ 595

Net fixed assets 5,470 6,587 Long-term debt 2,891 3,075

PARROTHEAD ENTERPRISES 2021

Income Statement

Sales $16,831

Costs 7,849

Depreciation 1,499

Interest paid 427

a. What is owners’ equity for 2020 and 2021?

b. What is the change in net working capital for 2021?
c. In 2021, Parrothead Enterprises purchased $2,740 in new fixed assets. How much in fixed assets did
Parrothead Enterprises sell? What is the cash flow from assets for the year? The tax rate is 21 percent.
d. During 2021, Parrothead Enterprises raised $554 in new long-term debt. How much long-term debt
must Parrothead Enterprises have paid off during the year? What is the cash flow to creditors?

a. Total assets2020 = $1,327 + 5,470 = $6,797

Total liabilities2020 = $530 + 2,891 = $3,421
Owners' equity2020 = $6,797 - 3,421 = $3,376

Total assets2021 = $1,438 + 6,587 = $8,025

Total liabilities2021 = $595 + 3075 = $3,670
Owners' equity2021 = $8,025 - 3,670 = $4,355

b. NWC2020 = CA2020 - CL2020 = $1,327 - 530 = $797

NWC2018 = CA2021 - CL2021 = $1,438 - 595 = $843
Change in NWC = NWC2021 - NWC2020 = 843 - 797 = $46
Waris 01-322221-024 Assignment # 1 - CF 09-03-2023

c. We can calculate net capital spending as:

Net capital spending = Net fixed assets2021 - Net fixed assets2020 + Depreciation
Net capital spending = $6,587 - 5,470 + 1,499 = $2,616

So, the company had a net capital spending cash flow of $2,616. We also know that
net capital spending is:

Net capital spending = Fixed assets bought - Fixed assets sold

$2,616 = $2,740 - Fixed assets sold
Fixed assets sold = $2,740 - 2,616 = $124

To calculate the cash flow from assets, we must first calculate the operating cash
flow. The income statement is:

EBIT = Sales -Costs - Depreciation

EBIT = $ 7,483
EBT = EBIT – Interest = $ 7,056
Taxes (21%) 1,482
Net income $ 5,574

So, the operating cash flow is:

OCF = EBIT + Depreciation - Taxes = $7,483 + 1,499 - 1,482 = $7,500

And the cash flow from assets is:

Cash flow from assets = OCF - Change in NWC - Net capital spending.
= $7,500 - 46 - 2,616 = $4,838

d. Net new borrowing = LTD21 - LTD20 = $3,075 - 2,891 = $184

Cash flow to creditors = Interest - Net new LTD = $427 - 184 = $243

Net new borrowing = $184 = Debt issued 3 Debt retired

Debt retired = $554 3 184 = $370