a)
To calculate: The shareholders’ equity for the year 2014 and 2015.
Introduction:
The owner’s equity refers to the amount of total assets minus total liabilities. It represents the money invested into the business minus the amount of drawings plus the net income from the point of incorporation.
a)
Answer to Problem 21QP
The owner’s equity for the year 2014 and 2015 are $2,567 and $3,122.
Explanation of Solution
Given information:
The assets and liabilities of Enterprise W for the year 2015 are as follows; current assets of $1,176, net fixed assets of $5,104, current liabilities of $445, long term debt of $2,713.
The assets and liabilities of Enterprise W for the year 2014 are as follows; current assets of $964, net fixed assets of $4,384, current liabilities of $401, long term debt of $2,380.
Formulae:
The formula to calculate the total assets:
The formula to calculate the total liabilities:
The formula to calculate the
Compute the total assets for the year 2014:
Hence, the total assets for the year are $5,348.
Compute the total liabilities for the year 2014:
Hence, the total liabilities for the year 2014 are $2,781.
Compute the stockholders’ equity for the 2014:
Hence, the stockholders equity for the year 2014 is $2,567.
Compute the total assets for the year 2015:
Hence, the total assets for the year 2015 are$6,280.
Compute the total liabilities for the year 2015:
Hence, the total liabilities for the year 2015 are $3,158.
Compute the stockholders’ equity for the year 2015:
Hence, the stockholders’ equity for the year is $3,122.
b)
To calculate: The change in net working capital for the year 2015.
Introduction:
Net working capital refers to the difference of current assets and current liabilities. Net working capital indicates the short term liquidity of the business.
b)
Answer to Problem 21QP
The change in net working capital for the year 2015 is $168.
Explanation of Solution
Given information:
The assets and liabilities of Enterprise W for the year 2015 are current assets of $1,176, net fixed assets of $5,104, current liabilities of $445, long term debt of $2,713.
The assets and liabilities of Enterprise W for the year 2014 are as follows; current assets of $964, net fixed assets of $4,384, current liabilities of $401, long term debt of $2,380.
Formulae:
The formula to calculate the ending net working capital:
The formula to calculate the beginning net working capital:
The formula to calculate the changes in net working capital:
Compute the ending net working capital:
Hence, the ending net working capital is $731.
Compute the beginning net working capital:
Hence, the beginning net working capital is $563.
Compute the change in net working capital:
Hence, the change in net working capital is $168.
c)
To calculate: The cash flow from assets for 2016, and the fixed assets sold in 2016.
c)
Answer to Problem 21QP
The cash flow from assets is $3,814. The company sold $440 worth of fixed assets.
Explanation of Solution
Given information:
The net income of Company W has following items of sales $14,740, costs of $5,932, depreciation of $1,190, and interest paid of $328. The tax rate is 40%. The changes in net working capital are $168. The net fixed assets are $5,104 for the year 2015 and net fixed assets for the year 2016 is $4,384. The company purchased fixed assets of $2,350.
The formula to calculate the net capital spending:
The formula to calculate the cash flow from assets:
Compute the net income:
Income statement | ||
Particulars | Amount | Amount |
Net sales | $14,740 | |
Less: | ||
Costs | $5,932 | |
Depreciation | $1,190 | $7,122 |
Earnings before interest and taxes | $7,618 | |
Less: Interest paid | $328 | |
Taxable income | $7,290 | |
Less: Taxes ($7290×40%) | $2,916 | |
Net income | $4,374 |
Hence, the net income is $4,374.
Compute the operating cash flow:
Operating cash flow | |
Particulars | Amount |
Earnings before interest and taxes | $7,618 |
Add: Depreciation | $1,190 |
$8,808 | |
Less: Taxes | $2,916 |
Operating cash flow | $5,892 |
Hence, the operating cash flow is $5,892.
Compute the net capital spending:
Net capital spending | |
Particulars | Amount |
Ending net fixed assets | $5,104 |
Less: Beginning net fixed assets | $4,384 |
$720 | |
Add: Depreciation | $1,190 |
Net capital spending | $1,910 |
Hence, the net capital spending is $1,910.
Compute the cash flow from assets:
The operating cash flow is $5,892. The change in net working capital is $168 and the net capital spending is $1,910.
Hence, the cash flow from assets is $3,814.
Compute the fixed assets sold:
Hence, the value of fixed assets sold is $440.
d)
To calculate: The cash flow to creditors and the amount of long-term debt paid off.
d)
Answer to Problem 21QP
The cash flow to creditors is −$5. The company paid off $122 worth of long-term debt.
Explanation of Solution
Given information:
The ending long term debt is $2,713 and the beginning long term debt is $2,380. The interest expenses are $328. The company raised $455 in new long term debt.
The formula to calculate the net new borrowings:
Or
The formula to calculate the cash flow to creditors:
Compute the net new borrowing:
Hence, the net new borrowing is $333.
Compute the cash flow to creditors:
Hence, the cash flow to creditors is −$5.
Compute the debt paid off:
Hence, the value of debt paid off is $122.
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Chapter 2 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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