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Klara Neema Weidemann 19REG75083, MBA-75/D 02.09.2019 Accounting and Finance Problem Set 3 and 4 Chapter 3: p.97 3-9. Action number a.) is the most likely to directly increase cash as shown on a firm’s balance sheet, because an increase in common stock (liability + equity side) will therefore lead to a balance on the Assets side which increases the cash value. Option b.) until d.) will have the opposite effect by decreasing or not affecting cash: b.) leads to an increase of debts, c.) has no effect on the cash and d.) is decreasing cash because it is lowering the retained earnings. 3-10. Retained earnings year-end  –  retained earnings prior year: 278,9 Mio  –  212.3 Mio = 66.6 Mio Difference + Dividends paid: 66.6 Mio + 22.5 Mio = 89,1 Mio   Net Income of the year was \$89,1 million 3-11. Sales: \$22,500,000 Operating Costs: \$18,000,000 Total invested capital: \$15,000,000 After-tax cost of capital: 9% Tax rate: 35% EVA = EBIT (1  –  T)  –  (Total invested capital x After-tax cost of capital) EBIT = Sales revenue  –  operating costs = \$22,500,000  –  \$18,000,000 = \$4,500,000 EVA = \$4,500,000 (1  –  0.35)  –  (\$15,000,000 x 0.09) = \$2,925,000  –  1,350,000 = \$ 1,575,000 3-12. Cash 2014: \$55,000 Investing activities: \$250,000 Cash 2015: \$25,000 Financing activities: \$170,000   Net decrease: \$30,000  a.) Cash flow operating activities? Net decrease = Financing activities + Operating activities + Investing activities - \$30,000 = \$170,000  –  \$250,000 + x - \$30,000 = x  –  \$80,000 \$50,000 = x   The cash flow from operating activities is \$50,000. b.) Firm’s net income?  Operating Activities = Depreciation and amortization + Increase in accrued wages and taxes + Increase in inventories + Net income \$50,000 = \$10,000 + \$25,000  –  \$100,000 + x \$50,000 = \$35,000  –  \$100,000 + x \$50,000 =  –  \$65,000 + x \$115,000 = x    The firm’s net income is \$115,000 . 3-13. year I. Operating Activities Net income \$ 5,000,000 Depreciation and amortization 450,000 Net cash provided by (used in) operating activities \$ 5,450,000 II. Long-Term Investing Activities Additions to property, plant, and equipment \$ (5,000,000) Net cash used in investing activities \$ (5,000,000) III. Financing Activities Increase in bonds \$ 1,000,000 Payment of dividends to shareholders (750,000) Net cash provided by financing activities \$ 250,000 IV. Summary Net decrease in cash (Net sum of I, II, and III) \$ 700,000 Cash and equivalents at the beginning of the year 100,000 Cash and equivalents at the end of the year \$ 800,000 Chapter 4: p.143  –  146 4-7. Net income: \$25,000 Interest expense: \$5,000 Tax rate: 40% Notes payable: \$25,000 Total debt: \$100,000 Long-term debt: \$75,000 Common Equity: \$250,000  ROE = Net income = \$25,000 = 0,1= 10% Common equity \$250,000 ROIC = EBIT (1  –  T) = EBIT (1  –  T) Total invested capital Debt + Equity EBIT = EBT + Interest EBT = Net Income = \$25,000 = \$25,000 = \$41,667 1  –  T 1  –  0,4 0,6 EBIT = \$41,667 + \$5,000 = \$46,667 ROIC = \$46,667 (1  –  0,4) = \$28,000 = 0.08 = 8% \$100,000 + \$250,000 \$350,000   Return on Common Equity is 10% and Return on Invested Capital is 8%. 4-8. Sales: \$6,000,000 ROE: 12% Total assets turnover: 3.2x Common equity: 50% ROE = Profit margin x Total assets turnover x Equity multiplier = Net income x Sales x Total assets Sales Total assets Total common equity 12% = Net income x 3,2 x Total assets \$6,000,000 Total common equity Total assets? Common Equity? Assets turnover: 3.2 = \$6,000,000 x x = \$6,000,000 = \$1,875,000   Total assets: \$1,875,000 3.2 Common Equity: 50% x \$1,875,000 = \$937,500 12% = Net income x 3,2 x \$1,875,000 \$6,000,000 \$937,500 = Net income x 3,2 x 2 \$6,000,000 Net income = 0.12 \$6,000,000 6,4 Net income = 0.01875 \$6,000,000 Net income = \$112,500  4-13. Debt (interest): \$500,000 Interest rate: 10%   Interest charge: \$50,000 Common stock: \$700,000 Sales: \$2,000,000 Tax rate: 30% Profit Margin: 5%   \$100,000   Compute TIE and ROIC EBIT = EBT + Interest EBT = Net Income = \$100,000 = \$100,000 = \$142,857 1  –  T (1  –  0,3) 0,7 EBIT = \$142,857 + \$50,000 = \$192,857 TIE = EBIT = \$192,857 = 3.86 Interest Charge \$50,000 ROIC = EBIT (1  –  T) = \$192,857 (1  –  0.3) = \$135,000 = 0.1125 = 11.25% Debt + Equity (\$500,000) + (\$700,000) \$1,200,000   Times-Interest-Earned ratio is 3.86x and Return on Invested Capital is 11.25% 4-15. Sales: \$200,000 Net Income: \$15,000 Industry Average: 2,5x Current Ratio: 2,5x Current Ratio = Current Asset Current Liabilities 2,5 = Current Asset Current Liabilities 2,5 (Current Liabilities) = Current Asset 2,5 (\$50,000) = Current Asset Projected Current Asset = \$125,000 \$210,000  –  \$125,000 = \$85,000 Old Current Asset = \$210,000 The inventory has to be reduced by \$85,000 to reach the projected Current Asset of \$125,000. The projected inventory value is \$65,000. By reducing the value of equity to \$85,000 (resulting from the sale of inventory), we get a common equity value of \$115,000. New ROE = Net Income = \$15,000 = 0.1304 = 13.04% New Common Equity \$115,000 Current ROE = Net Income = \$15,000 = 0,075 = 7.5% Common Equity \$200,000   ROE Change = 13.04%  –  7.5% = 5.54% New Quick Ratio = Current assets  –  Inventories = \$125,000 - \$65,000 = 1,2 Current liabilities \$50,000 With the new ratio, the Return on Common Equity changes from 7,5% to 13.04%. Hence, it changes 5.54%. The New Quick Ratio is 1,2. 4-23. a.) Calculate indicated ratios for Barry. Ratio Barry Industry Average Current 1,98 2,00 Quick 1,25 1,30 Days Sales Outstanding 76,29 35,00 Inventory Turnover 6,66 6,70% Total Assets Turnover 1,70 3,00 Profit Margin 1,70% 1,20% ROA 2,88% 3,60% ROE 7,56% 9,00% ROIC 5,99% 7,50% TIE 2,86 3,00 DEBT / TOTAL CAPITAL 48,54% 47% EBIT (1  –  T) 42,000 Total Invested Capital \$701,500 b.) Construct DuPont equation for Barry and industry. DuPont Barry = Net income x Sales x Total assets Sales Total assets Total common equity = \$27,300 x \$1,607,500 x \$947,500 \$1,607,500 \$947,500 \$361,000 = 0,0169 x 1,6965 x 2,6246 = 7,56% DuPont Ind. = ROA x Equity Multiplier 9% = 3.60% x Equity Multiplier Equity M. = 2.50 c.) Ratio Analysis It appears that the Days Sales Outstanding are quite lame compared to the industry average. Furthermore, The Total Asset Turnover shows imbalance compared to the industry average. This indicates that the value of Sales generated is still below the industry and thus, needs to be improved. By contrast the profit margin generated by the company lies above the industry average. One reason could be that the company is efficient in managing expenses.

Oct 15, 2019

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