Foundations of Financial Management Tenth Canadian Edition Solution Manual

Preview (31 of 697 Pages)

100%

Purchase to unlock

Loading page image...

Chapter1Foundations of Fin. Mgt.10CeBlock, Hirt,Danielsen,Short, Perretta1-1Discussion Questions1-1.Capital budgetingwas the first area of studyin which the financial manager waspresented with analytical techniques for allocating resources among the various assets ofthe firm.1-2.The student should beprepared to pay a higher price for the promised $2 from the RoyalBank. The risk is lower.1-3.The goal of shareholder wealth maximization implies that the firm will attempt to achievethe highest possible valuation in the marketplace. It is the one overriding objective of thefirm and should influence every decision. The problem with a profit maximization goal isthat it fails to take account of risk, the timing of the benefits is not considered, and profitmeasurement is a very inexact process.1-4.Agency theory examines the relationship between the owners of the firm and themanagers of the firm. In privately owned firms, management and the owners are usuallythe same people. Management operates the firm to satisfy its own goals, needs, financialrequirements and the like. As a company moves from private to public ownership,management now represents all owners. This places management in the agency positionof making decisions in the best interest of all shareholders.1-5.Because institutional investors such as pension funds(Ontario Teachers’, CPP)andmutual funds own a large percentage of major companies, they are having more to sayabout the way publicly owned companies are managed. As a group, they have the abilityto vote large blocks of shares for the election of a board of directors, which is suppose torun the company in an efficient, competitive manner. The threat of being able to replacepoor performing boards of directors makes institutional investors quite influential. Sincethese institutions, like pension funds and mutual funds, represent individual workers andinvestors, they have a responsibility to see that the firm is managed in an efficient andethical way.1-6.Insider trading occurs when someone has information that is not available to the publicand then uses the information to profit from trading in a company’s common stock. Theprovincial securities commissions are responsible for protecting against insider trading.1-7.Regulations set the “rules of the game” in which the firm operates.Shareholder wealthmaximization can and should still be sought within the rules,for economicefficiency tobe achieved. Society judges deregulationbenefitsagainst the costs of regulation.1-8.Management operateswithin a competitivemarketand they should be paidtheiropportunity cost. If managers do not act to maximize shareholder wealth, share priceswill become depressed. To the extent manager’s compensation is tied to share priceperformance, shareholders can fire managers, and there exists a market for corporatecontrol, management will be compensated based on their economic contribution.

Loading page image...

Chapter1Foundations of Fin. Mgt.10CeBlock, Hirt,Danielsen,Short, Perretta1-21-9.Daily functions-cash management, inventory control, receipt and disbursement of funds.Occasional-shareissue, bond issue, capital budgeting and dividend decisions.1-10.Thereisunlimitedliabilityforthesoleproprietorshipandpartnershipformsofownership. Under the limited partnership, only the general partner(s) has unlimitedliability, with limited partners obligated only to the extent of their initial contribution.Finally,allshareholdersinacorporationhavelimitedliability,althoughowner/shareholders of small businesses often have to give banks their personalguarantees.1-11.The corporate form is best suited to large organizations because of the easy divisibility ofownership through issuance of shares. Also, the corporation has continued existenceindependent of any shareholder.1-12.Money markets refer to those markets dealing with short-term securities that have a lifeof one year or less. Capitalmarkets refer to securities with a life of more than one year.1-13.A primary market refers to the use of the financial markets to raise new funds. After thesecurities are sold to the public (institutions and individuals), they trade in the secondarymarket between investors. It is in the secondary market that prices are continuallychanging as investors buy and sell securities based on the expectations of corporateprospects.A liquid secondary market promotes a successful primary market.1-14.Government debt loads require financing. This puts large demands ($1 trillion inaccumulated federal and provincial debt in 2011) on the capital markets,putting upwardpressure on interest rates and a corporation’s ability to invest in capital projects. Whengovernments financetheir deficits abroadthey placeCanada’s economic levers outside ofour control and debt servicing payments can impact the foreign exchange markets.Asgovernment debt loads have been reducedin recent yearsthere has been less pressure oninterest rates, corporations have borrowed more, butthere have been less ‘risk free’government securities available (causing liquidity problemsparticularly in the moneymarkets).1-15.Stakeholdersinclude:shareholders,creditors,employees,unions,environmentalists,consumer groups, Canada Revenue Agency, government regulatory bodies, customers,managers and others.Internet Resources and Questions1.www.nobelprize.org2.www.fin.gc.ca3.www.bankofcanada.ca4.http://onex.com/Principles_and_Values.aspxhttp://www.rbc.com/aboutus/visionandvalues.html5.http://www.bce.ca/responsibility/corporateresponsibility

Loading page image...

Chapter1Foundations of Fin. Mgt.10CeBlock, Hirt,Danielsen,Short, Perretta1-3Problems1-1.Incubus Corporationa.Common stock(contributed capital)$40,000Retained earnings(deficit)(7,000)$33,000b.Common stock$40,000Retained earnings2,000$42,000c.Common stock$60,000Retained earnings8,000$68,0001-2.PuppetCorporationa.Commonstock$20,000Retained earnings2,000$22,000b.Common stock$20,000Retained earnings8,000$28,000c.Common stock$30,000Retained earnings10,500$40,5001-3.Two to Ten Dollar Corporation would be expected to have the highervaluation becausethe $10 per share dividend (although achieved later) is expected to be sustained for amuch longer periodof time. Buildingearnings for longer termsustainability is morevaluable than quick returns that peter out.

Loading page image...

Chapter1Foundations of Fin. Mgt.10CeBlock, Hirt,Danielsen,Short, Perretta1-41-4.Share value is a combination of expected earnings (or cash flow) and the risk inherent inthose cash flows. Although the financial institution reports lower earnings it is becauseof restructuring charges that lower reported earnings. Cash flows are notlikely to beeffected. Future earnings should be more reliable and therefore less risky than those ofthe new health services company. Therefore the market is likely to suggest a highervalue for the financial institution.1-5.Board of Directors Decisiona.A combination of high profit margins and strong consumer acceptance should bepositive for share value. However a new product introduces a high degree of risk thatwill mitigate higher share values.b.More detailed financial information for investors should increase their confidence in theactivities of the firm and lower the risk of their investment. This will be offset by thelikely increase costs of providing this information. In an environment of questionableethics by management this should be slightly positive to share value.c.Pollution control devices will increase firm costs. The local residents will view the firmmore positively which should have some positive cash flow effects as they may be morewilling to purchase the firm’s products and will decrease possible litigations orharassment. Overall it is likely to be a neutral or slightly negative effect on share value.d.Aligning management compensation motivators with shareholder goals should bepositive for share values with implemented. The effect however may be small.There is no correct answer. It depends on the tradeoff between risk, returns and costs.

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-1Discussion Questions2-1.The price-earnings ratio will be influenced by the earnings and sales growth of the firm,the risk or volatility in performance, the debt-equity structure of the firm, the dividendpayment policy, the quality of management,and a number of other factors.The ratiotends to be future-oriented, andwill be higherthe more positive theoutlook2-2.Book value per share is arrived at by taking the cost of the assets and subtracting outliabilities and preferred stock and dividing by the numberof common shares outstanding.It is based on thehistorical costs of the assets.Market value per share is based on currentassessed value of the firm in the marketplace and may bear little relationship to originalcost. Besides the disparity between book and market value caused by the historical costapproach, other contributing factors are the growth prospects for the firm, the quality ofmanagement, and the industry outlook.To the extent these are quite negative,or positive,market value may differ widely from book value.2-3.The only way amortization generates cash flows for the company is by serving as a taxshield against reported income. Allowable amortization for tax purposes is known ascapital cost allowance (CCA). In most instances this will be different than accountingamortization.This non-cash deduction may provide cash flow equal to the tax rate timesthe amortization charged.This much in taxes will be saved, while no cash paymentsoccur.2-4.Accumulated amortization is the sum of all past and present amortization charges, whileamortization expenseis the current year's charge.They are related in that the sum of allprior amortization expense should be equal to accumulated amortization (subject to somedifferential related to asset write-offs).2-5.The balancesheet, for private companiesusing ASPE,is based on historical costs.Whenpricesarerisingrapidly,historicalcostdatamaylosemuchoftheirmeaning-particularly for plant,equipment and inventory.However, the balance sheetof publiccompanies usingIFRS is based on market values and opposite order whereby non-currentassetsare listed ahead of current assets. The same applies to the liabilities section thatlists non-current liabilities first.2-6.The income statement and balance sheet are based on the accrual method of accounting,which attempts to match revenues and expenses in the period in which they occur.However, accrual accounting does not attempt to properly assess the cash flow positionof the firm.The statement of changes in financial position fulfills this need.The valueson these statements will differ for public companies using IFRScompared to privatefirms.2-7.The sections of the statementof cash flowsand sources of informationare:Cash flows from operating activities(Income statement)Cash flows from investing activities(non-current assets section of balance sheet)Cash flows from financing activities(non-current liabilities and equity section)

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-2The payment of cash dividends falls into the financing activities category.2-8.We can examine the various sources that were utilized by the firm as indicated on thestatement. Possible sources for the financing of an increase in assets might be profits,increases in liabilities, or decreases in other asset accounts.2-9.Free cash flow is equal to:Cashflow from operating activitiesMinus:Capital expenditures required to maintain the productive capacity of thefirm.Minus:Dividends (required to maintain the payout on common stock and to coverany preferred stockobligation).The analyst or banker normally looks at free cash flow to determine whether there aresufficient excess funds to pay back the loan associated with the leveraged buy-out(acompany with limited cash acquiring stocks of another company toacquirecontrol).2-10.Interest expense is a tax deductible item to the corporation, while dividend payments arenot. The net cost to the corporation of interest expense is the amount paid multiplied bythe difference of (one minus the applicable tax rate). The firm must bear the full burdenof thecash outflowof dividend paymentsbecause they are not an expense, but rather adistribution out of retained earnings.Internet Resources and Questions1.www.cica.ca,www.cpa.ca2.www.cma-canada.org3.www.cga-canada.org4.www.ifrs.org.5.www.kpmg.ca/taxi6.www.pwc.com/ca/tax7.www.cra-arc.gc.ca

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-3Problems(The following solutions use the2014tax ratesor rates givenin the text. The2013rates are also shown but subject to change).2-1.Bradley Bus Inc.a.Last YearEarnings after taxes$600,000Sharesoutstanding300,000Earnings per share($600,000/300,000 shares)$2.00b.Current YearEarnings after taxes ($600,000 × 125%)$750,000Shares outstanding (300,000 + 40,000)340,000Earnings per share($750,000/340,000 shares)$2.212-2.DoverRiver Companya.Operating profit (EBIT).........................$200,000Interest expense.................................10,000Earnings before taxes (EBT)..................190,000Taxes..................................................61,250Earnings after taxes (EAT)......................128,750Preferred dividends ...........................18,750Available to common shareholders........$110,000Commondividends............................$ 30,000Increase in retained earnings..................$ 80,000EPS=Earnings available to common shareholders/Number of shares of common stock outstanding= $110,000/20,000 shares=$5.50 per shareDividends per Share= $30,000/20,000 shares=$1.50 per shareb.Payout Ratio=Dividend per share/Earnings per share=1.50/5.50 per share=27.27%c.Increase in retained earnings=$80,000d.Price/earnings ratio= $26.40/ $5.50=4.8×

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-42-3.Far EastFast Foodsa.2014Earnings aftertaxes$230,000Shares outstanding200,000Earnings per share$1.15b.2015Earnings aftertaxes($230,000 × 125%)$287,500Shares outstanding230,000Earnings per share$1.252-4.Sheridan Travela.EPS =$600,000=$2.00 per share300,000b.New Net Income: $600,000 x 125% = $750,000Shares: 300,000 + 40,000 = 340,000 sharesNew EPS =$750,000=$2.21 per share340,000

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-52-5.Moore Enterprise/ Kipling CorporationMooreKiplingGross profit.........................$880,000$880,000Selling and adm. expense...120,000760,000120,000760,000Amortization.......................360,00060,000Operating profit..................400,000700,000Taxes (40%)........................160,000280,000Earnings after-taxes..............240,000420,000Plus:AmortizationExpense...360,00060,000Cash Flow...........................$600,000$480,000Moore had $300,000 more in amortization, which provided $120,000(0.40 × $300,000) more in cash flow. Moore paid0.40×300,000(difference in operating income) = $120,000 less taxes.

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-62-6.Yes,Aztec Book Company made a profit of $13,920 for theyear ended December 31,2015.AztecBook CompanyIncome StatementForthe Year ended December 31,2015Sales (1,400 books at $84each)....................................$117,600Cost of goods sold (1,400 books at $63each)..............88,200GrossProfit...............................................................29,400Selling expense..............................................................2,000Amortization expense....................................................5,000Operating profit.........................................................22,400Interest expense..............................................................5,000Earnings before taxes................................................17,400Taxes @20%.................................................................3,480Earnings aftertaxes....................................................$13,920

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-72-7.CarrAuto WholesalersIncome StatementFor the Year ended December 31, 2015a.Sales……………………………………………..$900,000Cost of goods sold@ 65%...................................585,000Gross profit…………………………………..315,000Selling and administration expense@ 9%.........81,000Amortization expense…………………………...10,000Operatingprofit………………………………224,000Interest expense………………………………….8,000Earnings before taxes…………………………216,000Taxes@ 30%........................................................64,800Earnings aftertaxes……………………………$151,200b.Sales……………………………………………..$1,000,000Cost of goods sold@ 60%....................................600,000Gross profit…………………………………...400,000Sellingand administration expense @ 12%.........120,000Amortization expense…………………….……..10,000Operating profit………………………………270,000Interest expense………………………………….15,000Earnings before taxes…………………………255,000Taxes @ 30%……………………………………76,500Earnings aftertaxes……………………………$ 178,500Ms. Hood’s idea will increase profitability.

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-82-8.IncomeStatementSalesCostof goods soldGross profitSelling and administrative expenseAmortization expenseOperating profitInterest expenseEarnings before taxesTaxesEarnings aftertaxesPreferred stock dividendsEarnings available tocommon shareholdersShares outstandingEarnings per share

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-92-9.David’s Magic Storesa.Operating profit(EBIT).........................$210,000Interest expense.................................30,000Earnings beforetaxes (EBT)..................180,000Taxes..................................................59,300Earnings aftertaxes (EAT)......................120,700Preferred dividends...........................24,700Available to common shareholders........$96,000Common dividends............................36,000Increase in retained earnings..................$60,000EPS=Earnings available to common shareholdersNumber of shares ofcommon stock outstanding=$96,000/16,000shares=$6.00per shareDividends per Share=$36,000/16,000 shares=$2.25per shareb.Payout ratio = $2.25/ $6.00 = .375 =37.5%c.Increase in retained earnings=$60,000d.Price/earnings ratio= $90/ $6.00=15.02-10.Thermo Dynamicsa.Retained earnings, December 31,2015.............$450,000Less: Retained earnings, December 31,2014....400,000Change in retainedearnings...............................50,000Add: Common stockdividends..........................25,000Earnings available to common shareholders......$ 75,000b.Earnings per share= $75,000/20,000 shares=$3.75per sharec.Payout ratio = $25,000/ $75,000 = .333 =33.33%d.Price/earnings ratio=$30.00/$3.75=8.0×

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-102-11.Brandon Fast Foods Inc.a.Operating Income–Taxes–Interest=Net income after taxes= $210,000–$59,300–$30,000 = $120,700Net income after taxes–Preferred dividends= Earnings availableto common shareholders=$120,700–$24,700 = $96,000EPS = $96,000/ 16,000 shares =$6EPSCommon Dividendsper Share = Div. paid /shares=$36,000/16,000 shares =$2.25 Dividend per Shareb.Increase in RE = Income–Dividends–PreferredDividend= $120,700–$36,000–$24,700 =$60,000.2-12.Balance Sheet ItemsCommon stock–noncurrentAccounts payable–currentPreferred stock–noncurrentPrepaid expenses–currentBonds payable–noncurrentInventory–currentInvestments–noncurrentMarketable securities–currentAccounts receivable–currentPlant and equipment–noncurrentAccrued wages payable–currentRetained earnings–noncurrent

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-112-13.Balance SheetAssetsCurrent AssetsCash...................................................$ 10,000Marketable securities.........................20,000Accounts receivable...........................$48,000Less: Allowance for bad debts......6,00042,000Inventory............................................66,000Total Current Assets.................138,000Other Assets:Investments........................................20,000Capital Assets:Plant and equipment..........................680,000Less: Accumulated amortization..300,000Net plant and equipment...................380,000Total Assets...........................................$538,000Liabilities and Shareholders' EquityCurrent Liabilities:Accounts payable..............................$35,000Notes payable....................................33,000Total current Liabilities................68,000Long-Term Liabilities............................Bonds payable...................................136,000Total Liabilities.............................204,000Shareholders' Equity:Preferred stock,1,000 shares outstanding…....50,000Common stock,100,000 shares outstanding....188,000Retained earnings.............................................96,000TotalShareholders' Equity...........................334,000Total Liabilities and Shareholders' Equity……....$538,000

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-122-14.Bengal Wood CompanyCurrent assets……………………..$100,000Capital assets………………………140,000Total assets………………………..240,000–Current liabilities…………….…..60,000–Long-term liabilities……………..90,000Shareholders’ equity………….……90,000–Preferred stock obligation………..20,000Net worth assigned to common……$ 70,000Common shares outstanding………17,500Book value (net worth) per share…$4.002-15.Monique’s Boutiquea.Total assets......................................$600,000–Current liabilities.........................150,000–Long-termliabilities....................120,000Shareholders' equity........................330,000–Preferred stock..............................75,000Networth assigned to common.......$255,000Common shares outstanding…............30,000Bookvalue (net worth) per share….....$8.50b.Earnings available to common.........$33,600Shares outstanding...........................30,000Earnings per share............................$1.12P/E ratio×earnings per share=price12 × $1.12=$13.44c.Market value per share(price) to book value per share$13.44/$8.50=1.58

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-132-16.Phelps Labsa.Total assets......................................$1,800,000–Current liabilities.........................595,000–Long-term liabilities....................630,000Shareholders'equity........................575,000–Preferred stock..............................165,000Net worth assigned to common.......$410,000Common sharesoutstanding…............20,000Book value (net worth) per share….....$20.50b.Earnings available to common.........$45,000Shares outstanding...........................20,000Earnings per share............................$2.25P/E ratio × earnings per share= price13×$2.25=$29.25c.Market value per share (price) to book value per share$29.25/$20.50=1.432-17.Phelps Labs(Continued)2 × book value= price2 × $20.5= $41.00P/E ratio= $41.00/$2.25=18.22

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-142-18.AppropriateFinancial Statement1.Balance Sheet (BS)2.Income Statement (IS)3.Current Assets (CA)4.Capital Assets (Cap A)5.Current Liabilities (CL)6.Long-Term Liabilities (LL)7.Shareholders Equity (SE)Indicate Whetherthe Item is onBalance SheetorIncome StatementIf the Item is onBalance Sheet,Designate WhichCategoryItemBSSERetained earningsISIncome tax expenseBSCAAccounts receivableBSSECommon stockBSLLBonds payable,maturity2022BSCLNotespayable (6 months)ISNet incomeISSelling andadministrativeexpensesBSCAInventoriesBSCLAccrued expensesBSCACashBSCapAPlant andequipmentISSalesISOperating expensesBSCAMarketable securitiesBSCLAccounts payableISInterest expenseBSCLIncome tax payable

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-152-19.Cash Flow ImpactIncrease in inventory--decreases cash flow (use)Decrease in prepaid expenses--increases cash flow (source)Decrease in accounts receivable--increases cash flow (source)Increase in cash--decreases cash flow (use)Decrease in inventory--increases cash flow (source)Dividend payment--decreases cash flow (use)Increase in short-term notes payable--increases cash flow (source)Amortization expense–does not affect cash flow(However in the cash flow statement it is added to net income todeterminecash provided by operations)Decrease in accounts payable--decreases cash flow (use)Increase in long-term investments--decreases cash flow (use)2-20.JupiterCorporation–SaturnCorporationJupiterSaturnGrossprofit.........................$700,000$700,000Selling and adm. expense...160,000160,000Amortization.......................240,000400,000Operating profit..................300,000140,000Taxes (40%)........................120,00056,000Earningsaftertaxes..............180,00084,000Plusamortization expense...240,000400,000Cash Flow...........................$420,000$484,000Saturn had $160,000 more in amortization, whichprovided$64,000(0.40×$160,000) more in cash flow.We observe that Saturn’s taxeswere less by: $120,000 ─ $56,000 = $64,000 (0.40 × $160,000).

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-162-21.LoofaCorporationa.Statementof Cash FlowsForthe Year Ended December 31,2015Operating activities:Net income (earnings aftertaxes)...............$54,610Add items not requiring an outlay of cash:Amortization.................................8,1908,190Cash flow fromoperations62,800Changes in non-cash working capital:Decrease in accounts receivable....5,460Increase in inventory.....................(16,385)Increase in accounts payable.........19,115Decrease in taxespayable...............(5,455)Net change in non-cash working capital....2,735Cash provided by operatingactivities........65,535Investing activities:Increase in plant and equipment...........(19,115)Cash used ininvesting activities................(19,115)Financing activities:Issueof common stock ........................16,385Common stock dividends paid.............(27,305)Cash used infinancing activities………...(10,920)Net increasein cash(equivalents)during the year..35,500Cash,beginning of year……….21,845Cash, end of year……………...$57,345b.Major accounts contributing topositivechange in cash positionare: net income,payables and common stock issuance. Negativechange comes frominventory,plant and equipmentand dividendspaid.

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-172-22.Waif Corporationa.Statement of Cash FlowsForthe Year Ended December 31,2015Operating activities:Net income (earnings aftertaxes)...............$ 91,000Add items not requiring an outlay of cash:Amortization.................................$22,00022,000Cash flow from operations113,000Changes in non-cash working capital:Increase in accounts receivable....(12,600)Decrease in inventory.....................7,100Decrease in accounts payable.........(10,000)Net change in non-cash working capital....(15,500)Cash provided by operatingactivities........97,500Investing activities:Increase in plant and equipment...........(48,000)Sale of land……………………………27,000Cash used ininvesting activities................(21,000)Financing activities:Retirement of bonds payable...............(40,000)Issue of common stock........................40,000Common stock dividends paid………(39,400)Cash used infinancing activities………...(39,400)Net increase in cash(equivalents)during the year37,100Cash, beginning of year……….17,400Cash, end of year……………...$54,500b.Major accounts contributing topositivechange in cash positionare: net income, amortization,sale of land and common stockissuance. Negative change fromplant and equipment,bondretirement, and dividendspaid.

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-182-23.MarisCorporationStatementof Cash FlowsForthe Year Ended December 31,2015Operating activities:Net income(earnings aftertaxes)................$250,000Add items not requiring an outlay of cash:Amortization..............................$ 230,000230,000Cash flow from operations480,000Increase in accounts receivable..(10,000)Increase in inventory..................(30,000)Decrease in prepaid expenses....30,000Increase in accounts payable.....250,000Decrease inaccrued expenses...(20,000)Net change in non-cash working capital.....220,000Cash provided byoperating activities.........700,000Investing activities:Decrease in investments.....................10,000Increase in plant and equipment.........(600,000)Cash used ininvesting activities................(590,000)Financing activities:Increase in bonds payable ..................60,000Preferred stock dividends paid...........(10,000)Common stock dividends paid...........(140,000)Cash used in financing activities………..(90,000)Net increase (decrease) in cash20,000Cash,at beginning of year100,000Cash,end of year$120,000

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-192-24.Maris Corporation (continued)Cash flow provided byoperating activities exceeds net income by$450,000.This occurs primarily becausewe add back amortization of$230,000 and accounts payable increasesby $250,000.Thus, the readerof the cash flow statement gets important insights as to how much cashflow was developed from daily operations.2-25.Maris Corporation (continued)The buildup in plant and equipment of$600,000 (gross) and $370,000(net) has been financed, in part, by the largeincrease in accountspayable ($250,000). This is nota very satisfactory situation.Short-termsources of funds can always dry up, while capital assetneeds arepermanent in nature.The firm may wish to consider more long-termfinancing, such as a mortgage, to go alongwith profits, the increase inbonds payable, and the add-back of amortization.2-26.Maris Corporation (continued)Book value=Shareholders'equity-Preferredstockper shareCommon sharesoutstandingBook value=($1,390,000-$90,000)=$1,300,000=$8.67per share150,000150,000(2014)Book value=($1,490,000-$90,000)=$1,400,000=$9.33per share150,000150,000(2015)2-27.Maris Corporation (continued)Market value=2.8×$9.33=$26.12P/E ratio=$26.12/$1.60=16.33or16x

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-202-28.WinfieldCorporationStatementof Cash FlowsDecember 31,2015Operating activities:Net income(earnings aftertaxes)...............$ 14,000Add items not requiring an outlay of cash:Amortization (buildings).....$10,500Gain on sale of investment……..(5,250)Loss on sale of equipment...........1,0506,300Cash flow fromoperations:20,300Changes in non-cash working capital:Increase inaccountsreceivable...(2,450)Increase in inventory...................(5,250)Increase in prepaid expenses.......(175)Decrease in accounts payable.....(1,750)Increase inaccrued expenses......1,925Decrease ininterest payable........(175)Net change in non-cash working capital......(7,875)Cash provided byoperating activities…......12,425Investing activities:Proceeds fromthe sale ofstock............8,750Proceeds from the sale of equipment....2,450Purchase of equipment..........................(15,750)Cash usedin investing activities…………..(4,550)Financing activities:Payment towardsnotes payable............(6,125)Increase in bonds payable.....................5,250Common stock dividends paid..............(6,650)Cash provided byfinancing activities…………..(7,525)Net increasein cash350Cash,beginning of year1,400Cash, end of year$1,750

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-212-29.GardnerCorporationa.Income StatementFor the Year Ending December 31,2015Sales……………………………………………..$220,000Cost of goods sold @ 60%...................................132,000Grossprofit…………………………………..88,000Selling and administration expense…………......22,000Amortization expense…………………………...20,000Operating profit………………………………46,000Interest expense(1)……………………………..6,000Earnings beforetaxes…………………………40,000Taxes @ 18%........................................................7,200Earnings aftertaxes……………………………$32,800(1)Interest expense = (10% × $20,000 + 8% × $50,000) = $6,000b.GardnerCorporationBalance SheetDecember 31,2015Cash$ 10,000Accounts payable$ 15,000Accounts receivable16,500Notes payable26,000Inventory27,500Bonds payable40,000Prepaid expenses12,000Current assets66,000Current liabilities81,000Capital assets:Shareholders’ equity:Plant andEquipment285,000Common stock75,000less: acc. amortization70,000Retained earnings125,000Net plant & equipment215,000Total assets$281,000Total liabilities & equity$281,000Acc. Amortization = $50,000 + $20,000 = $70,000Retained Earnings = $105,000 + $20,000 = $125,000

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-22c.GardnerCorporationStatement of Cash FlowsForthe Year Ended December 31,2015Operating activities:Net income (earningsaftertaxes)................$32,800Add items not requiring an outlay of cash:Amortization..............................$20,00020,000Cash flow from operations52,800Increase in accounts receivable..(1,500)Increase in inventory..................(2,500)Increase in accounts payable.....3,000Increase innotes payable*…….6,000Net change in non-cash working capital.....5,000Cash provided by operating activities.........57,800Investing activities:Increase in plant and equipment.........(35,000)Cash used in investingactivities................(35,000)Financing activities:Decrease in bonds payable..................(10,000)Common stock dividends paid...........(12,800)Cash used in financing activities………..(22,800)Net increase (decrease) in cash0Cash, at beginning of year10,000Cash, end of year$10,000* Note: There is a healthy debate as to whether notes payable (trade related) shouldbe included in operating or financing activities.d.Major accounts contributing topositivechange incash positionare: net income and amortization. Negative change is fromplantand equipment, bonds payable and dividends paid.

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-232-30.Ron’s AerobicsLtd.a.2014Net income$68,000Taxes @16.5%11,220Income aftertaxes$56,7802015Netincome$142,000Taxes @13%(Text)18,460Income aftertaxes$123,540Note: Manitoba2014tax rate wasactuallychanged tonil%onlower rate and 12%upper rate. Federal corp.low rate 11%b.The averagetax rate is14.75%.(basedon various assumptions).2-31.Inland FisheriesCorpa.Cash flow from operating activities$6.00million-Capital expenditures2.00-Common share dividends0.75-Preferred share dividends0.35Free cash flow$2.90millionb.Free cash flowrepresents the funds that are available for specialfinancial activities, such astheacquisition of another firmespecially when it is a leveraged buyout.

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-242-32.NixCorporationIncome StatementSales...............................................................$485,000Cost of goods sold.........................................205,000Gross Profit...................................................280,000Selling and administrative expense...............70,000Amortization expense....................................60,000Operating profit.............................................150,000Interest expense.............................................25,000Earnings before taxes....................................125,000Taxes @14.5%(Given).........................................18,125Earnings aftertaxes.........................................$106,875Note: The B.C.2013 combinedtax rate ischanged to13.5%2-33.NixCorporation (Continued)Tax savings on amortization= $60,000 ×14.5%=$8,7002-34.R.E. Forms Ltd.AlbertaNet income$75,000Taxes @14%10,500Income aftertaxes$64,500OntarioNet income$75,000Taxes @16.5%12,375Income aftertaxes$62,625(2013rate changed to 15.5%)

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-252-35.J.B. Wandsa.Investment(bonds)$14,000Bond interest @ 6.0%x $14,000 =$840.00Marginal tax rate (Saskatchewan)35.00%Deduct:Combined taxes payable35% ×$840 =294.00Aftertax bond yield (return)$546.00Aftertax yield= return / investment x 100%=$546.00/ $14,000 × 100% =3.90%Investment(shares)$14,000Share dividend @ 5.0%x $14,000 =$700.00Marginal tax rate (Saskatchewan)17.5%Deduct:Combined taxes payable17.5%×$700=122.50Aftertaxdividendyield (return)$577.50Aftertax yield= return / investment x 100%=$577.50/ $14,000 × 100% =4.125%The dividend provides a slightly better aftertax yield (return).b.Bond interest is a fixed payment. Share dividends may not be paidand shares are subject to capital gains and losses. This makesthesharesriskier.The result illustrates the “risk–return tradeoff”.

Loading page image...

Chapter 2Foundations of Fin. Mgt. 10CeBlock, Hirt, Danielsen, Short, Perretta2-262-36.Billie FruitA.Top bracket(Investment of $20,000)Share dividend@ 7.0%x $20,000 =$1,400.00Marginal tax rate (Yukon)$1,400 x17.30%Deduct:Combined taxes payable242.20Aftertaxdividend yield (return)$1,157.80Aftertax yield= return / investment x 100%=Better:$1,157.80/$20,000×100%=5.79%Capital gain@ 7.0%x $20,000 =$1,400.00Marginal tax rate (Yukon)$1,400 x21.20%Deduct:Combined taxes payable296.80Aftertax bond yield (return)$1,103.20Aftertax yield= return / investment x 100%$1,103.20/$20,000×100%=5.52%B.Middle bracket($35,000 to $55,280)Share dividend@ 7.0%$1,400.00Marginal tax rate (Yukon)4.4%Combined taxes payable(4.4 x $1,400)61.60Aftertax dividend yield(return)$1,338.40Aftertax yieldBetter:$1,338.40/$20,000×100%=6.69%Capital gain@ 7.0%$1,400.00Marginal tax rate (Yukon)14.40%Combined taxes payable201.60Aftertax yield (return)$1,198.40Aftertax yield$1,198.40/$20,000×100%=5.99%

Preview Mode

This document has 697 pages. Sign in to access the full document!

Report

Study Now!

Document Details

Related Documents

Foundations of Financial Management 16th Edition Solution Manual

Foundations Of Financial Management, Tenth Canadian Edition Solution Manual

Texas Life and Health Insurance Exam 150 Questions

Understanding Obligation and Deobligation in Resou

Budgeting for Life After High School

Ch 4 les 1

Understanding Credit Reports Analyzing John's Fina

Financial Planning and Budget Analysis

Financial Research Report

WACC Project Verizon Communication Inc

Company

Explore

Study Tools