End of Chapter SolutionsEssentials of Corporate Finance 6th editionRoss, Westerfield, and JordanUpdated 08-01-2007
CHAPTER 1INTRODUCTION TO CORPORATEFINANCEAnswers to Concepts Review and Critical Thinking Questions1.Capital budgeting (deciding on whether to expand a manufacturing plant), capital structure(deciding whether to issue new equity and use the proceeds to retire outstanding debt), and workingcapital management (modifying the firm’s credit collection policy with its customers).2.Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raisecapital funds. Some advantages: simpler, less regulation, the owners are also the managers,sometimes personal tax rates are better than corporate tax rates.3.The primary disadvantage of the corporate form is the double taxation to shareholders of distributedearnings and dividends. Some advantages include: limited liability, ease of transferability, ability toraise capital, and unlimited life.4.The treasurer’s office and the controller’s office are the two primary organizational groups thatreport directly to the chief financial officer. The controller’s office handles cost and financialaccounting, tax management, and management information systems. The treasurer’s office isresponsible for cash and credit management, capital budgeting, and financial planning. Therefore,the study of corporate finance is concentrated within the functions of the treasurer’s office.5.To maximize the current market value (share price) of the equity of the firm (whether it’s publiclytraded or not).6.In the corporate form of ownership, the shareholders are the owners of the firm. The shareholderselect the directors of the corporation, who in turn appoint the firm’s management. This separation ofownership from control in the corporate form of organization is what causes agency problems toexist. Management may act in its own or someone else’s best interests, rather than those of theshareholders. If such events occur, they may contradict the goal of maximizing the share price of theequity of the firm.7.A primary market transaction.8.In auction markets like the NYSE, brokers and agents meet at a physical location (the exchange) tobuy and sell their assets. Dealer markets like Nasdaq represent dealers operating in
CHAPTER 2 B-3dispersed locales who buy and sell assets themselves, usually communicating with other dealerselectronically or literally over the counter.9.Since such organizations frequently pursue social or political missions, many different goals areconceivable. One goal that is often cited is revenue minimization; i.e., providing their goods andservices to society at the lowest possible cost. Another approach might be to observe that even a notfor-profit business has equity. Thus, an appropriate goal would be to maximize the value of theequity.10. An argument can be made either way. At one extreme, we could argue that in a market economy, allof these things are priced. This implies an optimal level of ethical and/or illegal behavior and theframework of stock valuation explicitly includes these. At the other extreme, we could argue thatthese are non-economic phenomena and are best handled through the political process. Thefollowing is a classic (and highly relevant) thought question that illustrates this debate: “A firm hasestimated that the cost of improving the safety of one of its products is 30 million. However, thefirm believes that improving the safety of the product will only save 20 million in product liabilityclaims. What should the firm do?”11. The goal will be the same, but the best course of action toward that goal may require adjustmentsdue different social, political, and economic climates.12. The goal of management should be to maximize the share price for the current shareholders. Ifmanagement believes that it can improve the profitability of the firm so that the share price willexceed 35, then they should fight the offer from the outside company. If management believes thatthis bidder or other unidentified bidders will actually pay more than 35 per share to acquire thecompany, then they should still fight the offer. However, if the current management cannot increasethe value of the firm beyond the bid price, and no other higher bids come in, then management is notacting in the interests of the shareholders by fighting the offer. Since current managers often losetheir jobs when the corporation is acquired, poorly monitored managers have an incentive to fightcorporate takeovers in situations such as this.13. We would expect agency problems to be less severe in other countries, primarily due to therelatively small percentage of individual ownership. Fewer individual owners should reduce thenumber of diverse opinions concerning corporate goals. The high percentage of institutionalownership might lead to a higher degree of agreement between owners and managers on decisionsconcerning risky projects. In addition, institutions may be able to implement more effectivemonitoring mechanisms than can individual owners, given an institutions’ deeper resources andexperiences with their own management. The increase in institutional ownership of stock in theUnited States and the growing activism of these large shareholder groups may lead to a reduction inagency problems for U.S. corporations and a more efficient market for corporate control.
SOLUTIONS B-414. How much is too much? Who is worth more, Steve Jobs or Tiger Woods? The simplest answer isthat there is a market for executives just as there is for all types of labor. Executive compensation isthe price that clears the market. The same is true for athletes and performers. Having said that, oneaspect of executive compensation deserves comment. A primary reason executive compensation hasgrown so dramatically is that companies have increasingly moved to stock-based compensation.Such movement is obviously consistent with the attempt to better align stockholder and managementinterests. In recent years, stock prices have soared, so management has cleaned up. It is sometimesargued that much of this reward is simply due to rising stock prices in general, not managerialperformance. Perhaps in the future, executive compensation will be designed to reward onlydifferential performance, i.e., stock price increases in excess of general market increases.15. The biggest reason that a company would “go dark” is because of the increased audit costsassociated with Sarbanes-Oxley compliance. A company should always do a cost-benefit analysis,and it may be the case that the costs of complying with Sarbox outweigh the benefits. Of course, thecompany could always be trying to hide financial issues of the company! This is also one of thecosts of going dark: Investors surely believe that some companies are going dark to avoid theincreased scrutiny from SarbOx. This taints other companies that go dark just to avoid compliancecosts. This is similar to the lemon problem with used automobiles: Buyers tend to underpay becausethey know a certain percentage of used cars are lemons. So, investors will tend to pay less for thecompany stock than they otherwise would. It is important to note that even if the company delists,its stock is still likely traded, but on the over-the-counter market pink sheets rather than on anorganized exchange. This adds another cost since the stock is likely to be less liquid now. All elsethe same, investors pay less for an asset with less liquidity. Overall, the cost to the company is likelya reduced market value. Whether delisting is good or bad for investors depends on the individualcircumstances of the company. It is also important to remember that there are already many smallcompanies that file only limited financial information already.
CHAPTER 2WORKING WITH FINANCIALSTATEMENTSAnswers to Concepts Review and Critical Thinking Questions1.Liquidity measures how quickly and easily an asset can be converted to cash without significant lossin value. It’s desirable for firms to have high liquidity so that they can more safely meet short-termcreditor demands. However, liquidity also has an opportunity cost. Firms generally reap higherreturns by investing in illiquid, productive assets. It’s up to the firm’s financial management staff tofind a reasonable compromise between these opposing needs.2.The recognition and matching principles in financial accounting call for revenues, and the costsassociated with producing those revenues, to be “booked” when the revenue process is essentiallycomplete, not necessarily when the cash is collected or bills are paid. Note that this way is notnecessarily correct; it’s the way accountants have chosen to do it.3.Historical costs can be objectively and precisely measured, whereas market values can be difficultto estimate, and different analysts would come up with different numbers. Thus, there is a tradeoffbetween relevance (market values) and objectivity (book values).4.Depreciation is a non-cash deduction that reflects adjustments made in asset book values inaccordance with the matching principle in financial accounting. Interest expense is a cash outlay,but it’s a financing cost, not an operating cost.5.Market values can never be negative. Imagine a share of stock selling for – 20. This would meanthat if you placed an order for 100 shares, you would get the stock along with a check for 2,000.How many shares do you want to buy? More generally, because of corporate and individualbankruptcy laws, net worth for a person or a corporation cannot be negative, implying that liabilitiescannot exceed assets in market value.6.For a successful company that is rapidly expanding, capital outlays would typically be large,possibly leading to negative cash flow from assets. In general, what matters is whether the money isspent wisely, not whether cash flow from assets is positive or negative.7.It’s probably not a good sign for an established company, but it would be fairly ordinary for a startup, so it depends.8.For example, if a company were to become more efficient in inventory management, the amount ofinventory needed would decline. The same might be true if it becomes better at collecting itsreceivables. In general, anything that leads to a decline in ending NWC relative to beginning NWCwould have this effect. Negative net capital spending would mean more long-lived assets wereliquidated than purchased.
SOLUTIONS B-69.If a company raises more money from selling stock than it pays in dividends in a particular period,its cash flow to stockholders will be negative. If a company borrows more than it pays in interest, itscash flow to creditors will be negative.10. The adjustments discussed were purely accounting changes; they had no cash flow or market valueconsequences unless the new accounting information caused stockholders to revalue the company.11. The legal system thought it was fraud. Mr. Sullivan disregarded GAAP procedures, which isfraudulent. That fraudulent activity is unethical goes without saying.12. By reclassifying costs as assets, it lowered costs when the lines were leased. This increased the netincome for the company. It probably increased most future net income amounts, although not asmuch as you might think. Since the telephone lines were fixed assets, they would have beendepreciated in the future. This depreciation would reduce the effect of expensing the telephonelines. The cash flows of the firm would basically be unaffected no matter what the accountingtreatment of the telephone lines.Solutions to Questions and ProblemsNOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiplesteps. Due to space and readability constraints, when these intermediate steps are included in thissolutions manual, rounding may appear to have occurred. However, the final answer for each problem isfound without rounding during any step in the problem.Basic1.The balance sheet for the company will look like this:Current assetsNet fixed assetsTotal assetsBalance sheet 1,850Current liabilities8,600Long-term debtOwner's equity 10,450Total liabilities & Equity 1,6006,1002,750 10,450The owner’s equity is a plug variable. We know that total assets must equal total liabilities &owner’s equity. Total liabilities and equity is the sum of all debt and equity, so if we subtract debtfrom total liabilities and owner’s equity, the remainder must be the equity balance, so:
CHAPTER 2 B-7Owner’s equity Total liabilities & equity – Current liabilities – Long-term debtOwner’s equity 10,450 – 1,600 – 6,100Owner’s equity 2,750Net working capital is current assets minus current liabilities, so:NWC Current assets – Current liabilitiesNWC 1,850 – 1,600NWC 2502.The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtractout interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get:Income StatementSalesCostsDepreciationEBITInterestTaxable incomeTaxesNet income3. 625,000260,00079,000 286,00043,000 243,00085,050 157,950The dividends paid plus addition to retained earnings must equal net income, so:Net income Dividends Addition to retained earningsAddition to retained earnings 157,950 – 60,000Addition to retained earnings 97,9504.Earnings per share is the net income divided by the shares outstanding, so:EPS Net income / Shares outstandingEPS 157,950 / 40,000EPS 3.95 per shareAnd dividends per share are the total dividends paid divided by the shares outstanding, so:DPS Dividends / Shares outstandingDPS 60,000 / 40,000DPS 1.50 per share5.To find the book value of assets, we first need to find the book value of current assets. We are giventhe NWC. NWC is the difference between current assets and current liabilities, so we can use thisrelationship to find the book value of current assets. Doing so, we find:NWC Current assets – Current liabilitiesCurrent assets 100,000 780,000 880,000
SOLUTIONS B-8Now we can construct the book value of assets. Doing so, we get:Book value of assetsCurrent assets 880,000Fixed assets4,800,000Total assets 5,680,000All of the information necessary to calculate the market value of assets is given, so:Market value of assetsCurrent assets 805,000Fixed assets5,600,000Total assets 6,405,0006.Using Table 2.3, we can see the marginal tax schedule. The first 25,000 of income is taxed at 15percent, the next 50,000 is taxed at 25 percent, the next 25,000 is taxed at 34 percent, and the next 215,000 is taxed at 39 percent. So, the total taxes for the company will be:Taxes 0.15( 50,000) 0.25( 25,000) 0.34( 25,000) 0.39( 315,000 – 100,000)Taxes 106,1007.The average tax rate is the total taxes paid divided by net income, so:Average tax rate Total tax / Net incomeAverage tax rate 106,100 / 315,000Average tax rate .3368 or 33.68%The marginal tax rate is the tax rate on the next dollar of income. The company has net income of 315,000 and the 39 percent tax bracket is applicable to a net income of 335,000, so the marginaltax rate is 39 percent.8.To calculate the OCF, we first need to construct an income statement. The income statement startswith revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxableincome, and then subtract taxes to arrive at net income. Doing so, we get:Income StatementSalesCostsDepreciationEBITInterestTaxable incomeTaxes (35%)Net income 16,5505,9301,940 8,6801,460 7,2202,527 4,693
CHAPTER 2 B-9Now we can calculate the OCF, which is:OCF EBIT Depreciation – TaxesOCF 8,680 1,940 – 2,527OCF 8,0939.Net capital spending is the increase in fixed assets, plus depreciation. Using this relationship, wefind:Net capital spending NFAend – NFAbeg DepreciationNet capital spending 2,120,000 – 1,875,000 220,000Net capital spending 465,00010. The change in net working capital is the end of period net working capital minus the beginning ofperiod net working capital, so:Change in NWC NWCend – NWCbegChange in NWC (CAend – CLend) – (CAbeg – CLbeg)Change in NWC ( 910 – 335) – (840 – 320)Change in NWC 5511. The cash flow to creditors is the interest paid, minus any new borrowing, so:Cash flow to creditors Interest paid – Net new borrowingCash flow to creditors Interest paid – (LTDend – LTDbeg)Cash flow to creditors 49,000 – ( 1,800,000 – 1,650,000)Cash flow to creditors – 101,00012. The cash flow to stockholders is the dividends paid minus any new equity raised. So, the cash flowto stockholders is: (Note that APIS is the additional paid-in surplus.)Cash flow to stockholders Dividends paid – Net new equityCash flow to stockholders Dividends paid – (Commonend APISend) – (Commonbeg APISbeg)Cash flow to stockholders 70,000 – [( 160,000 3,200,000) – ( 150,000 2,900,000)]Cash flow to stockholders – 240,00013. We know that cash flow from assets is equal to cash flow to creditors plus cash flow tostockholders. So, cash flow from assets is:Cash flow from assets Cash flow to creditors Cash flow to stockholdersCash flow from assets – 101,000 – 240,000Cash flow from assets – 341,000
SOLUTIONS B-10We also know that cash flow from assets is equal to the operating cash flow minus the change in networking capital and the net capital spending. We can use this relationship to find the operating cashflow. Doing so, we find:Cash flow from assets OCF – Change in NWC – Net capital spending– 341,000 OCF – (– 135,000) – (760,000)OCF – 341,000 – 135,000 760,000OCF 284,000Intermediate14. a. To calculate the OCF, we first need to construct an income statement. The income statementstarts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to gettaxable income, and then subtract taxes to arrive at net income. Doing so, we get:Income StatementSales 138,000Costs71,500Other Expenses4,100Depreciation10,100EBIT 52,300Interest7,900Taxable income 44,400Taxes17,760Net income 26,640DividendsAddition to retained earnings 5,40021,240Dividends paid plus addition to retained earnings must equal net income, so:Net income Dividends Addition to retained earningsAddition to retained earnings 26,640 – 5,400Addition to retained earnings 21,240So, the operating cash flow is:OCF EBIT Depreciation – TaxesOCF 52,300 10,100 – 17,760OCF 44,640b. The cash flow to creditors is the interest paid, minus any new borrowing. Since the companyredeemed long-term debt, the new borrowing is negative. So, the cash flow to creditors is:Cash flow to creditors Interest paid – Net new borrowingCash flow to creditors 7,900 – (– 3,800)Cash flow to creditors 11,700
CHAPTER 2 B-11c. The cash flow to stockholders is the dividends paid minus any new equity. So, the cash flow tostockholders is:Cash flow to stockholders Dividends paid – Net new equityCash flow to stockholders 5,400 – 2,500Cash flow to stockholders 2,900d. In this case, to find the addition to NWC, we need to find the cash flow from assets. We can thenuse the cash flow from assets equation to find the change in NWC. We know that cash flow fromassets is equal to cash flow to creditors plus cash flow to stockholders. So, cash flow from assetsis:Cash flow from assets Cash flow to creditors Cash flow to stockholdersCash flow from assets 11,700 2,900Cash flow from assets 14,600Net capital spending is equal to depreciation plus the increase in fixed assets, so:Net capital spending Depreciation Increase in fixed assetsNet capital spending 10,100 17,400Net capital spending 27,500Now we can use the cash flow from assets equation to find the change in NWC. Doing so, wefind:Cash flow from assets OCF – Change in NWC – Net capital spending 14,600 44,640 – Change in NWC – 27,500Change in NWC 2,54015. Here we need to work the income statement backward. Starting with net income, we know that netincome is:Net income Dividends Addition to retained earningsNet income 915 2,100Net income 3,015Net income is also the taxable income, minus the taxable income times the tax rate, or:Net income Taxable income – (Taxable income)(Tax rate)Net income Taxable income(1 – Tax rate)We can rearrange this equation and solve for the taxable income as:Taxable income Net income / (1 – Tax rate)Taxable income 3,015 / (1 – .40)Taxable income 5,025
SOLUTIONS B-12EBIT minus interest equals taxable income, so rearranging this relationship, we find:EBIT Taxable income InterestEBIT 5,025 1,360EBIT 6,385Now that we have the EBIT, we know that sales minus costs minus depreciation equals EBIT.Solving this equation for EBIT, we find:EBIT Sales – Costs – Depreciation 6,385 42,000 – 28,000 – DepreciationDepreciation 7,61516. We can fill in the balance sheet with the numbers we are given. The balance sheet will be:Balance SheetCashAccounts receivableInventoryCurrent assets 167,000241,000498,000 906,000Tangible net fixed assetsIntangible net fixed assets 4,700,000818,000Total assets 6,424,000Accounts payableNotes payableCurrent liabilitiesLong-term debtTotal liabilities 236,000176,000 412,000913,000 1,325,000Common stockAccumulated retained earningsTotal liabilities & owners’ equity?4,230,000 6,424,000Owners’ equity has to be total liabilities & equity minus accumulated retained earnings and totalliabilities, so:Owner’s equity Total liabilities & equity – Accumulated retained earnings – Total liabilitiesOwners’ equity 6,424,000 – 4,230,000 – 1,325,000Owners’ equity 869,00017. Owner’s equity is the maximum of total assets minus total liabilities, or zero. Although the bookvalue of owners’ equity can be negative, the market value of owners’ equity cannot be negative, so:Owners’ equity Max [(TA – TL), 0]a. If total assets are 8,700, the owners’ equity is:Owners’ equity Max[( 8,700 – 7,500),0]Owners’ equity 1,200b. If total assets are 6,900, the owners’ equity is:Owners’ equity Max[( 6,900 – 7,500),0]Owners’ equity 0
CHAPTER 2 B-1318. a. Using Table 2.3, we can see the marginal tax schedule. For Corporation Growth, the first 50,000 of income is taxed at 15 percent, the next 25,000 is taxed at 25 percent, and the next 25,000 is taxed at 34 percent. So, the total taxes for the company will be:TaxesGrowth 0.15( 50,000) 0.25( 25,000) 0.34( 8,000)TaxesGrowth 16,470For Corporation Income, the first 50,000 of income is taxed at 15 percent, the next 25,000 istaxed at 25 percent, the next 25,000 is taxed at 34 percent, the next 235,000 is taxed at 39percent, and the next 7,965,000 is taxed at 34 percent. So, the total taxes for the company willbe:TaxesIncome 0.15( 50,000) 0.25( 25,000) 0.34( 25,000) 0.39( 235,000) 0.34( 7,965,000)TaxesIncome 2,822,000b. The marginal tax rate is the tax rate on the next 1 of earnings. Each firm has a marginal tax rateof 34% on the next 10,000 of taxable income, despite their different average tax rates, so bothfirms will pay an additional 3,400 in taxes.19. a. The income statement starts with revenues and subtracts costs to arrive at EBIT. We thensubtract interest to get taxable income, and then subtract taxes to arrive at net income. Doing so,we get:Income StatementSales 2,700,000Cost of goods sold1,690,000Other expenses465,000Depreciation530,000EBIT 15,000Interest210,000Taxable income– 195,000Taxes (35%)0Net income– 195,000The taxes are zero since we are ignoring any carryback or carryforward provisions.b. The operating cash flow for the year was:OCF EBIT Depreciation – TaxesOCF 15,000 530,000 – 0OCF 545,000c. 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-cashexpense and interest is a financing, not an operating, expense.
SOLUTIONS B-1420. A firm can still pay out dividends if net income is negative; it just has to be sure there is sufficientcash flow to make the dividend payments. The assumptions made in the question are:Change in NWC Net capital spending Net new equity 0To find the new long-term debt, we first need to find the cash flow from assets. The cash flow fromassets is:Cash flow from assets OCF – Change in NWC – Net capital spendingCash flow from assets 545,000 – 0 – 0Cash flow from assets 545,000We can also find the cash flow to stockholders, which is:Cash flow to stockholders Dividends – Net new equityCash flow to stockholders 500,000 – 0Cash flow to stockholders 500,000Now we can use the cash flow from assets equation to find the cash flow to creditors. Doing so, weget:Cash flow from assets Cash flow to creditors Cash flow to stockholders 545,000 Cash flow to creditors 500,000Cash flow to creditors 45,000Now we can use the cash flow to creditors equation to find:Cash flow to creditors Interest – Net new long-term debt 45,000 210,000 – Net new long-term debtNet new long-term debt 165,00021. a. To calculate the OCF, we first need to construct an income statement. The income statementstarts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to gettaxable income, and then subtract taxes to arrive at net income. Doing so, we get:Income StatementSalesCost of goods soldDepreciationEBITInterestTaxable incomeTaxes (35%)Net income 18,45013,6102,420 2,420260 2,160756 1,404
CHAPTER 2 B-15b. The operating cash flow for the year was:OCF EBIT Depreciation – TaxesOCF 2,420 2,420 – 756 4,084c. To calculate the cash flow from assets, we also need the change in net working capital and netcapital spending. The change in net working capital was:Change in NWC NWCend – NWCbegChange in NWC (CAend – CLend) – (CAbeg – CLbeg)Change in NWC ( 4,690 – 2,720) – ( 3,020 – 2,260)Change in NWC 1,210And the net capital spending was:Net capital spending NFAend – NFAbeg DepreciationNet capital spending 12,700 – 12,100 2,420Net capital spending 3,020So, the cash flow from assets was:Cash flow from assets OCF – Change in NWC – Net capital spendingCash flow from assets 4,084 – 1,210 – 3,020Cash flow from assets – 146The cash flow from assets can be positive or negative, since it represents whether the firm raisedfunds or distributed funds on a net basis. In this problem, even though net income and OCF arepositive, the firm invested heavily in both fixed assets and net working capital; it had to raise anet 146 in funds from its stockholders and creditors to make these investments.d. The cash flow from creditors was:Cash flow to creditors Interest – Net new LTDCash flow to creditors 260 – 0Cash flow to creditors 260Rearranging the cash flow from assets equation, we can calculate the cash flow to stockholdersas:Cash flow from assets Cash flow to stockholders Cash flow to creditors– 146 Cash flow to stockholders 260Cash flow to stockholders – 406Now we can use the cash flow to stockholders equation to find the net new equity as:Cash flow to stockholders Dividends – Net new equity– 406 450 – Net new equityNet new equity 856
SOLUTIONS B-16The firm had positive earnings in an accounting sense (NI 0) and had positive cash flow fromoperations. The firm invested 1,210 in new net working capital and 3,020 in new fixed assets.The firm had to raise 146 from its stakeholders to support this new investment. It accomplishedthis by raising 856 in the form of new equity. After paying out 450 in the form of dividends toshareholders and 260 in the form of interest to creditors, 146 was left to just meet the firm’scash flow needs for investment.22. a. To calculate owners’ equity, we first need total liabilities and owners’ equity. From the balancesheet relationship we know that this is equal to total assets. We are given the necessaryinformation to calculate total assets. Total assets are current assets plus fixed assets, so:Total assets Current assets Fixed assets Total liabilities and owners’ equityFor 2007, we get:Total assets 2,050 9,504Total assets 11,554Now, we can solve for owners’ equity as:Total liabilities and owners’ equity Current liabilities Long-term debt Owners’ equity 11,554 885 5,184 Owners’ equityOwners’ equity 5,485For 2008, we get:Total assets 2,172 9,936Total assets 12,108Now we can solve for owners’ equity as:Total liabilities and owners’ equity Current liabilities Long-term debt Owners’ equity 12,108 1,301 6,048 Owners’ equityOwners’ equity 4,759b. The change in net working capital was:Change in NWC NWCend – NWCbegChange in NWC (CAend – CLend) – (CAbeg – CLbeg)Change in NWC ( 2,172 – 1,301) – ( 2,050 – 885)Change in NWC – 294c. To find the amount of fixed assets the company sold, we need to find the net capital spending,The net capital spending was:Net capital spending NFAend – NFAbeg DepreciationNet capital spending 9,936 – 9,504 2,590Net capital spending 3,022
CHAPTER 2 B-17To find the fixed assets sold, we can also calculate net capital spending as:Net capital spending Fixed assets bought – Fixed assets sold 3,022 4,320 – Fixed assets soldFixed assets sold 1,298To calculate the cash flow from assets, we first need to calculate the operating cash flow. For theoperating cash flow, we need the income statement. So, the income statement for the year is:Income StatementSalesCostsDepreciationEBITInterestTaxable incomeTaxes (35%)Net income 30,67015,3802,590 12,700480 12,2204,277 7,943Now we can calculate the operating cash flow which is:OCF EBIT Depreciation – TaxesOCF 12,700 2,590 – 4,277 11,013And the cash flow from assets is:Cash flow from assets OCF – Change in NWC – Net capital spending.Cash flow from assets 11,013 – (– 294) – 3,022Cash flow from assets 8,285d. To find the cash flow to creditors, we first