BUSI 530
CHAPTER 3 HOMEWORK- CONNECT
Homework: Accounting and Finance Assignment
22out of/22 Total points awarded
1. Construct a balance sheet for Sophie's Sofas given the following data,
including shareholders' equity.
Cash balances = $ 11,500
Inventory of
sofas = $215,000
Store and
property = $115,000
Accounts
receivable = $ 23,500
Accounts payable = $ 18,500
Long-term debt = $185,000
BALANCE SHEET OF SOPHIE'S SOFAS
Assets Liabilities & Shareholders' Equity
Cashselected answer
correct
$11,500selected
answer correct
Accounts payableselected
answer correct
$18,500selected
answer correct
Accounts receivableselected
answer correct
23,500selected
answer correct
Long-term debtselected
answer correct
185,000selected
answer correct
Inventoryselected answer
correct
215,000selected
answer correct
Shareholders'
equityselected answer
correct
161,500selected
answer correct
Store and propertyselected
answer correct
115,000selected
answer correct not attempted not attempted
not attempted not attempted not attempted not attempted
Total assets $365,000 Total liabilities &
shareholders' equity $365,000
2. A firm’s income statement included the following data. The firm’s
average tax rate was 20%.
Cost of goods sold $9,800
Income taxes paid $3,800
Administrative
expenses $4,800
Interest expense $2,800
Depreciation $2,800
a. What was the firm’s net income?
Net
income
$15,200selected
answer correct
b. What must have been the firm's revenues?
Revenues $39,200selected
answer correct
c. What was EBIT?
EBIT $21,800
Explanation
a.
If the firm paid income taxes of $3,800 and the average tax rate was 20%, then taxable
income must have been: $3,800 / 0.20 = $19,000.
Therefore: Net income = Taxable income − Taxes = $15,200
b.
Revenues $ ???
Cost of goods sold − 9,800
Administrative expenses − 4,800
Depreciation expense − 2,800
Interest expense − 2,800
Taxable income $19,000 [from part (a)]
We conclude that revenues were $39,200.
c.
Revenues $39,200
Cost of goods sold − 9,800
Administrative expenses − 4,800
Depreciation expense − 2,800
EBIT $21,800
3. The year-end 2018 balance sheet of Brandex Inc. listed common stock
and other paid-in capital at $2,800,000 and retained earnings at
$5,100,000. The next year, retained earnings were listed at $5,400,000.
The firm’s net income in 2019 was $1,070,000. There were no stock
repurchases during the year. What were the dividends paid by the firm
in 2019?
Dividends paid $770,000
Explanation
Net income = Increase in retained earnings + Dividends$1,070,000 = ($5,400,000 − $5,100,000)
+ Dividends ⇒⇒ Dividends = $770,000
4. South Sea Baubles has the following (incomplete) balance sheet and
income statement.
BALANCE SHEET AT END OF YEAR
(Figures in $ millions)
Assets 2018 2019
Liabilities and Shareholders'
Equity 2018 2019
Current assets $ 96 $170 Current liabilities $ 62 $ 78
Net fixed assets 860 960 Long-term debt 630 810
INCOME STATEMENT, 2019
(Figures in $ millions)
Revenue $1,980
Cost of goods sold 1,060
Depreciation 380
Interest expense 246
a&b. What is shareholders’ equity in 2018 and 2019?
c&d. What is net working capital in 2018 and 2019?
e. What are taxes paid in 2019? Assume the firm pays taxes equal to 21% of
taxable income.
f. What is cash provided by operations during 2019?
g. Net fixed assets increased from $860 million to $960 million during 2019.
What must have been South Sea’s gross investment in fixed assets during
2019?
A & B
2018 2019
Shareholders' equity $264selected answer correct million $242selected answer correct million
C & D
2018 2019
Net working
capital
$34selected answer
correct million $92selected answer
correct million
E
Taxes
paid
$61.74selected answer
correct million
F
Cash provided by
operations
$554.26selected answer
correct million
G
Gross
investment
$480selected answer
correct million
5. The founder of Alchemy Products Inc. discovered a way to turn gold into
lead and patented this new technology. He then formed a corporation
and invested $1,800,000 in setting up a production plant. He believes
that he could sell his patent for $48 million.
a. What is the book value of the firm? (Enter your answer in dollars
not in millions.)
b. What is the market value of the firm? (Enter your answer in dollars not in
millions.)
c. If there are two million shares of stock in the new corporation, what would
be the book value per share? (Round your answer to 2 decimal
places.)
d. If there are two million shares of stock in the new corporation, what would
be the price per share? (Round your answer to 2 decimal places.)
a. Book value $1,800,000selected answer correct
b. Market value $49,800,000selected answer correct
c. Book value per share $0.90selected answer correct
d. Price per share $24.90
Explanation
a.
Book value equals the $1,800,000 the founder of the firm has contributed in tangible
assets.
b.
Market value equals the value of his patent plus the value of the production plant:
$48,000,000 + $1,800,000 = $49,800,000.
c.
Book value per share = $1,800,000 / 2,000,000 shares = $0.90
d.
Price per share = $49,800,000.0 / 2,000,000 shares = $24.90
6. Butterfly Tractors had $20.00 million in sales last year. Cost of goods
sold was $9.20 million, depreciation expense was $3.20 million, interest
payment on outstanding debt was $2.20 million, and the firm’s tax rate
was 21%.
a. What was the firm’s net income? (Enter your answers in millions
rounded to 2 decimal places.)
b. What was the firm’s cash flow? (Enter your answers in millions
rounded to 2 decimal places.)
c. What would happen to net income and cash flow if depreciation were
increased by $2.20 million? (Enter your numeric answers in
millions rounded to 2 decimal places. Select "unaffected" if
the results do not affect the balance.)
f. What would be the impact on cash flow if depreciation was $2.20 million
and interest expense was $3.20 million? (Enter your numeric answer
in millions rounded to 2 decimal places. Select "unaffected"
if the results do not affect the balance.)
Net income $4.27selected answer correct million
a.
b. Net cash flow $7.47selected answer correct million
c. Net income would be decreasedselected answer correct by $1.74selected answer correct million
Cash flow would be increasedselected answer correct by $0.46selected answer correct million
f. Cash flow would be decreasedselected answer correct by $1.00selected answer correct million
Explanation
a.
($ in millions)
Sales $20.00
Cost of goods sold 9.20
Interest expense 2.20
Depreciation expense 3.20
Taxable income $ 5.40
Taxes (21%) 1.13
Net income $ 4.27
b.
Net cash flow = net income + depreciation expense = $7.47 million
c.
If depreciation expense were increased by $2.20 million, net income would be reduced by $1.74
million. Cash flow (= net income + depreciation) would be increased by − $1.74 million + $2.20
million = $0.46 million.
Cash flow increases because depreciation expense is not a cash outflow, but increasing the
depreciation expense for tax purposes reduces taxes paid by $0.46 million.
f.
If interest expense was $1.00 million higher and the depreciation was $1.00 million lower, the
taxes will be the same, but the drop in depreciation would cause a decrease in cash flow by $1.00
million.
7. Sheryl’s Shipping had sales last year of $19,000. The cost of goods sold
was $8,300, general and administrative expenses were $2,800, interest
expenses were $2,300, and depreciation was $2,800. The firm’s tax rate
is 21%.
a. What are earnings before interest and taxes?
Earnings before interest
and taxes
$5,100selected answer
correct
b. What is net income?
Net
income
$2,212selected
answer correct
c. What is cash flow from operations?
Cash flow from
operations
$5,012selected answer
correct
Explanation
a. & b.
Sales $19,000
Cost of goods sold 8,300
General & administrative expenses 2,800
Depreciation expense 2,800
EBIT $ 5,100
Interest expense 2,300
Taxable income $ 2,800
Taxes (21%) 588
Net income $ 2,212
c.
Cash flow from operations = net income + depreciation expense = $5,012
8. During the last year of operations, Theta’s accounts receivable
increased by $26,000, accounts payable increased by $13,000, and
inventories decreased by $3,000. What is the total impact of these
changes on the difference between profits and cash flow?
Total
impact
decreasedselected
answer correct by $10,000selected
answer correct
Explanation
An increase in accounts receivable reduces cash flow by $26,000. An increase in accounts
payable increases cash flow by $13,000. A decrease in inventory increases cash flow by $3,000.
The total impact is a reduction in cash flow by $10,000.
The following table shows an abbreviated income statement and balance
sheet for Quick Burger Corporation for 2019.
INCOME STATEMENT OF QUICK BURGER CORP., 2019
(Figures in $ millions)
Net sales $27,572
Costs 17,574
Depreciation 1,407
Earnings before interest and taxes (EBIT)$ 8,591
Interest expense 522
Pretax income 8,069
Federal taxes (@ 21%) 1,694
Net income $ 6,375
BALANCE SHEET OF QUICK BURGER CORP., 2019
(Figures in $ millions)
Assets 2019
2018
Liabilities and
Shareholders'
Equity 2019
2018
Current
assets Current
liabilities
Cash and
marketable
securities
$ 2,341 $ 2,341 Debt due for
repayment — $ 382
Receivables 1,380 1,340 Accounts
payable $ 3,408 3,148
Inventories 127 122 Total current
liabilities $ 3,408 $ 3,530
Other
current
assets
1,094 621
Total
current assets$ 4,942 $ 4,424
Fixed assets Long-term debt $13,638 $12,139
Property,
plant, and
equipment
$24,682 $22,840
Other long-
term
liabilities
3,062 2,962
Intangible
assets
(goodwill)
2,809 2,658 Total
liabilities $20,108 $18,631
Other long-
term assets 2,988 3,104
Total
shareholders’
equity
15,313 14,395
Total assets$35,421 $33,026
Total
liabilities
and
shareholders’
equity
$35,421 $33,026
In 2019 Quick Burger had capital expenditures of $3,054.
a. Calculate Quick Burger’s free cash flow in 2019. (Enter your answer
in millions.)
Free cash
flow
$4,992selected answer
correct million
b. If Quick Burger was financed entirely by equity, how much more tax would
the company have paid? (Assume a tax rate of 21%.) (Do not round
intermediate calculations. Enter your answer in millions
rounded to 2 decimal places.)
Additional
tax
$109.62selected
answer correct million
c. What would the company’s free cash flow have been if it was all-equity
financed? (Enter your answer in millions.)
Free cash
flow
$4,882selected answer
correct
Explanation
a.
Cash flow from operations = net income + interest + depreciation − additions to net
working capital
Free cash flow = cash flow from operations − capital expenditures
Additions to net working capital = ($3,408 − 3,148) − ($1,380 − 1,340) − ($127 − 122)
− ($1,094 − 621) = $258
Cash flow from operations = $6,375 + 522 + 1,407 − 258 = $8,046
Capital expenditures = $3,054
Free cash flow = $8,046 − 3,054 = $4,992
b.
Tax increase due to $522 million more in taxable income $109.62 = (522 × 0.21)
c.
Additions to net working capital = ($3,408 − 3,148) − ($1,380 − 1,340) − ($127 − 122)
− ($1,094 − 621) = $258
Cash flow from operations = $6,787 + 0 + 1,407 − 258 = $7,936
Free cash flow = 7,936 − 3,054 = 4,882
9. Use Table 3.6. (Do not round intermediate calculations.
Enter the average tax rate as a percent rounded to 1
decimal place.)
a. What would be the marginal tax rate for a married couple with income of
$89,700?
b. What would be the average tax rate for a married couple with income of
$89,700?
c. What would be the marginal tax rate for an unmarried taxpayer with income
of $89,700?
d. What would be the average tax rate for an unmarried taxpayer with income
of $89,700?
a. Marginal tax rate for a married couple 22.0selected answer
correct %
b. Average tax rate for a married couple 13.0selected answer %
correct
c. Marginal tax rate for an unmarried
taxpayer
24.0selected answer
correct %
d. Average tax rate for an unmarried
taxpayer
17.6selected answer
correct %
Explanation
a.
For a married couple, the marginal tax rate on $89,700 of income is 22%.
b.
Taxes = ($19,050 × 0.10) + (($77,400 – 19,050) × 0.12) + (($89,700 – 77,400) × 0.22)
= $11,613.00
The average tax rate = $11,613.00 / $89,700 = 12.95%
c.
For a single person, the marginal tax rate on $89,700 of income is also 24%.
d.
Taxes = ($9,525 × 0.10) + (($38,700 – 9,525) × 0.12) + (($82,500 – 38,700) × 0.22) +
(($89,700 − 82,500) × 0.24) = $15,817.50
The average tax rate = $15,817.50 / $89,700 = 17.63%
