FIN 510 - Homework Week 1

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Liberty University *

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510

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Finance

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Feb 20, 2024

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FIN 510 - Week 1 Homework An Overview of Financial Management and the Financial Environment: Forms of Business Organization The basic concepts of financial management are the same for all businesses, regardless of how they are organized. However, a firm's legal structure affects its operations. The main forms of business organizations are: (1) proprietorships, (2) partnerships, (3) corporations, and (4) limited liability companies (LLCs) and limited liability partnerships (LLPs). In terms of numbers, most businesses are [ proprietorships C ] @ However, based on the dollar value of sales, most business is done by [ corporations ) @ Businesses are frequently started as | proprietorships = @ and then converted to [ corporations c] @ when their growth results in disadvantages outweighing advantages. subject to lower income taxes than are @ However, a proprietorship also has three important limitations: (1) A proprietor has @ personal liability for the business' debts. (2) The life of the business is limited to the life of the individual who created it. (3) A proprietorship has difficulty obtaining large sums of capital so proprietorships are used primarily for small businesses. A partnership has two important advantages: (1) It is easily and inexpensively formed and (2) its income is allocated on a pro rata basis to partners and taxed on a(n) @ basis so the partnership avoids higher @ income taxes. A partnership has four important disadvantages: (1) @ personal liability, (2) ) life, (3) difficulty of transferring ownership, and (4) difficulty of raising large amounts of capital. liability, and (4) can @ raise large amounts of capital to operate large businesses. Its disadvantages are: (1) Corporate earnings may be subject to @ taxation and (2) setting up a corporation and filing required state and federal reports, which is more complex and time-consuming. Large corporations are known as C corporations. However, as an aid to small businesses Congress created S corporations. @. Investors in an LLC or LLP have votes in proportion to their ownership interest. LLCs and LLPs have been gaining in popularity, but large companies still find it advantageoustobe (¢ 4] @ corporations because of advantages in raising capital for growth. e — E=] eBook Statement of Retained Earnings In its most recent financial statements, Del-Castillo Inc. reported $60 million of net income and $910 million of retained earnings. The previous retained earnings were $875 million. How much in dividends did the firm pay to shareholders during the year? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. $ | 25,000,000 @ Free Cash Flow (FCF) Carter Swimming Pools has $18 million in net operating profit after taxes (NOPAT) in the current year. Carter has $12 million in total net operating assets in the current year and had $9 million in the previous year. What is its free cash flow? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. $ | 15,000,000 @

Corporate Tax Liability The Talley Corporation had taxable operating income of $385,000 (i.e., earnings from operating revenues minus all operating costs). Talley also had (1) interest charges of $60,000, (2) dividends received of $15,000, and (3) dividends paid of $20,000. Its federal tax rate was 21% (ignore any possible state corporate taxes). Recall that 50% of dividends received are tax exempt. What is the firm’s taxable income? Round your answer to the nearest dollar. $ 332,500 @ What is the tax expense? Round your answers to the nearest dollar. $ 69,825 @ What is the after-tax income? Round your answers to the nearest dollar. $ 270,175 @ The Wendt Corporation reported $35 million of taxable income. Its federal tax rate was 21% (ignore any possible state corporate taxes). a. What is the company's federal income tax bill for the year? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. $ | 7,350,000 @ b. Assume the firm receives an additional $3 million of interest income from some bonds it owns. What is the additional tax on this interest income? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. $ 630,000 @ c. Now assume that Wendt does not receive the interest income but does receive an additional $3 million as dividends on some stock it owns. Recall that 50% of dividends received are tax exempt. What is the additional tax on this dividend income? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. $ 315,000 @

Sales $12,000 $11,000 Operating costs excluding depreciation 10,508 9,628 Depreciation and amortization 420 380 Earnings before interest and taxes $ 1,072 $ 992 Less interest 180 100 Pre-tax income $ 892 $ 892 Taxes (25%) 223 223 Net income available to common stockholders $ 669 $ 669 Common dividends $ 202 $ 200 Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars) 2020 2019 Assets Cash $ 550 $ 500 Short-term investments 230 200 Accounts receivable 2,750 2,500 Inventories 1,550 1,400 Total current assets $5,080 $4,600 Net plant and equipment 3,850 3,500 Total assets $8,930 $8,100 Liabilities and Equity Accounts payable $1,100 $1,000 Accruals 550 500 Notes payable 188 100 Total current liabilities $1,838 $1,600 Long-term debt 1,100 1,000 Total liabilities $2,938 2,600 Common stock 4,625 4,600 Retained earnings 1,367 900 Total common equity $5,992 $5,500 Total liabilities and equity $8,930 $8,100 Suppose the federal-plus-state tax corporate tax is 25%. Answer the following questions.

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. What is the net operating profit after taxes (NOPAT) for 2020? Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answer to the nearest whole number. $ 804 @ million . What are the amounts of net operating working capital for both years? Enter your answers in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answers to the nearest whole number. 2020: $ 3200 @ million 2019: $ 2900 @ million . What are the amounts of total net operating capital for both years? Enter your answers in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answers to the nearest whole number. 2020: $ 7050 @ million 2019: $ 6400 @ million . What is the free cash flow for 2020? Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Cash outflow, if any, should be indicated by a minus sign. Round your answer to the nearest whole number. $ 154 @ million . What is the ROIC for 2020? Round your answer to two decimal places. 11.4 @ % . How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) Enter your answers in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answers to the nearest whole number. After-tax interest payment $ 135 @ million Reduction (increase) in debt $ -188 @ million Payment of dividends $ 202 @ million Repurchase (Issue) stock $ 25 @ million Purchase (Sale) of short-term investments $ 30 @ million