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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

FREE CASH FLOW Arlington Corporation's financial statements (dollars and shares are in millions) are provided here.

Balance Sheets as of December 31

  2018 2017
Assets    
Cash and equivalents $ 15,000 $ 14,000
Accounts receivable 35,000 30,000
Inventories 33,320 27,000
Total current assets $83,320 $71,000
Net plant and equipment 48,000 46,000
Total assets $131,320 $117,000
Liabilities and Equity    
Accounts payable $ 10,100 $ 9,000
Accruals 8,000 6,000
Notes payable 7,000 5,050
Total current liabilities $ 25,100 $ 20,050
Long term bonds 20,000 $20,000
Total liabilities $45,100 $ 40,050
Common stock(4,000 shares) 40,000 40,000
Retained earnings 46,220 36,950
Common equity $ 86,220 $ 76,950
Total liabilities and equity $ 131,320 $ 117,000

Income Statement for Year Ending December 31, 2018

Sales $ 210,000
Operating cost excluding depreciation and amortization 160,00
EBITDA $ 50,000
Depreciation and amortization 6000
EBIT $ 44,000
interest 5,350
EBT 5,38,650
Taxes (40%) 15,460
Net income $ 23,190
Dividends paid $13,920
  1. a. What was net operating working capital for 2017 and 2018? Assume that all cash is excess cash; i.e., this cash is not needed for operating purposes.
  2. b. What was .Arlington’s 2018 free cash flow?
  3. c. Construct Arlington’s 2018 statement of stockholders’ equity.
  4. d. What was Arlington’s 2018 EVA? Assume that its after tax cost of capital is 10%.
  5. e. What was Arlington’s MVA at year-end 2018? Assume that its stock price at December 31, 2018? Was $25.

a.

Summary Introduction

To compute: The net operating working capital of Company A.

Financial Statements:

A part of annual report that is attributed to the financials aspects of the company for an accounting period is called financial statements. These include balance sheet, statement of retained earnings, income statement, and cash flow statement.

Net Operating Working Capital:

The difference of current assets and current liabilities is called as the working capital. When only accounts payable and accruals are considered instead of total current liabilities, the difference is called as the net operating working capital.

Explanation

Given information (for 2017)

Cash and equivalents is $14,000.

Note payable is $5,050.

Current assets are $71,000.

Current liabilities is $20,050.

Formula to compute operating current assets is as follows:

operating current assets=Total current assetsCash and equivalents

Compute operating current assets is as follows:

operating current assets=Total current assetsCash and equivalents=$71,000$14,000=$57,000

Hence, the operating current asset is $57,000.

Formula to compute operating current liabilities is as follows:

operating current liabilities=Total current libilitiesNotes payable

Compute operating current liabilities is as follows:

operating current liabilities=Total current libilitiesNotes payable=$20,050$5,050=$15,000

Hence, the operating current liabilities is $15,000.

Formula to compute net operating working capital is as follows:

Net operating working capital(2017)=Operating current assetsOperting current liabilities

Compute net operating working capital is as follows:

Net operating working capital(2017)=Operating current assetsOperting current liabilities=$57,000$15,000=$42,000

Hence, the net operating working capital for 2017 is $42,000

b.

Summary Introduction

To compute: The free cash flow in 2018 for Company A.

Free Cash Flow: The cash generated over and above required by the business operations and capital expenditure known as free cash flow. Statement of cash flow reports the cash flow generated or consumed by the business.

c.

Summary Introduction

To prepare: The statement of stockholders’ equity of Company A for 2018.

Statement of Stockholders’ Equity: Statement of stockholders’ equity shows the opening and closing balance of stockholder’s equity with the changes occurred during the accounting period.

d.

Summary Introduction

To compute: The economic value added for Company A for 2018.

Economic Value Added (EVA): It is a measure along with market value added to evaluate the management’s performance. It considers the opportunity costs of capital invested in the business and the net operating profit generated by the business.

e.

Summary Introduction

To compute: The market value added for Company A for the year 2018.

Market Value Added: The measure to evaluate management’s performance in a company’s operations and growth, market value added considers the market value of company’s outstanding shares. It reports the market value over and above the book value of those outstanding shares.

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