FINANCIAL STATEMENTS, CASH FLOW, AND TAXES Laiho Industries' 2013 and 2014 balance sheets (in thousands of dollars) are shown.
2014 | 2013 | |
Cash | $102,850 | $ 89,725 |
Accounts receivable | 103,365 | 85,527 |
Inventories | 38,444 | 34,982 |
Total current assets | $244,659 | $210,234 |
Net fixed assets | 67,165 | 42,436 |
Total assets | $311,824 | $252,670 |
Accounts payable | $ 30,761 | $ 23,109 |
Accruals | 30,477 | 22.656 |
Notes payable | 16,717 | 14,217 |
Total current liabilities | $ 77,955 | $ 59,982 |
long term debt | 76,264 | 63,914 |
Total liabilities | $154,219 | $123,896 |
Common stock | 100,000 | 90,000 |
57,605 | 38,774 | |
Total common equity | $157,605 | $128,774 |
Total liabilities and equity | $311,824 | $252,670 |
- a. Sales for 2014 were $455,150,000, and EBITDA was 15% of sales. Furthermore,
depreciation and amortization were 11% of net fixed assets, interest was $8,575,000, the corporate tax rate was 40%, and Laiho pays 40% of its net income as dividends. Given this information, construct the firm's 2014 income statement. - b. Construct the statement of stockholders' equity for the year ending December 31,2014, and the 2014 statement of cash flows.
- c. Calculate 2013 and 2014 net operating working capital (NOWC) and 2014
free cash flow (FCF). - d. If Laiho increased its dividend payout ratio, what effect would this have on corporate taxes paid? What effect would this have on taxes paid by the company's shareholders?
- e. Assume that the firm's after-tax cost of capital is 105%. What is the firm's 2014 EVA?
- f. Assume that the firm's stock price is $22 per share and that at year-end 2014 the firm has 10 million shares outstanding. What is the firm's MVA at year-end 2014?
a.
To prepare: The income statement of L Industries.
Income statement:
This is a financial statement that shows the net income earned or net loss suffered by a company through reporting all the revenues earned and expenses incurred by the company over a specific period of time.
Retained earnings statement:
This is a financial statement that shows the amount of net income retained by a company at a particular point of time for reinvestment and to pay its debts and obligations. It shows the amount of retained earnings that is not paid as dividends to the shareholders.
Balance sheet:
This is a financial statement that shows the available assets (owner’s equity and outsider’s equity) and owed liabilities from investing and financial activities of a company. This statement reveals the financial health of company.
Statement of cash flows:
This is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It determines the net changes in cash through reporting the sources and uses of cash due to operating, investing, and financial activities of a company.
Explanation of Solution
Prepare the income statement as shown below.
L Industries Income Statement For the year ended 2014 | |
Particulars | Amounts ($) |
Sales | 455,150,000 |
Less: Operating cost | 386,877,500 |
EBITDA | 68,272,500 |
Less: Depreciation and amortization | 7,388,150 |
EBIT | 60,884,350 |
Less: Interests | 8,575,000 |
EBT | 52,309,350 |
Less: Tax | 20,923,740 |
Net income | 31,385,610 |
Table 1
Hence, the net income of L Industries is $31,385,610.
b.
To prepare: The stockholders’ equity and the cash flow statement of L Industries.
Explanation of Solution
Prepare the stockholders’ equity statement as shown below.
L Industries Stockholders’ equity statement For the year ended 2015 | ||
Particulars | Amounts ($) | Amounts ($) |
Common stock | $1,000,000,000 | |
Retained earnings, 2014 | 38,774,000 | |
Add: Net income | 31,385,610 | |
$70,159,610 | ||
Less: Dividends | $12,554,244 | |
Retained earnings, 2015 | $57,605,366 | |
Total stockholders’ equity | $1, 057,605,366 |
Table 2
Prepare the statement of the cash flow as shown below.
L Industries Cash flow statement For the year ended 2015 | ||
Particulars | Amount ($) | Amount ($) |
Cash flow from operating activities | ||
Net income | 31,385,244 | |
Adjustments | ||
Depreciation and amortization | 7,3 88,150 | |
Increase in receivables | -17,838,000 | |
Increase in inventory | -3,462,000 | |
Increase in payables | 7,652,000 | |
Increase in accruals | 7,821,000 | |
Increase in notes payable | 2,500,000 |
4,061,150 |
Net cash flow from operating activities (a) | 35,446,394 | |
Cash flow from investing activities | ||
Purchase of net fixed assets |
-32,117,150 | |
Net cash flow from investing activities (b) |
-32,117,150 | |
Cash flow from financing activities | ||
Proceeds from long term debt | 12,350,000 | |
Issue of common stock | 10,000,000 | |
Dividend paid | -12,554,244 | |
Net cash flow from financing activities (c) | 9,795,756 | |
Net increase in cash and cash equivalents (a + b + c) | 13,125,000 | |
Add: Cash and cash equivalents at the beginning of the period | 89,725,000 | |
Cash and cash equivalents at the end of the period | 102,850,000 |
Table 3
Hence, the stockholders’ equity and the cash flow statement are prepared as above.
c.
To determine: The net operating working capital for the year 2014 and 2015 and the free cash flow of L industries.
Explanation of Solution
Compute the net operating working capital as shown below.
Particulars | 2015 | 2014 |
Cash | 102,850,000 | 89,725,000 |
Accounts receivable | 103,365,000 | 85,527,000 |
Inventories | 38,444,000 | 34,982,000 |
Total current operating assets (a) | 244,659,000 | 210,234,000 |
Accounts payable | 30,761,000 | 23,109,000 |
Accrued expense | 30,477,000 | 22,656,000 |
Total current operating liabilities (b) | 61,238,000 | 45,765,000 |
Net operating working capital (a) - (b) | 183,421,000 | 164,469,000 |
Table 4
Compute the free cash flow as shown below.
Particulars | Amounts ($) | Amounts ($) |
EBIT after tax | 36,530,610 | |
Add: Depreciation and amortization | 7,388,150 | |
Less: Change in working capital | ||
Increase in receivables | -17,838,000 | |
Increase in inventory | -3,462,000 | |
Increase in payables | 7,652,000 | |
Increase in accruals | 7,821,000 | |
Increase in notes payable | 2,500,000 | 3,327,000 |
Less: Capital expense | 32,117,150 | |
Free cash flow | 8,474,610 |
Table 5
Hence, the net operating working capital for the year 2014 and 2015 and the free cash flow of L Industries is calculated as above.
d.
To determine: The effect on corporate taxes and the taxes paid by shareholders of the company, on increasing the dividend payout ratio.
Explanation of Solution
On increasing the dividend payout ratio, the corporate taxes would not be affected. It is so because the company did not pay any tax on the dividend distributed to the shareholders. It can be concluded from the income statement that tax is computed on the net income before deducting the dividend paid. Therefore, there is no impact on the corporate tax.
Yes, there would be an impact on the tax paid by the shareholders. The increase in payout ratio will increase the earnings of the shareholder. Therefore, the shareholders’ taxes will increase with the increase in payout ratio.
Hence, there is no impact on the corporate tax and the shareholder taxes will increase with the increase in payout ratio.
e.
To determine: The EVA of the L Industries.
Explanation of Solution
Calculate the EVA as shown below:
Hence, the EVA is $11,974.
f.
To determine: The MVA of the L Industries.
Explanation of Solution
Calculate the MVA as shown below:
Hence, the MVA is $219,842,395.
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Chapter 3 Solutions
Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
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