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The assets of Dallas & Associates consist entirely of current assets and net plant and equipment. The firm has total assets of \$2.5 million and net plant and equipment equals \$2 million. It has notes payable of \$150,000, long-term debt of \$750,000 and total common equity of \$1.5 million. The firm does have accounts payable and accruals on its balance sheet. The firm only finances with debt and

common equity, so it has no preferred stock on its balance sheet.

• a. What is the amount of total liabilities and equity that appears on the firm's

balance sheet?

• b. What is the balance of current assets on the firm's balance sheet?

• c. What is the balance of current liabilities on the firm's balance sheet?

• d. What is the amount of accounts payable and accruals on its balance sheet?

(Hint: Consider this as a single line item on the firm's balance sheet).

• e. What is the firm's net working capital?

• f. What is the firm's net operating capital?

• g. What is the explanation for the difference in your answers to parts e and f?

• a. See balance sheet on separate document. We are given that the firm's total assets equal \$2,500,000.

Since both sides of the balance sheet must equal, total liabilities and equity must equal total assets =

\$2,500,000.

• b. Total assets = Current assets + Net plant and equipment

2500000= CA + 2000000

CA= \$500000

• c. Total liabilities and equity= Current liabilities + Long-term debt + Total common equity

\$2,500,000= Current liabilities + \$750,000 + \$1,500,000 Current liabilities= \$250,000.

• d. Current liabilities= Accounts payable and accruals + Notes payable

\$250,000= Accounts payable and accruals + \$150,000 Accounts payable and accruals= \$100,000.

• e. Net working capital = Current assets - Current liabilities = \$500,000 - \$250,000= \$250,000

• f. Net operating working capital = Current assets - (Current liabilities - Notes payable) = \$500,000 - (\$250,000 - \$150,000)= \$400000

• g. NOWC - NWC = \$400,000 - \$250,000= \$150,000.

The difference between the two is equal to the notes payable balance.

Little Books Inc. recently reported \$3 million of net income. Its EBIT was \$6 million, and its tax rate was 40%. What was its interest expense?

EBT= NI / .6 = 3/.6=5 EBT= EBIT- Interest

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5= 6- I I= \$1 million

Pearson Brothers recently reported an EBITDA of 7.5 million and net income of 1.8 million. It had \$2.0 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization?

(EBITDA - Depreciation)= NI / (1 - Tax Rate) = 1.8 / (1 - .4)= 3 (EBITDA- Depreciation)= EBITDA - Depreciation - Interest 3= 7.5- D - 2 D= \$2.5 million

Henderson Industries has \$500 million of common equity on its balance sheet. The company's current stock price is \$60 per share, and its Market Value Added (MVA) is \$130 million. HOW MANY SHARES OF THE COMPANY'S STOCK ARE CURRENTLY OUTSTANDING?

MVA= P0* # common of shares - BV of equity 130= 60x - 500 x= 10500 common shares

Computer World inc. paid out \$22.5 million in total common dividends and reported \$278.9 million of retained earnings at year-end. The prior year's retained earnings were \$212.3 million. What was the net income? Assume that all dividends declared actually paid.

Ending RE= Beginning RE + NI - Dividends 278.9= 212.3 + NI - 22.5 NI= \$89.1 million

Bailey Corporation's financial statements (dollars and shares are in millions) are provided here. See page 88 for BS & IS.

• a. What was the net operating capital for 2010 and 2011?

• b. What was Bailey's 2011 cash flow?

• c. Construct Bailey's 2011 statement of stockholder's equity.

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• d. What was Bailey's 2011 EVA? Assume that its weighted average cost of capital

is 10%.

• a. NOWC2010= Total CA - (Current liabilities - Notes payable) = \$59,000 - (\$20,150 - \$5,150)= \$44000 NOWC2011= \$72,125 - (\$25,100 - \$6,700)= \$53725

• b. CE= PE2011-PE2010+Depreciation

= 50000 -47000+5000=8000 FCF2011= [EBIT(1 - T) + Deprec.] - [Capital expenditures + NOWC change] = [\$39,000(1 - 0.4) + \$5,000] - [\$8,000 + \$9,725]=\$10,675

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