Finance Chapter 3 Exercises

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Financial Statements. Earlier in the chapter, we characterized the balance sheet as providing a snapshot of the firm at one point in time and the income statement as providing a video. What did we mean by this? Is the statement of cash flow more like a snapshot or a video?

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The balance sheet shows the position of the firm at onepoint in time. It shows the amounts ofassets and liabilities at that particular time. In this sense it is like a snapshot. The income statement shows the effect of business activities over theentire year. Since it captures eventsover an extended period, it is more like a video. The statement of cash flow is like the incomestatement in that it summarizes activity over the full year, so it too is likea video.

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Balance Sheet/Income Statement. The year-end 2013 balance sheet of Brandex Inc. listed common stock and other paid-in capital at $1,100,000 and retained earnings at $3,400,000. The next year, retained earnings were listed at $3,700,000. The firm's net income in 2014 was $900,000. There were no stock repurchases during the year. What were the dividends paid by the firm in 2014?

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Net income = increase in retained earnings + dividends

$900,000 = ($3,700,000 -$3,400,000) + dividends ==> dividends = $600,000

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Accounting revenues and expenses can differ fromcash flows because some items included in the computation of revenues andexpenses do not entail immediate cash flows. For example, sales made on credit are considered revenue even thoughcash is not collected until the customer makes a payment. Also, depreciation expense reduces netincome, but does not entail a cash outflow. Conversely, some cash flows are not included in revenues or expenses. For example, collection of accountsreceivable results in a cash inflow but is not revenue. Purchases of inventory require cash outlaysbut are treated as investments in working capital, not as expensesind=vR(9

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Working capital ought to be increasing. The firm will be building up stocks ofinventory as it ramps up production. Inaddition, as sales increase, accounts receivable will increase rapidly. While accounts payable will probably alsoincrease, the increase in accounts receivable will tend to dominate since salesprices exceed input costs

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18. Cash flow from operations can be positive even if net income is negative. For example, if depreciation expenses are large, then negative net income might correspond to positive cash flow because depreciation is treated as an expense in calculating net income but does not represent a cash outflow. Conversely, if net income is positive, but a large portion of sales are made on credit, cash flow can be negative since the sales are revenue but do not yet generate cash.

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19. An increase in accounts receivable reduces cash flow by $10,000. An increase in accounts payable increases cash flow by $5,000. A decrease in inventory increases cash flow by $2,000. The total impact is a reduction in cash flow by $3,000.

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23. The free cash flow is listed as $6,117 million. Total cash distributed to shareholders was $5,727 million. Of this, $1,743 was paid as a dividend and $3,984 was paid to shareholders to repurchase stock. The Statement of Cash Flows shows $507 million was added to cash reserves. The numbers do not add up because Home Depot had many other transactions which impacted the cash flows of the company.

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Working Capital. What was the change in net working capital during the year?

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Working Capital. What was the change in net working capital during the year?

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Earnings per Share. Suppose that Fincorp has 500,000 shares outstanding. What were earnings per share?

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Earnings per share in 2013 = $850,000/500,000 shares = $1.70

Earnings per share in 2014 = $760,000/500,000 shares = $1.52

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Earnings per Share. Suppose that Fincorp has 500,000 shares outstanding. What were earnings per share?

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Net fixed assets increased by $800,000 during 2014, while depreciation expense in 2014 was $520,000. Therefore, gross investment in plant and equipment was $1,320,000.

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Earnings per Share. Suppose that Fincorp has 500,000 shares outstanding. What were earnings per share?

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Earnings per Share. Suppose that Fincorp has 500,000 shares outstanding. What were earnings per share?

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Tax Rates.

a. What was the firm's average tax bracket for each year?

b. Do you have enough information to determine the marginal tax bracket?

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