3-1 The assets of Dallas & Associates consist entirely of current assets and net

plant and equipment, and the firm has no excess cash. 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.

Total Assets = $2,500,000

Net Plant & Equipment = $2,000,000
Notes Payable = $150,000
Long-Term Debt = $750,000
Total Common Equity = $1,500,000

a. What is the company’s total debt?

Total Debt = short-term debt + long-term debt
Notes Payable = short-term debt
Total Debt = $150,000 + $750,000 = $900,000

b. What is the amount of total liabilities and equity that appears on the firm’s balance
sheet?
Total Assets = Total Liabilities + Total Equity
Total Liabilities & Equity = $2,500,000

c. What is the balance of current assets on the firm’s balance sheet?

Net plant & equipment = fixed (long-term) asset
Current Assets = Total Assets - Net plant & equipment
Current Assets = $2,500,000 - $2,000,000 = $500,000

d. What is the balance of current liabilities on the firm’s balance sheet?

Current Liabilities = Total Liabilities - Long-Term Debt
Total Liabilities = Total Liabilities and Equity ($2,500,000) - Equity ($1,500,000) =
$1,000,000
Current Liabilities = $1,000,000 - $750,000 = 250,000

e. 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.)
Current Liabilities [- Notes Payable] = Accounts Payable + Accruals + Notes
Payable[- Notes Payable]
Current Liabilities - Notes Payable = Accounts Payable and Accruals
$250,000 - $150,000 = $100,000 = Accounts Payable and Accruals

f. What is the firm’s net working capital?

Net Working Capital = current assets - current liabilities
Net Working Capital = $500,000 - $250,000 = $250,000

g. What is the firm’s net operating working capital?

Net Operating Working Capital (NOWC) = Current assets - (Current liabilities - Notes
payable)
NOWC = $500,000 - ($250,000 - $150,000) = $500,000 - $100,000 = $400,000

h. What is the explanation for the difference in your answers to parts f and g?
Even though both h and g ask you to solve for net working capital, h is asking you to
solve for net operating working capital. This means that questions g is asking you to
take into consideration interest-bearing notes liabilities, which incur interest expense
that is included as a financing cost. This additional cost results in h having a lower net
working capital of $250,000. With g, we see that with "free", or non-interest-bearing,
current liabilities the networking operational capital is much higher at $400,000.

3-2 Byron Books Inc. recently reported $13 million of net income. Its EBIT was
$20.8 million, and its tax rate was 35%. What was its interest expense? (Hint:
Write out the headings for an income statement and fill in the known values.
Then divide $13 million of net income by (1 2T) 5 0.65 to find the pretax income.
The difference between EBIT and taxable income must be interest expense. Use
this same procedure to complete similar problems.)
EBT (Earnings Before Tax) = Net income/(1−Tax
rate)=$13,000,000/(1-0.35)
= $20,000,000

EBIT + Interest Expense = EBT

Interest Expense = EBIT - EBT = $20,800,000 - $20,000,000 = $800,000

3-3 Patterson Brothers recently reported an EBITDA of $7.5 million and net income
of $2.1 million. It had $2.0 million of interest expense, and its corporate tax rate was
30%. What was its charge for depreciation and amortization?
EBT (Earnings Before Tax) = Net income/(1 - Tax rate)=$2,100,000/(1-0.3)
= $3,000,000
3-4 In its most recent financial statements, Nessler Inc. reported $75 million of
net income and $825 million of retained earnings. The previous retained earnings
were $784 million. How much in dividends were paid to shareholders during the
year? Assume that all dividends declared were actually paid.
Dividend = Opening retained earnings + Net income - Ending retained earnings
= $784 million + $75 million - $825 million
= $34 million

3-5 Harper Industries has $900 million of common equity on its balance sheet, its
stock price is $80 per share, and its market value added (MVA) is $50 million.
How many common shares are currently outstanding?
The number of outstanding common shares = (MVA+Common equity)/Market stock
price = ($50,000,000+$900,000,000)/$80 = 11,875,000 shares

3-10 Electronics World Inc. paid out $22.4 million in total common dividends
and reported $144.7 million of retained earnings at year-end. The prior year’s
retained earnings were $95.5 million. What was the net income? Assume that all
dividends declared were actually paid.
Net income for the current year = (Closing balance of retained earnings - Opening
balance of retained earnings) + Dividends paid for the current year
= ($144,700,000 - $95,500,000) + $22,400,000
= $71,600,000

3-12 Hampton Industries had $39,000 in cash at year-end 2017 and $11,000 in
cash at year-end 2018. The firm invested in property, plant, and equipment
totaling $210,000. Cash flow from financing activities totaled +$120,000.
a. What was the cash flow from operating activities?
Cash flow from operating activities
Investment $210,000
Less: Cash flow from financing activities 120,000
Less: Opening cash balance 39,000
Add: Closing cash balance 11,000
Operating cash flow $62,000

b. If accruals increased by $15,000, receivables and inventories increased by $50,000,

and depreciation and amortization totaled $25,000, what was the firm’s net income?
Net income
Operating cash flow $62,000
Less: Increase in accruals 15,000
Less: Depreciation 25,000
Add: Increase in inventory 50,000
Net income $72,000

3-14
a. Net operating working capital = (Current assets - excess cash) - (current liabilities -
notes payable)
For 2017: NOWC = (71,000 - 14,000) - (20,050 - 5,050) = 42,000
For 2018: NOWC = (83,320 - 15,000) - (25,100 - 7,000) = 50,220

b. EBIT = 44,000
Capital expenditure = Change in net fixed assets + depreciation = (48,000 - 46,000) +
6,000 = 8,000
Change in net operating working capital = 50,220 - 42,000 = 8,220
Free cash flow = EBIT*(1 - t) + Depreciation - Capital expenditure - Change in net
operating working capital
Free cash flow = 44,000 * (1 - 0.4) + 6,000 - 8,000 - 8,220 = 16,180

c. Statement of stockholders’ equity

Common stock
Share Amount Retained Total stockholder’s
Earnings equity

Balances, 31st 4,000 $40,000 $36,950 $76,950

December
2017
2018 net $23,190
income
Less: Cash $13,920
dividend
Balances, 31st 4,000 $40,000 $46,220 $86,220
December
2018

d. EVA = Net operating profits after taxes - Annual dollar cost of capital
= EBIT x ( 1 - Tax rate) - ( Total invested capital x After tax cost of capital)
Total invested capital = Net fixed assets 2018 + NOWC 2018 + Cash and cash
equivalents = $48,000 + $50,220 + $15,000 = $113,220
EVA = EBIT x (1 - T) -[Total invested capital x After-tax percentage cost of capital]
= $44,000 x (1 – 40%) - [$113,220 x 10%] = $15,078

e. MVA
MVA = (P0 × Shares outstanding) - Book value of total common equity
P0 stands for price of the stock
MVA = ($25 x 4,000) - $86,220 = $13,780

3-16
a. Construct the statement of stockholders’ equity for December 31, 2018. No
common stock was issued during 2018.

Common stock
Share Amount Retained Earnings Total
stockholder’s
equity

Balances, 31st 100,000,000 $260,000,000 $1,374,000,000 $1,634,000,000

December (1,600,000,000 +
2017 146,000,000 –
372,000,000)

2018 net $372,000,000 $372,000,000

income
Less: Cash $146,000,000 $146,000,000
dividend
Balances, 31st 100,000,000 $260,000,000 $1,600,000,000 $1,860,000,000
December
2018

b. How much money has been reinvested in the firm over the years?
Retained earnings = $1,600 million have been reinvested in the firm over the years.
c. At the present time, how large a check could be written without it bouncing?
The largest check could be Cash & Cash Equivalents = $15 millions
d. How much money must be paid to current creditors within the next year?
All the current liabilities i.e. $620 million will be paid over the next year.