Connect 6

Which one of the following favors a low dividend policy?

the tax on capital gains is deferred until the gain is realized

Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $311,360?

Tax = .15($50,000) + .25($25,000) + .34($25,000) + .39($211,360) = $104,680.40 Average tax rate = $104,680.40/$311,360 = 33.62 percent

The ex-dividend date is defined as _____ business day(s) before the date of record.

2

The 2008 balance sheet of Maria's Tennis Shop, Inc., showed long-term debt of $2.9 million, and the 2009 balance sheet showed long-term debt of $3.8 million. The 2009 income statement showed an interest expense of $290,000. What was the firm's cash flow to creditors during 2009?

Cash flow to creditors = Interest paid - Net new borrowing Cash flow to creditors = Interest paid - (LTDend - LTDbeg) Cash flow to creditors = $290,000 - ($3,800,000 - 2,900,000) Cash flow to creditors = $-610,000

The 2008 balance sheet of Maria's Tennis Shop, Inc., showed $930,000 in the common stock account and $6.85 million in the additional paid-in surplus account. The 2009 balance sheet showed $895,000 and $8.3 million in the same two accounts, respectively. If the company paid out $530,000 in cash dividends during 2009, What was the cash flow to stockholders for the year?

Cash flow to stockholders = Dividends paid - Net new equity Cash flow to stockholders = Dividends paid - [(Commonend + APISend) - (Commonbeg + APISbeg)] Cash flow to stockholders = $530,000 - [($895,000 + 8,300,000) - ($930,000 + 6,850,000)] Cash flow to stockholders = $-885,000

The 2008 balance sheet of Saddle Creek, Inc., showed current assets of $1,310 and current liabilities of $820. The 2009 balance sheet showed current assets of $1,700 and current liabilities of $1,020. What was the company's 2009 change in net working capital, or NWC?

Change in NWC = NWCend - NWCbeg Change in NWC = (CAend - CLend) - (CAbeg - CLbeg) Change in NWC = ($1,700 - 1,020) - ($1,310 - 820) Change in NWC = $680 − 490 = $190

The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called the:

cash flow from assets.

The cash flow related to interest payments less any net new borrowing is called the:

cash flow to creditors.

Net working capital is defined as:

current assets minus current liabilities.

The board of directors of Wilson Sporting Equipment met this afternoon and passed a resolution to pay a cash dividend of $0.42 a share next month. In relation to this dividend, today is referred to as which one of the following dates?

declaration date

Which one of the following will increase the cash flow from assets, all else equal?

decrease in net capital spending

A firm issued new debt of $100,000 and paid off (retired) $40,000 of existing debt. How did these two transactions combined affect cash flow to creditors?

decreased cash flow to creditors by $60,000

Cash flow to stockholders is defined as:

dividend payments less net new equity raised.

Jetson Spacecraft Corp. shows the following information on its 2009 income statement: sales = $200,000; costs = $85,000; other expenses = $4,900; depreciation expense = $9,000; interest expense = $13,700; taxes = $30,590; dividends = $9,800. In addition, you're told that the firm issued $7,700 in new equity during 2009 and redeemed $9,300 in outstanding long-term debt. (a) What is the 2009 operating cash flow? (b) What is the 2009 cash flow to creditors? (c) What is the 2009 cash flow to stockholders?

(a) To find the OCF, we first calculate net income. Income Statement Sales $200,000 Costs 85,000 Other expenses 4,900 Depreciation 9,000 EBIT $101,100 Interest 13,700 Taxable income $87,400 Taxes 30,590 Net income $56,810 Dividends $9,800 Additions to RE $47,010 OCF = EBIT + Depreciation - Taxes = $101,100 + 9,000 - 30,590 = $79,510 (b) CFC = Interest - Net new LTD = $13,700 - (-9,300) = $23,000 (c) CFS = Dividends - Net new equity = $9,800 - 7,700 = $2,100

The last date on which you can purchase shares of stock and still receive the dividend is the day before the ex-dividend date. The day before the ex-dividend date is _____ business days prior to the date of record.

3

Earnhardt Driving School's 2008 balance sheet showed net fixed assets of $4 million, and the 2009 balance sheet showed net fixed assets of $7.1 million. The company's 2009 income statement showed a depreciation expense of $835,000. What was net capital spending for 2009?

Net capital spending = NFAend - NFAbeg + Depreciation Net capital spending = $7,100,000 − 4,000,000 + 835,000 Net capital spending = $3,935,000

A positive cash flow to stockholders indicates which one of the following with certainty?

The dividends paid exceeded the net new equity raised.

Papa Roach Exterminators, Inc., has sales of $639,000, costs of $275,000, depreciation expense of $45,000, interest expense of $32,000, and a tax rate of 40 percent. If the firm paid out $78,000 in cash dividends. What is the addition to retained earnings?

The income statement for the company is: Income Statement Sales $639,000 Costs 275,000 Depreciation 45,000 EBIT $319,000 Interest 32,000 EBT $287,000 Taxes(40%) 114,800 Net income $172,200 One equation for net income is: Net income = Dividends + Addition to retained earnings Rearranging, we get: Addition to retained earnings = Net income − Dividends = $172,200 − 78,000 = $94,200

A firm issued 1,000 shares of new stock for its par value of $1 plus $9 of additional paid in capital per share. It also repurchased $40,000 worth of its outstanding common stock. How did these two transactions combined affect the cash flow to stockholders?

increased cash flow to stockholders by $30,000

The Daily News had net income of $121,600 of which 40 percent was distributed to the shareholders as dividends. During the year, the company sold $75,000 worth of common stock. What is the cash flow to stockholders?

Cash flow to stockholders = .40($121,600) - $75,000 = -$26,360

What is the amount of dividends paid in 2011?

Dividends paid = $1,374 − ($2,696 − $2,122) = $800 (Net Income - Difference in Retained Earnings = Dividends Paid)

Crandall Oil has total sales of $1,349,800 and costs of $903,500. Depreciation is $42,700 and the tax rate is 34 percent. The firm does not have any interest expense. What is the operating cash flow?

Earnings before interest and taxes = $1,349,800 − $903,500 − $42,700 = $403,600 Tax = $403,600 × .34 = $137,224 Operating cash flow = $403,600 + $42,700 − $137,224 = $309,076 EBIT + Depreciation - Tax = Operating Cash Flow

Which of the following are included in current liabilities? I. note payable to a supplier in eight months II. amount due from a customer next month III. account payable to a supplier that is due next week IV. loan payable to the bank in fourteen months

I and III only