CH 2

Net working capital increases when

inventory is sold at a profit

The market value of an asset tends to...

provide a better guide to the actual worth of that asset than does the book value

LOOK AT HW 1 QUESTION 15

HW 1 QUESTION 15

Red's Tractors owes $52,311 in taxes on a taxable income of $608,606. The company has determined that it will owe $56,211 in tax if its taxable income rises to $620,424. What is the marginal tax rate at this level of income?

Marginal Tax Rate=($56,211-52,311)/($620,424-608,606)=.33 33%

The balance sheet of a firm shows beginning net fixed assets of $348,200 and ending net fixed assets of $371,920. The depreciation expense for the year is $46,080 and the interest expense is $11,460. What is the amount of the net capital spending?

Net Capital Spending = $371,920-348,200+46,080=$69,800

A firm's liquidity level decreases when

inventory is purchased with cash

Plaza Cafe has an operating cash flow of $83,770, depreciation expense of $43,514, and taxes paid of $21,590. A partial listing of its balance sheet accounts is as follows: beg bal - end bal Current Assets - $138,590 - $129,204 Net Fixed Assets - $599,608 - $597,913 Current Liabilities - $143,215 - $139,827 Long-Term Debt - $408,660 - $402,120

Cash flow from assets = $83,770- ($597,913-599,608 + 43,514) - [($129,204-139,827) - ($138,590- 143,215)] = $47,949

Andre's Dog House had current assets of $67,200 and current liabilities of $71,100 last year. This year, the current assets are $82,600 and the current liabilities are $85,100. The depreciation expense for the past year is $9,600 and the interest paid is $8,700. What is the amount of the change in net working capital?

Change in net working capital = ($82,600-85,100)-($67,200-71,100)=$1,400

Dockside Warehouse has net working capital of $42,400, total assets of $519,300, and net fixed assets of $380,200. What is the value of the current liabilities?

Current Liabilities=$519,300-380,200-42,400=$96,700

Wes Motors has total assets of $98,300, net working capital of $11,300, owners' equity of $41,600, and long-term debt of $38,600. What is the value of the current assets?

Current Liabilities=$98,300-38,600-41,600=$18,100 Current Assets=$11,300+18,100=$29,400 $29,400

An increase in what will increase the operating cash flow for a profitable, tax-paying firm?

Depreciation

The Pretzel Factory has net sales of $821,300 and costs of $698,500. The depreciation expense is $28,400 and the interest paid is $8,400. What is the amount of the firm's operating cash flow if the tax rate is 34 percent?

EBIT = $821,300-698,500-28,400=$94,400 Tax = ($94,400-8,400)*.34=$29,240 OCF = $94,400+28,400-29,240=$93,560

The Embroidery Shoppe had beginning retained earnings of $18,670. During the year, the company reported sales of $83,490, costs of $68,407, depreciation of $8,200, dividends of $950, and interest paid of $478. The tax rate is 34%. What is the retained earnings balance at the end of the year?

Net Income=($83,490-68,407-8,200-478)*(1-.34)=$4,227.30 Ending Retained Earnings=$18,670+4,227.30-950=$21,947

What is included in the market value of a firm but not in the book value?

Reputation of the firm

Taxable Income - Tax Rate $0-50,000 - 15% $50,001-75,000 - 25% $75,001-100,000 - 34% $100,001-335,000 - 39% $335,001-10,000,000 - 34% Comfy Inn earned $218,310 in taxable income for the year. How much tax does the company owe?

Total Tax=.15($50,000)+.25($25,000)+.34($25,000)+.39($218,310-100,000)= $68,390.90