solutions to problem set a

7/27/2019 Solutions to Problem Set A

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Solutions to Problem Set A

2-1A.

Belmond, Inc.

Balance SheetASSETS Current assetsCash $ 16,550Accounts receivable 9,600Inventory 6,500Total current assets $ 32,650Gross buildings & equipment $122,000Accumulated depreciation 34,000 Net buildings & equipment $ 88,000Total assets $120,650

LIABILITIES AND EQUITY

Liabilities Notes payable $ 600Accounts payable 4,800Total current liabilities $ 5,400Long-term debt 55,000Total liabilities $ 60,400EquityCommon stock $ 45,000

Retained earnings 15,250Total equity $ 60,250Total liabilities and equity $120,650



Belmond, Inc.

Income Statement

Sales $ 12,800Cost of goods sold 5,750Gross profits $ 7,050

General & admin expense $ 850Depreciation expense 500Total operating expense $ 1,350Operating income (EBIT) $ 5,700Interest expense 900Earnings before taxes $ 4,800Taxes 1,440 Net income $ 3,360

2-2A. Sharp Mfg Company

Balance Sheet

ASSETS Cash $ 96,000Accounts receivables 120,000Inventories 110,000Total current assets $ 326,000Machinery and equipment $ 700,000Accumulated depreciation 236,000 Net fixed assets 464,000Total assets $ 790,000

LIABILITIES & EQUITY Liabilities Notes payable $ 100,000Accounts payable 90,000Total current liabilities $ 190,000Long-term debt 160,000Total liabilities $ 350,000EquityCommon stock $ 320,000

Retained earningsPrior year 100,000Current year 20,000

Total equity $ 440,000Total liabilities and equity $ 790,000



Sharp Mfg. Company

Income Statement

Sales $ 800,000Cost of goods sold 500,000

Gross profits $ 300,000Operating expense 280,000 Net income $ 20,000(Assume no taxes)



2-5A. Pamplin, Inc.

Free cash flows from an asset perspective:

Operating income (EBIT) $ 360,000Depreciation 200,000EBITDA $ 560,000Tax expense 120,000Less change in tax payable -Cash taxes $ 120,000After-tax cash flows from operations $ 440,000

Change in net working capitalChange in current assets:

Change in cash $ (50,000)

Change in accounts receivable (25,000)Change in inventory 75,000Change in current assets $ -

Change in noninterest-bearing current debt:Change in accounts payable (50,000)Change in net operating working capital $ (50,000)

Change in long-term assets:Purchase of fixed assets 400,000

Free cash flows - asset perspective $ (10,000)

Free cash flows from a financing perspective: Interest received by investors 60,000Less change in interest payable -Interest received by investors $ 60,000Repayment of long-term debt -Increase in short-term debt (150,000)Repurchase of common stock -Common stock dividends 80,000Free cash flows - financing perspective: $ (10,000)

Note: The dividends were computed by comparing net income against the change inretained earnings. Net income was $180,000, but retained earnings increased only by$100,000; thus the balance was distributed in the form of dividends.

Pamplin, Inc. had an after-tax operating cash flow of $440,000. Additionally, Pamplinacquired further financing though increasing short-term debt by $150,000. This cash wasmainly used to purchase fixed assets of $400,000. The remainder was used to decrease



payables to suppliers by $50,000, pay interest of $60,000, and pay dividends back to theinvestors of $80,000.

solutions to problem set a

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