Solutions to Problem Set A

2-1A. Belmond, Inc. Balance Sheet ASSETS Current assets Cash Accounts receivable Inventory Total current assets Gross buildings & equipment Accumulated depreciation Net buildings & equipment Total assets

$ 16,550 9,600 6,500 $ 32,650 $122,000 34,000 $ 88,000 $120,650

LIABILITIES AND EQUITY Liabilities Notes payable Accounts payable Total current liabilities Long-term debt Total liabilities Equity Common stock Retained earnings Total equity Total liabilities and equity

600 4,800 $ 5,400 55,000 $ 60,400 $ 45,000 15,250 $ 60,250 $120,650

Belmond, Inc. Income Statement Sales Cost of goods sold Gross profits General & admin expense Depreciation expense Total operating expense Operating income (EBIT) Interest expense Earnings before taxes Taxes Net income $ 12,800 5,750 $ 7,050 $ 850 500 $ $ $ $ 1,350 5,700 900 4,800 1,440 3,360

2-2A.

Sharp Mfg Company Balance Sheet ASSETS Cash Accounts receivables Inventories Total current assets Machinery and equipment Accumulated depreciation Net fixed assets Total assets

96,000 120,000 110,000 $ 326,000 $ 700,000 236,000 464,000 $ 790,000

LIABILITIES & EQUITY Liabilities Notes payable Accounts payable Total current liabilities Long-term debt Total liabilities Equity Common stock Retained earnings Prior year Current year Total equity Total liabilities and equity

$ 100,000 90,000 $ 190,000 160,000 $ 350,000 $ 320,000 100,000 20,000 $ 440,000 $ 790,000

Sharp Mfg. Company Income Statement Sales Cost of goods sold Gross profits Operating expense Net income (Assume no taxes) $ 800,000 500,000 $ 300,000 280,000 $ 20,000

2-5A. Pamplin, Inc. Free cash flows from an asset perspective: Operating income (EBIT) Depreciation EBITDA Tax expense Less change in tax payable Cash taxes After-tax cash flows from operations Change in net working capital Change in current assets: Change in cash Change in accounts receivable Change in inventory Change in current assets Change in noninterest-bearing current debt: Change in accounts payable Change in net operating working capital Change in long-term assets: Purchase of fixed assets Free cash flows - asset perspective Free cash flows from a financing perspective: Interest received by investors Less change in interest payable Interest received by investors Repayment of long-term debt Increase in short-term debt Repurchase of common stock Common stock dividends Free cash flows - financing perspective:

$ 360,000 200,000 $ 560,000 120,000 $ 120,000 $ 440,000

$ (50,000) (25,000) 75,000 $ -

(50,000) $ (50,000)

400,000 $ (10,000)

60,000 $ 60,000 (150,000) 80,000 $ (10,000)

Note: The dividends were computed by comparing net income against the change in retained 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, Pamplin acquired further financing though increasing short-term debt by $150,000. This cash was mainly 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 the investors of $80,000.