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02problem

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6/1/2010

10/25/2015 12:42

Chapter 2. Solution to End-of-Chapter Comprehensive/Spreadsheet Problem

Problem 2-13
Sinotronics December 31 Balance Sheets
(in thousands of dollars)
2008
Assets
Cash and cash equivalents
Accounts receivable
Inventories
Total current assets
Net fixed assets
Total assets

$
$

Liabilities and equity

Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity
Total liabilities and equity

$
$

$
$

2007

102,850
103,365
38,444
244,659
67,165
311,824

30,761
30,477
16,717
77,955
76,264
154,219
100,000
57,605
157,605
311,824

$
$

$
$

$
$

89,725
85,527
34,982
210,234
42,436
252,670

23,109
22,656
14,217
59,982
63,914
123,896
90,000
38,774
128,774
252,670

a. Sales for 2008 were $455,150,000, and EBITDA was 15% of sales. Furthermore, depreciation and
amortization amounted to 11% of net fixed assets, interest was $8,575,000, the corporate tax
rate was 40%, and Sinotronics pays 40% of its net income in dividends. Given this information,
construct Sinotronics 2008 income statement.
The input information required for the problem is outlined in the "Key Input Data" section below. Using
this data and the balance sheet above, we constructed the income statement shown below.
KEY INPUT DATA: Laiho Industries
Sales
EBITDA as a percentage of sales
Depr. as a % of fixed assets
Tax rate
Interest expense
Dividend payout ratio

$455,150
15%
11%
40%
$8,575
40%

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Sinotronics Income Statement
(in thousands of dollars)

Sales
Expenses excluding depreciation and amortization
EBITDA
Depreciation and amortization
EBIT
Interest expense
EBT
Taxes (40%)
Net Income
Common dividends
Addition to retained earnings

2008
$455,150
386,878 Found after finding EBITDA
$68,273 Found this first
7,388
$60,884
8,575
$52,309
20,924
$31,386
$12,554
$18,831

b. Construct the statement of stockholders' equity for the year ending December 31, 2008,
and the 2008 statement of cash flows.
Statement of Stockholders' Equity
(in thousands of dollars)
Balance of Retained Earnings, December 31, 2007
Add: Net Income, 2008
Less: Common dividends paid, 2008
Balance of Retained Earnings, December 31, 2008

$38,774
$31,386
(12,554)
$57,605

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Statement of Cash Flows
(in thousands of dollars)

Operating Activities
Net Income
Depreciation and amortization
Increase in accounts payable
Increase in accruals
Increase in accounts receivable
Increase in inventories
Net cash provided by operating activities

Capital
expenditures
$32,117

+
+

$31,386
7,388
7,652
7,821
(17,838)
(3,462)
$32,947

Investing Activities
Additions to property, plant, and equipment
Net cash used in investing activities

($32,117)
($32,117)

Financing Activities
Increase in notes payable
Increase in long-term debt
Increase in common stock
Payment of common dividends
Net cash provided by financing activities

$2,500
12,350
10,000
(12,554)
$12,295

Summary
Net increase/decrease in cash
Cash balance at the beginning of the year
Cash balance at the end of the year

$13,125
89,725
$102,850

c. Calculate 2007 and 2008 net working capital and 2008 free cash flow.
Net Working Capital (must be financed by external sources)
NWC07 =
current assets
(A/P and accruals)
NWC07 =
$210,234
$45,765
NWC07 =
$164,469
NWC08 =
NWC08 =
NWC08 =

current assets
$244,659
$183,421

(A/P and accruals)

$61,238

+
+

Depreciation
$7,388

Free Cash Flow

113

FCF08 =
114 FCF08 =
115 FCF08 =
116

EBIT (1 - T)
$36,531
-$7,150

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d. If Sinotronics increased its dividend payout ratio, what effect would this have on its corporate taxes paid?
What effect would this have on the taxes paid by the company's shareholders?
An increase in the firm's dividend payout ratio would have no effect on its corporate taxes paid because
dividends are paid with after-tax dollars. However, the company's shareholders would pay additional
taxes on the additional dividends they would receive. As of 10/08, dividends are generally taxed at a
maximum rate of 15% in the United States.

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ore, depreciation
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ata" section below.
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ound after finding
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e on its corporate
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orate taxes paid120
because
would pay additional
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at a
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