Corporate Finance Chapter 1 Problems

Sixto Castillo, IV

FNCE 3410

Professor D'Sa

January 18, 2014

HW: Pg. 43 1-5, Pg. 47 Mini case 1&2

Pg.43

1. What is the value of the shareholder's equity account for this firm? How much is new working capital?

Current assets of the firm = $4,800

Fixed assets = $27, 500

Current liabilities = $4,200

Long-term debt = $10,500

Answer:

Value of the shareholder's equity account:

Total Assets= Current Assets + Net Fixed Assets

= $4,800 + $27,500

= $32,300

Total liabilities:

Total liabilities = Current liabilities + Long-term debt

Total liabilities = Current liabilities + Long-term debt

= $4,200 + $10,500

=$14,700

Therefore, Total assets = Total liabilities + Shareholder's equity

Shareholder's equity = $32,300 - $14,700

= $17,600

Net working Capital = Current assets - current liabilities

=$4,800 - $4,200 = $600

2. What is the net income for this firm?

Sales of the firm = $734,000

Cost of the firm = $315,000

Depreciation expenses are $48,000

Interest expenses are $35,000

Tax rate is 35%

Calculate the Net Income:

Income Statement |

Sales | | | | $734,000 |

Less: | Costs | | | ($315,000) |

| Depreciation | | ($48,000) |

Earnings before Interest & Tax (EBIT) | $371,000 |

Interest expenses | | | ($35,000) |

Earnings before Tax (EBT) | | $336,000 |

Less: Tax (35%) | | | ($117,600) |

Net Income | | | $218,400 |

3. What is the addition to retained earnings?

Dividends paid by the firm is $85,000

Net Income of the firm is $218,400

Calculate the addition to retained earnings:

Net income - Dividends = Retained earnings

= $218,000 - $85,000

= $133,400

4. What is the earnings per share, or EPS, figure? What is the dividends per share figure?

Common Share of outstanding stock = 110,000

Net income = $218,400

Dividend amount paid by the firm = $85,000

Calculate the Earnings per share (EPS)

EPS = Net income/ Number of common shares outstanding

= $218,400 /...