Poco Loco Inc.
Essay Preview: Poco Loco Inc.
Report this essay
Solutions to End-of-Chapter Three Problems3-1 From the data given in the problem, we know the following:Current assets $ 500,000c Accounts payable and accruals $ 100,000eNet plant and equipment 2,000,000 Notes payable 150,000 Current liabilities $ 250,000d Long-term debt 750,000 Total common equity 1,500,000Total assets $2,500,000 Total liabilities and equity $2,500,000bNote: Superscripts correspond to parts below.a. Total debt = Short-term debt + Long-term debtTotal debt = $150,000 + $750,000Total debt = $900,000.b. We are given that the firm’s total assets equal $2,500,000. Since both sides of the balance sheet must equal, total liabilities and equity must equal total assets = $2,500,000.c. Total assets = Current assets + Net plant and equipment $2,500,000 = Current assets + $2,000,000 Current assets = $2,500,000 – $2,000,000 Current assets = $500,000.d. Total liabilities and equity = Current liabilities + Long-term debt + Total common equity $2,500,000 = Current liabilities + $750,000 + $1,500,000 $2,500,000 = Current liabilities + $2,250,000 Current liabilities = $2,500,000 – $2,250,000 Current liabilities = $250,000.e. Current liabilities = Accounts payable and accruals + Notes payable $250,000 = Accounts payable and accruals + $150,000 Accounts payable and accruals = $250,000 – $150,000 Accounts payable and accruals = $100,000.f. Net working capital = Current assets – Current liabilities Net working capital = $500,000 – $250,000 Net working capital = $250,000.g. Net operating working capital = Current assets – (Current liabilities – Notes payable) Net operating working capital = $500,000 – ($250,000 – $150,000) Net operating working capital = $400,000.h. NOWC – NWC = $400,000 – $250,000
NOWC – NWC = $150,000. The difference between the two is equal to the notes payable balance.3-2 NI = $3,000,000; EBIT = $6,000,000; T = 40%; Interest = ?Need to set up an income statement and work from the bottom up.EBIT $6,000,000[pic 1]Interest 1,000,000EBT $5,000,000 EBT = Taxes (40%) 2,000,000NI $3,000,000Interest = EBIT – EBT = $6,000,000 – $5,000,000 = $1,000,000.3-3 EBITDA $7,500,000 (Given)Depreciation 2,500,000 Deprec. = EBITDA – EBIT = $7,500,000 – $5,000,000EBIT $5,000,000 EBIT = EBT + Int = $3,000,000 + $2,000,000Interest 2,000,000 (Given)[pic 2]EBT $3,000,000[pic 3]Taxes (40%) 1,200,000 Taxes = EBT × Tax rateNI $1,800,000 (Given)3-4 NI = $50,000,000; R/EY/E = $810,000,000; R/EB/Y = $780,000,000; Dividends = ? R/EB/Y + NI – Div = R/EY/E $780,000,000 + $50,000,000 – Div = $810,000,000 $830,000,000 – Div = $810,000,000 $20,000,000 = Div.3-5 MVA = (P0 × Number of common shares) − BV of common equity$130,000,000 = $60X − $500,000,000$630,000,000 = $60X X = 10,500,000 common shares.3-6 Book value of equity = $35,000,000.Price per share (P0) = $30.00.Common shares outstanding = 2,000,000 shares.Market value of equity = P0 × Common shares outstanding = $30 × 2,000,000 = $60,000,000.MVA = Market value of equity – Book value of equity = $60,000,000 – $35,000,000