Ba513 Connect Assignment Week 7
Here are book and market value balance sheets of the United Frypan Company (UF):
Book Value Balance Sheet
|
Net working capital
|
$20
|
$40
|
Debt
|
Long-term assets
|
80
|
60
|
Equity
|
|
$100
|
$100
|
|
|
Market Value Balance Sheet
|
Net working capital
|
$20
|
$40
|
Debt
|
Long-term assets
|
140
|
120
|
Equity
|
|
$160
|
$160
|
|
|
Assume that MM's theory holds with taxes. There is no growth, and the $40 of debt is expected to be permanent. Assume a 40% corporate tax rate.
a.How much of the firm's value is accounted for by the debt-generated tax shield?
PV tax shield $
PV of tax shield ($40 × 40%) = $16
b.How much better off will UF's shareholders be if the firm borrows $20 more and uses it to repurchase stock?
Increase in equity value $
Incremental Gain = $24 - $16 = $8
a.What is the relative tax advantage of corporate debt if the corporate tax rate isTc = .35, the personal tax rate isTp = .35, but all equity income is received as capital gains and escapes tax entirely (TpE = 0)?
Relative tax advantage
= (1-Tp) / [(1-Tpe) × (1-Tc)] = (1-0.35) / [(1 - 0) × (1-0.35)]
b.How does the relative tax advantage change if the company decides to pay out all equity income as cash dividends that are taxed at 15%?(Do not round intermediate calculations. Round your answer to 2 decimal places.)
Relative tax advantage
= (1-Tp) / [(1-Tpe) × (1-Tc)] = (1-0.35) / [(1 – 0.15) × (1-0.35)]
Construct a balance sheet for Galactic Enterprises given the following data:
|
|
|
Cash balances
|
$
|
25,000
|
Inventories
|
|
30,000
|
Net plant and equipment
|
|
140,000
|
XXXXXXXX receivable
|
|
35,000
|
Accounts payable
|
|
XX,000
|
Long-term XXXX
|
|
XXX,XXX
|
|
Current AssetsXXXXXX,000
Inventory30,000
Accounts XXXXXXXXXX
Non-current assetsNet plant &XXX; XXXXXXXXXXXX,XXX
Total Assets230,XXX
XXXXXXX XXXXXXXXXXX
XXXXXXXX XXXXXXXXX,XXX
Non-current XXXXXXXXXXX
Long term XXXXXXX,XXX
XXXXXXXXXXXX’ equity (XXXXXXXXX)XX,XXX
XXXXX liabilities & XXXXXX230,000
What XX XXXXXXXXXXXX’ equity?
XXXXXXXXXXXX' XXXXXX $
TheXXXXXXXXX table XXXXX XXXXXXXXXXX XXXXXXX sheets XXX income XXXXXXXXXX XXX XXXXXXXXX (XXXXXXX in $ millions).
XXXXXXX XXXXX
|
|
XXX XX Year
|
|
Start XX Year
|
XXXXXX
|
|
|
|
Current XXXXXX:
|
|
|
|
XXXX and marketable XXXXXXXXXX
|
X,XXX
|
|
3,234
|
Accounts XXXXXXXXXX
|
XXX
|
|
XXX
|
Inventories
|
X,091
|
|
1,XXX
|
Other current XXXXXX
|
285
|
|
288
|
XXXXX current assets
|
4,XXX
|
|
X,471
|
Fixed assets:
|
|
|
|
Net fixed XXXXXX
|
X,XXX
|
|
3,201
|
XXXXX XXXX-XXXX XXXXXX
|
3,XXX
|
|
2,XXX
|
Total assets
|
XX,752
|
|
11,517
|
XXXXXXXXXXX XXX Shareholders' Equity
|
|
|
|
XXXXXXX liabilities:
|
|
|
|
Accounts payable
|
2,244
|
|
X,XXX
|
XXXXX XXXXXXX liabilities
|
XXX
|
|
3,XXX
|
Total current XXXXXXXXXXX
|
X,XXX
|
|
X,XXX
|
XXXX-term debt
|
X,XXX
|
|
1,299
|
XXXXX XXXX-term XXXXXXXXXXX
|
XXX
|
|
360
|
Total XXXXXXXXXXX
|
X,XXX
|
|
X,037
|
Total XXXXXXXXXXXX' equity
|
5,XXX
|
|
X,XXX
|
Total liabilities XXX shareholders’ XXXXXX
|
XX,752
|
|
11,XXX
|
|
|
|
|
Income XXXXXXXXX
|
XXX XXXXX
|
16,XXX
|
|
|
Cost of goods sold
|
X,XXX
|
|
|
XXXXXXX, general, XXX administrative expenses
|
5,XXX
|
|
|
XXXXXXXXXXXX
|
710
|
|
|
XXXXXXXX XXXXXX interest XXX XXXXX (XXXX)
|
X,XXX
|
|
|
XXXXXXXX expense
|
64
|
|
|
XXXXXXX income
|
X,160
|
|
|
Tax
|
1,XXX
|
|
|
Net XXXXXX
|
X,068
|
|
|
Dividends
|
XXX
|
|
|
XXXXXXXX to XXXXXXXX earnings
|
X,285
|
|
|
|
Assume a tax XXXX XX 35%. Calculate XXX XXXXXXXXX XXXXX XXXXXXX-sheet figures from XXX start of XXX XXXX:
a.XXXXXXXXX the return on XXXXXX.(XX not XXXXX XXXXXXXXXXXX XXXXXXXXXXXX. Enter your XXXXXX XX a percent XXXXXXX XX 2 XXXXXXX XXXXXX.)
Return XX XXXXXX %
(XXXXX tax XXXXXXXX + net income) / (total XXXXXX)
= XX.XX%
b.Calculate the XXXXXXXXX profit XXXXXX.(XX not round intermediate XXXXXXXXXXXX. Enter XXXX XXXXXX XX a XXXXXXX XXXXXXX to X decimal places.)
Operating XXXXXX XXXXXX %
= XX.83%
c.Calculate XXX sales-to-XXXXXX XXXXX.(XXXXX your answer XX X decimal XXXXXX.)
XXXXX-XX-assets XXXXX
Sales / XXXXX XXXXXX
= 1.XX XXXXX
d.Calculate the XXXXXXXXX turnover.(XXXXX your XXXXXX XX 2 XXXXXXX XXXXXX.)
Cost of XXXXX / Inventory
= 6.17 XXXXX
e.Calculate the debt-equity XXXXX.(Round your XXXXXX to 2 decimal places.)
XXXX-XXXXXX ratio
Long term XXXX / XXXXX XXXXXX
= X.29
f.XXXXXXXXX the current ratio.(Round your answer to X XXXXXXX places.)
XXXXXXX ratio
XXXXXXX XXXXXX / XXXXXXX XXXXXXXXXXX
= 1.XXX times
g.XXXXXXXXX XXX quick XXXXX.(XXXXX your answer to X decimal XXXXXX.)
XXXXX XXXXX
(XXXXXXX XXXXXX – inventories) / XXXXXXX liabilities
= 0.XXXX XXXXX
XXX XXXXXXXXX table XXXXX XXXXXXXXXXX XXXXXXX XXXXXX and income XXXXXXXXXX XXX Starbucks. At the XXX of fiscal XXXX, Starbucks XXX XXX million shares XXXXXXXXXXX XXXX a share price of $81.XX. XXX XXXXXXX's XXXXXXXX-XXXXXXX XXXX of XXXXXXX XXX XXXXX 9%. XXXXXX a XXX rate of XX%.
XXXXXXX Sheet
|
|
End XX XXXX
|
|
XXXXX XX XXXX
|
Assets
|
|
|
|
Current XXXXXX:
|
|
|
|
Cash XXX marketable securities
|
X,844
|
|
X,XXX
|
Accounts receivable
|
XXX
|
|
839
|
XXXXXXXXXXX
|
1,XXX
|
|
1,XXX
|
XXXXX current assets
|
XXX
|
|
XXX
|
Total current assets
|
4,XXX
|
|
X,471
|
Fixed assets:
|
|
|
|
XXX fixed assets
|
3,XXX
|
|
X,XXX
|
Other long-XXXX assets
|
X,XXX
|
|
2,XXX
|
XXXXX assets
|
XX,752
|
|
11,XXX
|
XXXXXXXXXXX XXX XXXXXXXXXXXX' Equity
|
|
|
|
Current XXXXXXXXXXX:
|
|
|
|
Accounts payable
|
X,244
|
|
1,XXX
|
XXXXX XXXXXXX liabilities
|
795
|
|
X,438
|
XXXXX current liabilities
|
3,XXX
|
|
5,XXX
|
XXXX-term XXXX
|
2,048
|
|
1,XXX
|
XXXXX XXXX-XXXX liabilities
|
394
|
|
360
|
XXXXX XXXXXXXXXXX
|
X,XXX
|
|
7,XXX
|
XXXXX shareholders' XXXXXX
|
X,272
|
|
X,480
|
Total XXXXXXXXXXX and shareholders’ equity
|
10,XXX
|
|
XX,517
|
|
|
|
|
XXXXXX Statement
|
Net XXXXX
|
XX,448
|
|
|
Cost of XXXXX sold
|
X,859
|
|
|
Selling, general, and administrative XXXXXXXX
|
X,655
|
|
|
Depreciation
|
710
|
|
|
Earnings before interest XXX taxes (XXXX)
|
X,XXX
|
|
|
XXXXXXXX XXXXXXX
|
64
|
|
|
Taxable income
|
3,XXX
|
|
|
XXX
|
X,092
|
|
|
Net XXXXXX
|
2,068
|
|
|
Dividends
|
XXX
|
|
|
Addition to retained XXXXXXXX
|
1,285
|
|
|
(figures in $ XXXXXXXX)
|
a.XXXXXXXXX XXX XXXXXX XXXXX added.(Do not round XXXXXXXXXXXX XXXXXXXXXXXX. Enter your XXXXXX in XXXXXXXX XXXXXXX to X decimal place.)
Market value XXXXX $ XXXXXXX
XXXXXX value of XXXXXX – XXXX XXXXX XX equity
XXX = XX,775 – XXXX =XXXXX.X
b.XXXXXXXXX XXX XXXXXX-XX-book XXXXX.(Do XXX XXXXX XXXXXXXXXXXX XXXXXXXXXXXX. XXXXX XXXX XXXXXX XX 2 decimal places.)
Market-XX-book XXXXX
Formula = Market value XX XXXXXX / book XXXXX XX XXXXXX (XXXXX year end figures)
c.Calculate XXX economic value XXXXX.(Do XXX XXXXX intermediate calculations. XXXXX your XXXXXX in millions rounded to 2 XXXXXXX XXXXXX.)
XXXXXXXX XXXXX XXXXX $ XXXXXXX
After XXX interest + Net XXXXXX – (XXXX XX XXXXXXX × XXXXX capitalization*)
*end XX year XXXXXXX XXX XXXX
[(X-X.35) × 64] + X,068 / [0.09 × (X,XXX+2,048)]
= X,XXX.XX
d.Calculate XXX XXXXXX XX start-of-XXX-XXXX capital.(Do not XXXXX intermediate XXXXXXXXXXXX. Enter XXXX answer as a XXXXXXX XXXXXXX to X decimal places.)
Return on capital %
XXXXX XXX XXXXXXXX + Net income / XXXXX XXXXXXX
[(1-X.XX) × 64] + 2,068 / (4,XXX+1,XXX)
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