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 $
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 $
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
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
Construct a balance sheet for Galactic Enterprises given the following data:
|
|
|
Cash balances
|
$
|
25,000
|
Inventories
|
|
30,000
|
Net plant and equipment
|
|
140,000
|
Accounts receivable
|
|
35,000
|
Accounts payable
|
|
24,000
|
Long-term debt
|
|
130,000
|
|
What is shareholders’ equity?
Shareholders' equity $
Thefollowing table gives abbreviated balance sheets and income statements for Starbucks (figures in $ millions).
Balance Sheet
|
|
End of Year
|
|
Start of Year
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and marketable securities
|
1,844
|
|
3,234
|
Accounts receivable
|
948
|
|
839
|
Inventories
|
1,091
|
|
1,111
|
Other current assets
|
285
|
|
288
|
Total current assets
|
4,169
|
|
5,471
|
Fixed assets:
|
|
|
|
Net fixed assets
|
3,519
|
|
3,201
|
Other long-term assets
|
3,064
|
|
2,845
|
Total assets
|
10,752
|
|
11,517
|
Liabilities and Shareholders' Equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
2,244
|
|
1,940
|
Other current liabilities
|
795
|
|
3,438
|
Total current liabilities
|
3,039
|
|
5,378
|
Long-term debt
|
2,048
|
|
1,299
|
Other long-term liabilities
|
394
|
|
360
|
Total liabilities
|
5,481
|
|
7,037
|
Total shareholders' equity
|
5,272
|
|
4,480
|
Total liabilities and shareholders’ equity
|
10,752
|
|
11,517
|
|
|
|
|
Income Statement
|
Net sales
|
16,448
|
|
|
Cost of goods sold
|
6,859
|
|
|
Selling, general, and administrative expenses
|
5,655
|
|
|
Depreciation
|
710
|
|
|
Earnings before interest and taxes (EBIT)
|
3,224
|
|
|
Interest expense
|
64
|
|
|
Taxable income
|
3,160
|
|
|
Tax
|
1,092
|
|
|
Net income
|
2,068
|
|
|
Dividends
|
783
|
|
|
Addition to retained earnings
|
1,285
|
|
|
|
Assume a tax rate of 35%. Calculate the following using balance-sheet figures from the start of the year:
a.Calculate the return on assets.(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Return on assets %
b.Calculate the operating profit margin.(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Operating profit margin %
c.Calculate the sales-to-assets ratio.(Round your answer to 2 decimal places.)
Sales-to-assets ratio
d.Calculate the inventory turnover.(Round your answer to 2 decimal places.)
e.Calculate the debt-equity ratio.(Round your answer to 2 decimal places.)
Debt-equity ratio
f.Calculate the current ratio.(Round your answer to 3 decimal places.)
Current ratio
g.Calculate the quick ratio.(Round your answer to 4 decimal places.)
Quick ratio
The following table gives abbreviated balance sheets and income statements for Starbucks. At the end of fiscal 2014, Starbucks had 748 million shares outstanding with a share price of $81.25. The company's weighted-average cost of capital was about 9%. Assume a tax rate of 35%.
Balance Sheet
|
|
End of Year
|
|
Start of Year
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and marketable securities
|
1,844
|
|
3,234
|
Accounts receivable
|
948
|
|
839
|
Inventories
|
1,091
|
|
1,111
|
Other current assets
|
285
|
|
288
|
Total current assets
|
4,169
|
|
5,471
|
Fixed assets:
|
|
|
|
Net fixed assets
|
3,519
|
|
3,201
|
Other long-term assets
|
3,064
|
|
2,845
|
Total assets
|
10,752
|
|
11,517
|
Liabilities and Shareholders' Equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
2,244
|
|
1,940
|
Other current liabilities
|
795
|
|
3,438
|
Total current liabilities
|
3,039
|
|
5,378
|
Long-term debt
|
2,048
|
|
1,299
|
Other long-term liabilities
|
394
|
|
360
|
Total liabilities
|
5,481
|
|
7,037
|
Total shareholders' equity
|
5,272
|
|
4,480
|
Total liabilities and shareholders’ equity
|
10,752
|
|
11,517
|
|
|
|
|
Income Statement
|
Net sales
|
16,448
|
|
|
Cost of goods sold
|
6,859
|
|
|
Selling, general, and administrative expenses
|
5,655
|
|
|
Depreciation
|
710
|
|
|
Earnings before interest and taxes (EBIT)
|
3,224
|
|
|
Interest expense
|
64
|
|
|
Taxable income
|
3,160
|
|
|
Tax
|
1,092
|
|
|
Net income
|
2,068
|
|
|
Dividends
|
783
|
|
|
Addition to retained earnings
|
1,285
|
|
|
(figures in $ millions)
|
a.Calculate the market value added.(Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place.)
Market value added $ million
b.Calculate the market-to-book ratio.(Do not round intermediate calculations. Round your answer to 2 decimal places.)
Market-to-book ratio
c.Calculate the economic value added.(Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
Economic value added $ million
d.Calculate the return on start-of-the-year capital.(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Return on capital %
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