Linda Lee

Topics: Depreciation, Generally Accepted Accounting Principles, Cash flow statement Pages: 5 (810 words) Published: February 3, 2013
Problem 3-7
Balance Sheet
Which of the following actions are most likely to directly increase cash as shown on a firm's balance sheet? Explain and state the assumptions that underlie your answer. a. It issues $2 million of new common stock

b. It buys new plant and equipment at a cost of $3 million
c. It reports a large loss for the year
d. It increases the dividends paid on its common stock

The answer is (a.). Issuing $2 million of new common stock would increase the cash because stock is sold and the firm gets paid cash and therefore increasing the cash balance. (b.) would decrease cash because the firm spent cash on new equipment. (c.) just reports a loss which wouldn’t change anything. (d.) would decrease cash because the firm would pay out cash to stockholders.

Problem 3-11
Statement of Cash Flows
You have just been hired as a financial analyst for Basel Industries. Unfortunately, company headquarters (where all of the firm’s records are kept) has been destroyed by fire. So, your first job will be to recreate the firm’s cash flow statement for the year just ended. The firm had $100,000 in the bank at the end of the prior year and its working capital accounts except cash remained constant during the year. It earned $5 million in net income during the year but paid $750,000 in dividends to common shareholders. Throughout the year, the firm purchased $5.5 million of machinery that was needed for a new project. You have just spoken to the firm’s accountants and annual depreciation expense for the year is $450,000; however, the new purchase price for the machinery represents additions to property, plant, and equipment before depreciation. Finally, you have determined that the only financing done by the firm was to issue long-term debt of $1 million at a 6% interest rate. What was the firm’s end –of-year cash balance? Recreate the firm’s cash flow statement to arrive at your answer. Statement of Cash Flows

I. Operating Activities
Net Income                                                             $5,000,000 Depreciation                                                       $450,000 Interest Expense $60,000 Net cash from operating activities                            $5,510,000

II. Long Term Investing Activities
Purchase of machinery ($5,500,000) Net cash from investing activities                           ($5,500,000)

III. Financing Activities
Issued long-term debt               $1,000,000 Interest from long-term debt ($60,000) Payment of dividends $750,000 Net cash from financing activities                           $19,000

Net increase in cash (sum of I, II, III)               $200,000 Cash at beginning of the year                               $100,000     Ending cash balance                                         $300,000

Problem 4-3


Doublewide Dealers has an ROA of 10%, a 2% profit margin, and an ROE of 15%. What is the

total assets turnover. What is its equity multiplier?

ROA = profit margin x asset turnovers

10% = 2% x asset turnovers
10% / 2% = asset turnovers
Asset turnovers = 5%

ROE = profit margin x asset turnovers x equity multiplier

15% = 2% x 5% x equity multiplier
15% = 10% x equity multiplier
15% / 10% = equity multiplier
Equity multiplier = 1.5

Problem 4-5

Price Earnings Ratio

A company has an EPS of $2.00, a book value per share of $20, and a market/book ratio of 1.2 x.

What is the P/E ratio?

P/E ratio = price per share / earnings per share

Market value / book value = 1.2
Market value / $20 = 1.2
Market value = $24

P/E = $24 / $2 = 12 times...
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