Poco Loco Inc.

Solutions to End-of-Chapter Three Problems

3-1        From the data given in the problem, we know the following:

Current assets        $   500,000c        Accounts payable and accruals        $   100,000e

Net plant and equipment          2,000,000        Notes payable             150,000

                Current liabilities        $   250,000d

                Long-term debt        750,000

                                Total common equity          1,500,000

Total assets        $2,500,000        Total liabilities and equity        $2,500,000b

Note:  Superscripts correspond to parts below.

a.        Total debt = Short-term debt + Long-term debt

Total debt = $150,000 + $750,000

Total 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          1,000,000

EBT        $5,000,000        EBT =

Taxes (40%)          2,000,000

NI        $3,000,000

Interest = 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 – $5,000,000

EBIT        $5,000,000        EBIT = EBT + Int = $3,000,000 + $2,000,000

Interest          2,000,000        (Given)[pic 2]

EBT        $3,000,000[pic 3]

Taxes (40%)          1,200,000        Taxes = EBT × Tax rate

NI        $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