A 1 02problem 2 3 Chapter 2.

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D
7/28/2013 4:13

G 6/1/2010

Solution to End-of-Chapter Comprehensive/Spreadsheet Problem

Sinotronics December 31 Balance Sheets (in thousands of dollars) 2008 Assets Cash and cash equivalents Accounts receivable Inventories Total current assets Net fixed assets Total assets Liabilities and equity Accounts payable Accruals Notes payable Total current liabilities Long-term debt Total liabilities Common stock Retained Earnings Total common equity Total liabilities and equity $ 102,850 103,365 38,444 244,659 67,165 311,824 $ 2007 89,725 85,527 34,982 210,234 42,436 252,670

$ $

$ $

$ $

$ $

30,761 30,477 16,717 77,955 76,264 154,219 100,000 57,605 157,605 311,824

$ $

$ $

23,109 22,656 14,217 59,982 63,914 123,896 90,000 38,774 128,774 252,670

a. Sales for 2008 were $455,150,000, and EBITDA was 15% of sales. Furthermore, depreciation and amortization amounted to 11% of net fixed assets, interest was $8,575,000, the corporate tax rate was 40%, and Sinotronics pays 40% of its net income in dividends. Given this information, construct Sinotronics 2008 income statement. The input information required for the problem is outlined in the "Key Input Data" section below. Using this data and the balance sheet above, we constructed the income statement shown below. KEY INPUT DATA: Laiho Industries Sales EBITDA as a percentage of sales Depr. as a % of fixed assets Tax rate Interest expense Dividend payout ratio $455,150 15% 11% 40% $8,575 40%

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A B Sinotronics Income Statement (in thousands of dollars)

Sales Expenses excluding depreciation and amortization EBITDA Depreciation and amortization EBIT Interest expense EBT Taxes (40%) Net Income Common dividends Addition to retained earnings

2008 $455,150 386,878 Found after finding EBITDA $68,273 Found this first 7,388 $60,884 8,575 $52,309 20,924 $31,386 $12,554 $18,831

b. Construct the statement of stockholders' equity for the year ending December 31, 2008, and the 2008 statement of cash flows. Statement of Stockholders' Equity (in thousands of dollars) Balance of Retained Earnings, December 31, 2007 Add: Net Income, 2008 Less: Common dividends paid, 2008 Balance of Retained Earnings, December 31, 2008 $38,774 $31,386 (12,554) $57,605

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A B Statement of Cash Flows (in thousands of dollars)

Operating Activities Net Income Depreciation and amortization Increase in accounts payable Increase in accruals Increase in accounts receivable Increase in inventories Net cash provided by operating activities Investing Activities Additions to property, plant, and equipment Net cash used in investing activities Financing Activities Increase in notes payable Increase in long-term debt Increase in common stock Payment of common dividends Net cash provided by financing activities Summary Net increase/decrease in cash Cash balance at the beginning of the year Cash balance at the end of the year

$31,386 7,388 7,652 7,821 (17,838) (3,462) $32,947

($32,117) ($32,117)

$2,500 12,350 10,000 (12,554) $12,295

$13,125 89,725 $102,850

c. Calculate 2007 and 2008 net working capital and 2008 free cash flow. Net Working Capital (must be financed by external sources) NWC07 = current assets (A/P and accruals) NWC07 = $210,234 $45,765 NWC07 = $164,469 NWC08 = NWC08 = NWC08 = current assets $244,659 $183,421 (A/P and accruals) $61,238

Free Cash Flow Capital expenditures $32,117 Increase in NWC $18,952

113 FCF08 = 114 FCF08 = 115 FCF08 = 116

EBIT (1 - T) $36,531 -$7,150

+ +

Depreciation $7,388

+ +

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A B C D E F G H d. If Sinotronics increased its dividend payout ratio, what effect would this have on its corporate taxes paid? What effect would this have on the taxes paid by the company's shareholders? An increase in the firm's dividend payout ratio would have no effect on its corporate taxes paid because dividends are paid with after-tax dollars. However, the company's shareholders would pay additional taxes on the additional dividends they would receive. As of 10/08, dividends are generally taxed at a maximum rate of 15% in the United States.