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# Ross, Westerfield, and Jordan's Spreadsheet Master Essentials of Corporate Finance, 7 th edition by Brad Jordan and Joe Smolira

Version 7.0

Chapter 2
Cell formatting Trace Dependents/Precedents VLOOKUP Referencing across worksheets The following conventions are used in these spreadsheets: 1) Given data in blue 2) Calculations in red
NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-In" be installed in Excel. To install these, click on the Office button then "Excel Options," "Add-Ins" and select "Go." Check "Analysis ToolPak" and "Solver Add-In," then click "OK."

In these spreadsheets, you will learn how to use the following Excel f

## Chapter 2 - Section 1 The Balance Sheet

Spreadsheets are a very useful way to do financial calculations. Throughout these spreadsheets, we will use Excel t the textbook. However, using Excel or any spreadsheet program is not a substitute for understanding the underlyin definitely applies to spreadsheets. You should realize that you do not need to understand these spreadsheets to un We would recommend that you first read the textbook to understand the concepts before you work through these through the problems by hand or using a financial calculator. As with most calculations, there are often multiple w one method of solving the problem presented, not necessarily the only way to solve the problem with a spreadshe Example 2.1: Building a Balance Sheet RWJ Excel Tip

Throughout these spreadsheets, Excel tips will be highlighted in blue. The tips will range from specific functions to will use is building a basic balance sheet. Although we could build a balance sheet and enter the numbers directly i create a column of variables and then refer to these input cells in the balance sheet. We also believe in the use of c these spreadsheets, if the number is blue, it is an input cell. If the number is red, the cell is a calculation or referen

Given the following information, what does the balance sheet look like? What is shareholders' equity? What is net Current assets: Net fixed assets: Short-term debt: Long-term debt: \$ \$ \$ \$ 100 500 70 200

RWJ Excel Tip In order to make a spreadsheet more presentable, cell formatting is important. To make the numbers in a cell appe amount, percentage, or other format, select the cells you want to format, right-click, and select the "Format Cells" numbers, the font, text color, cell background color, and lots of other options.

## Assets Current assets Fixed assets \$ 100 500

Total assets

600

Liabilities & Shareholders' Equity Current liabilities Long-term debt Shareholders' equity Total liabilities and shareholders' equity

To calculate the shareholders' equity, realize that total liabilities and shareholders' equity equals both total assets a shareholders' equity. Using these relationships, we can solve for shareholders' equity.

Net working capital = Current assets - Current liabilities Net working capital = \$ 30 Many of the examples in this chapter deal with the fictitious U.S. Corporation. The balance sheet for the company

RWJ Excel Tip Note that we will enter the data for the balance sheet here, but reference the numbers across different sheets, a v balance sheet balances, we will have Excel do the balance sheet calculations for us anyway. For example, total curr number is given in the textbook.

U.S. Corporation 2009 and 2010 Balance Sheets (\$ in millions) Assets 2009 Current assets Cash Accounts receivable Inventory Total Fixed assets Net plant and equipment \$ 104 \$ 455 553 1,112 \$ 2010 160 688 555 1,403

1,644 \$

1,709

Total assets

2,756 \$

3,112

## RWJ Excel Tip

In the balance sheet, select the 2009 cash balance, go to Formulas, and select Trace Dependents. This will draw a li liabilities. This function draws an arrow to any cell that uses the selected cell in a calculation. If you go to the total a menu, Excel will draw a line to total current assets and net plant and equipment to total assets. Tracing precedents for the calculation in that cell. Both functions are useful for tracing where cells are used in future calculations or wh

We will be using this balance sheet in future calculations. Example 2.2: Market Value versus Book Value We are given the following information on Klingon Corporation: Book value of fixed assets: Market value of fixed assets: Book value of net working capital: Market value of net working capital: Book value of long-term debt: Market value of long-term debt: \$ \$ \$ \$ \$ \$ 700 1,000 400 600 500 500

Below we have both the book value and market value balance sheets for Klingon Corporation. Klingon Corporation Balance Sheets Book Value and Market Value Assets Book Net working capital Net fixed assets \$ 400 \$ 700 Market 600 1,000

Total assets

1,100 \$

1,600

RWJ Excel Tip Notice we used separate input cells for the market value and book value of debt even though the two numbers are not have to be the same. Using different input cells makes the spreadsheet more versatile.

se spreadsheets, we will use Excel to perform most of the calculations that are presented in ute for understanding the underlying calculations. The old adage "Garbage in - Garbage out" nderstand these spreadsheets to understand Finance, but it is a useful tool for calculations. epts before you work through these spreadsheets. It might also be advantageous to work ulations, there are often multiple ways to arrive at the correct solution. The spreadsheets show solve the problem with a spreadsheet.

will range from specific functions to formatting and displaying output. The first application we eet and enter the numbers directly into the balance sheet, in some cases, our preference is to heet. We also believe in the use of color to differentiate input cells and calculation cells. In d, the cell is a calculation or references an input cell.

## s shareholders' equity? What is net working capital?

To make the numbers in a cell appear the way you would like them to, whether a dollar -click, and select the "Format Cells" option. This will allow you to change the format of the

Liabilities & Shareholders' Equity ent liabilities \$ -term debt eholders' equity liabilities and eholders' equity \$

## 70 200 330 600

ers' equity equals both total assets and current liabilities plus long-term debt plus equity.

## The balance sheet for the company is below.

numbers across different sheets, a very handy tool in Excel. Also, even though we know the r us anyway. For example, total current assets will be calculated in Excel even though the

orporation 10 Balance Sheets millions) Liabilities and Owner's Equity 2009 Current liabilities Accounts payable Notes payable Total Long-term debt Owner's equity Common stock and paid-in surplus Retained earnings Total Total liabilities and owner's equity \$ \$ \$ 232 \$ 196 428 \$ 408 \$ 2010 266 123 389 454

\$ \$

## 640 1,629 2,269

2,756 \$

3,112

race Dependents. This will draw a line from the cash balance cell to the 2009 total current a calculation. If you go to the total assets cell, and choose Trace Precedents from the same t to total assets. Tracing precedents allows us to see which cells the cell we selected is using are used in future calculations or which cell or cells are used in the current calculation.

Klingon Corporation.

Corporation ce Sheets and Market Value Liabilities and Owner's Equity Book Market Long-term debt \$ 500 \$ 500 Shareholders' equity 600 1,100 Total liabilities and owner's equity

1,100 \$

1,600

t even though the two numbers are the same. While they are the same in this case, they do re versatile.

## Chapter 2 - Section 2 The Income Statement

The income statement measures performance over time. The income statement for U.S. Corporation is:
Tax rate: U.S. Corporation 2010 Income Statement (\$ in millions) 34%

Net sales Cost of goods sold Depreciation Earnings before interest and taxes Interest paid Taxable income Taxes (34%) Net income Dividends Addition to retained earnings

\$ \$ \$ \$

## 1,509 750 65 694 70 624 212 412 103 309

We have the tax rate as an input cell. In this way, Excel will calculate the taxes automatically. The dividends are an input cell s Example 2.3: Calculating Earnings and Dividends per share Suppose that the shares outstanding for U.S. Corporation in millions are: What are the earnings per share and dividends per share? Earnings per share = Net income / Total shares outstanding = Dividends per share = Total dividends / Total shares outstanding = 200

## t for U.S. Corporation is:

ically. The dividends are an input cell since the dividends are at management discretion.

\$ \$

2.06 0.515

## Chapter 2 - Section 3 Taxes

The corporate income tax table currently in effect is: Taxable income is But greater than less or equal than or equal to. to \$ - \$ 50,000 50,001 75,000 75,001 100,000 100,001 335,000 335,001 10,000,000 10,000,001 15,000,000 15,000,001 18,333,333 18,333,334

Tax rate 15% 25% 34% 39% 34% 35% 38% 35%

Notice that we entered the minimum and maximum amount for each marginal tax rate in separate columns. Why w the tax on the next dollar of income. Suppose we have gathered the following information from a company's incom Taxable income: Taxes: The marginal tax rate will be: Marginal tax rate: 39% \$ \$ 200,000 68,000

RWJ Excel Tip To have Excel find the marginal tax rate at the requested level of income, we used VLOOKUP. This function is found VLOOKUP(lookup_value,table_array,col_index_num,range_lookup). The lookup_value is the number we want to fi we want to look for the number, index_number is the column in the selected data we want the answer returned fr only for an exact match (if FALSE is entered) or an approximate match (the default, or if TRUE is entered.) In this ca net income amount as the lookup_value, and entered "3" as the index_num since we wanted the number from the we did not enter a value for range_lookup, the default option was to look for the closest number and return the va cell calculation cell to see the syntax we used.

The average tax rate is simply the total taxes divided by the taxable income, or: Average tax rate: 34.00%

Of course, you could create a spreadsheet to calculate the total tax bill and average tax rate for a given level of tax this workbook asks you to create such a spreadsheet.

tax rate in separate columns. Why we did this we will explain shortly. The marginal tax rate is nformation from a company's income statement:

sed VLOOKUP. This function is found under Lookup & Reference. The format for this function is _value is the number we want to find, in this case the net income. The table_array is where ata we want the answer returned from, and range_lookup allows you to request an answer ault, or if TRUE is entered.) In this case, we highlighted the entire table, used the cell with the ce we wanted the number from the 3rd column we highlighted returned as our answer. Since he closest number and return the value from the column. Click on the marginal income tax rate

rage tax rate for a given level of taxable income. In fact, the Master it! problem at the end of

## Chapter 2 - Section 4 Cash Flow

Now we are ready to calculate the financial cash flows for the fictitious U.S. Corporation. When we calculate the ca from the previous worksheets so we do not have to enter the balance sheet and income statements again.

RWJ Excel Tip To reference data in another worksheet, first enter an equal sign in the cell you want the data in, then move the cu corresponds to the worksheet you want. Go to the cell that contains the desired data, left click your mouse, and pr click on the appropriate worksheet tab at the bottom of the spreadsheet.

U.S. Corporation 2010 Operating Cash Flow Earnings before interest and taxes + Depreciation - Taxes Operating cash flow

## 694 65 212 547

RWJ Excel Tip Excel will not let you enter a mathematical operator ( = , + , - , etc.) at the beginning of a text cell. However, if you e consider anything in the cell as text, not a mathematical operation. This is how we entered the "+" before Deprecia

Capital spending is the amount a company spends on fixed assets. For U.S. Corporation, the capital spending was: U.S. Corporation 2010 Capital Spending Ending fixed assets - Beginning fixed assets + Depreciation Net capital spending \$ 1,709 1,644 65 130

The change in net working capital is the amount spent on current assets. Net working capital is current assets minu net working capital was: U.S. Corporation 2010 Change in Net Working Capital Ending NWC \$ - Beginning NWC

1,014 684

Change in NWC

330

Now we are ready to calculate the cash flow from assets for U.S. Corporation. The cash flow from assets is the oper NWC. The cash flow from assets is: U.S. Corporation 2010 Cash Flow from Assets Operating cash flow - Net capital spending - Change in NWC Cash flow from assets

## 547 130 330 87

The cash flow to creditors is the interest paid minus net new borrowing. Net new borrowing is simply the differenc long-term debt. U.S. Corporation 2010 Cash Flow to Creditors Interest paid - Net new borrowing Cash flow to creditors \$ \$ 70 46 24

The cash flow to stockholders is dividends paid minus net new equity. To find net new equity, we can subtract the ending common stock and paid-in surplus. So, the cash flow to stockholders was: U.S. Corporation 2010 Cash Flow to Stockholders Dividends paid - Net new equity Cash flow to stockholders \$ \$ 103 40 63

poration. When we calculate the cash flows, we are going to reference inputs and calculations d income statements again.

want the data in, then move the cursor to the tab at the bottom of the spreadsheet that d data, left click your mouse, and press enter. To get back to the current worksheet, simply

ning of a text cell. However, if you enter an apostrophe as the first character in a cell, Excel will we entered the "+" before Depreciation.

## poration, the capital spending was:

orking capital is current assets minus current liabilities. So, for U.S. Corporation, the change in

he cash flow from assets is the operating cash flow less the capital spending less the change in

w borrowing is simply the difference between the ending long-term debt and the beginning

et new equity, we can subtract the beginning common stock and paid-in surplus from the s:

## Chapter 2 - Master it!

Using Excel to find the marginal tax rate can be accomplished using the VLOOKUP function. However, calculating the total tax bill is a little more difficult have shown a copy of the IRS tax table for an individual. Often, tax tables are presented in this format. If taxable income is over -\$0 7,825 31,850 77,100 160,850 349,700

## But not over -\$7,825 31,850 77,100 160,850 349,700

The tax is: 10% of the amount over \$0 \$782.50 plus 15% of the amount over \$7,825 \$4,386.25 plus 25% of the amount over \$31,850 \$15,698.75 plus 28% of the amount over \$77,100 \$39,148.75 plus 33% of the amount over \$160,850 \$101,469.25 plus 35% of the amount over \$349,700

In reading this table, the marginal tax rate for taxable income less than \$7,825 is 10%. If the taxable income is between \$7,825 and \$31,850, the tax bill plus the marginal taxes. The marginal taxes are calculated as the taxable income minus \$7,825 times the marginal tax rate of 15%. Below, we have the tax table as shown in the textbook, as well as a taxable income. Taxable income: \$ 1,350,000

The corporate income tax table currently in effect is: Taxable income is greater than But or equal less to. than \$ - \$ 50,000 50,001 75,000

## 34% 39% 34% 35% 38% 35%

Create a tax table for corporate taxes similar to the individual tax table shown above. For a given taxable income, what is the marginal tax rate? For a given taxable income, what is the total tax bill? For a given taxable income, what is the average tax rate?

## Master it! Solution

If taxable income is over -But not over --

a.

The tax is: plus plus plus plus plus plus plus

b. c.

The marginal tax rate is: The total tax bill is: Tax on the bottom of marginal tax bracket: Amount of income in marginal tax bracket: Total tax:

d.

## The average tax rate is:

of the amount over of the amount over of the amount over of the amount over of the amount over of the amount over of the amount over of the amount over