Ross, Westerfield, Jaffe, and Jordan's Excel Master

Corporate Finance, 11th edition

by Brad Jordan and Joe Smolira
Version 11.0

Chapter 2
In these spreadsheets, you will learn how to use the following Excel fu

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 File tab
then "Excel Options," "Add-Ins" and select
"Go." Check "Analysis ToolPak" and
"Solver Add-In," then click "OK."
 the following Excel functions:

eadsheets:

equire that
 Chapter 2 - Section 1
The Balance Sheet

Spreadsheets are a very useful way to do financial calculations. Throughout these spreadsheets, we will use Excel to
textbook. However, using Excel or any spreadsheet program is not a substitute for understanding the underlying cal
definitely applies to spreadsheets. You should realize that you do not need to understand these spreadsheets to und
would recommend that you first read the textbook to understand the concepts before you work through these spre
the problems by hand or using a financial calculator. As with most calculations, there are often multiple ways to arri
method of solving the problem presented, not necessarily the only way to solve the problem with a spreadsheet.

RWJ Excel Tip

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

Given the following information, what does the balance sheet look like? What is shareholders' equity? What is

Current assets: $ 100

Net fixed assets: $ 500
Short-term debt: $ 70
Long-term debt: $ 200

RWJ Excel Tip

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

Assets Liabilities & Shareholders' Equity

Current assets $ 100 Current liabilities
Fixed assets 500 Long-term debt
Shareholders' equity
Total liabilities and
Total assets $ 600 shareholders' equity

To calculate the shareholders' equity, realize that total liabilities and shareholders' equity equals both total ass
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. Composite Corporation. The balance sheet for the

RWJ Excel Tip

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

U.S. Composite Corporation

2015 and 2014 Balance Sheets
($ in millions)
Assets
2015 2014
Current assets
Cash and equivalents $ 140 $ 107
Accounts receivable 294 270
Inventory 269 280
Other 58 50
Total current assets $ 761 $ 707

Fixed assets
Property, plant and equipment $ 1,423 $ 1,274
Less accumulated depreciation 550 460
Net property, plant, and $ 873 $ 814
equipment
Intangible assets and others 245 221
Total fixed assets $ 1,118 $ 1,035

Total assets $ 1,879 $ 1,742

Notes to balance sheet

Par value of stock: $ 1
 New debt issued: $ 86
Debt retired: $ 73
Stock repurchased: $ 6
New shares issued: 23
Share price of new shares: $ 1.87
Total par value of new shares: $ 23
Additional capital surplus of $ 20
new shares:

RWJ Excel Tip

In the balance sheet, select the 2015 cash balance, go to Formulas, and select Trace Dependents. This will draw a lin
liabilities. This function draws an arrow to any cell that uses the selected cell in a calculation. If you go to the total as
menu, Excel will draw a line from total current assets and net plant and equipment to total assets. Tracing preceden
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 2.1: Market Value versus Book Value

We are given the following information on the Cooney Corporation:

Book value of fixed assets: $ 700

Market value of fixed assets: $ 1,000
Book value of net working capital: $ 400
Market value of net working capital: $ 600
Book value of long-term debt: $ 500
Market value of long-term debt: $ 500

Below we have both the book value and market value balance sheets for the Cooney Corporation.

Cooney Corporation
Balance Sheets
Book Value and Market Value
Assets
Book Market
Net working capital $ 400 $ 600
Net fixed assets 700 1,000

$ 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
have to be the same. Using different input cells makes the spreadsheet more versatile.
 e spreadsheets, we will use Excel to perform most of the calculations that are presented in the
or 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. We
before you work through these spreadsheets. It might also be advantageous to work through
here are often multiple ways to arrive at the correct solution. The spreadsheets show one
the problem with a spreadsheet.

ill range from specific functions to formatting and displaying output. The first application we
et 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 these
ell is a calculation or references an input cell.

hat is 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

nt liabilities $ 70
term debt 200
holders' equity 330
liabilities and
eholders' equity $ 600

holders' equity equals both total assets and current liabilities plus long-term debt plus
ers' equity.
poration. The balance sheet for the company is below.

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

site Corporation
14 Balance Sheets
millions)
Liabilities and Stockholder's Equity
2015 2014
Current liabilities
Accounts payable $ 213 $ 197
Notes payable 50 53
Accrued expenses 223 205
Total current liabilities $ 486 $ 455

Long-term liabilities
Deferred taxes $ 117 $ 104
Long-term debt 471 458
Total long-term liabilities $ 588 $ 562

Stockholders' equity
Preferred stock $ 39 $ 39
Common stock ($1 par value) 55 32
Capital surplus 347 327
Accumulated retained earnings 390 347
Less treasury stock 26 20
Total equity $ 805 $ 725

Total liabilities and

stockholders' equity $ 1,879 $ 1,742
 ace Dependents. This will draw a line from the cash balance cell to the 2015 total current
a calculation. If you go to the total assets cell, and choose Trace Precedents from the same
ent to total assets. Tracing precedents allows us to see which cells the cell we selected is using
re used in future calculations or which cell is used in the current calculation.

he Cooney Corporation.

Corporation
nce Sheets
and Market Value
Liabilities and Owner's Equity
Book Market
Long-term debt $ 500 $ 500
Shareholders' equity 600 1,100

$ 1,100 $ 1,600
 even though the two numbers are the same. While they are the same in this case, they do not
rsatile.
 Chapter 2 - Section 2
The Income Statement

The income statement measures performance over time. The income statement for U.S. Composite Corporation is:

U.S. Composite Corporation

2015 Income Statement
($ in millions)
Total operating revenues $ 2,262
Cost of goods sold 1,655
Selling, general, and administrative expenses 327
Depreciation 90
Operating income $ 190
Other income 29
Earnings before interest and taxes (EBIT) $ 219
Interest expense 49
Pretax income $ 170
Taxes 84
Current: $ 71
Deferred: 13
Net income $ 86

Dividends $ 43
Addition to retained earnings 43

Suppose that the shares outstanding for U.S. Composite Corporation in millions are:

What are the earnings per share and dividends per share?

Earnings per share = Net income / Total shares outstanding = $ 2.97

Dividends per share = Total dividends / Total shares outstanding = $ 1.48
nt for U.S. Composite Corporation is:

29
 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… Tax rate
$ - $ 50,000 15%
50,001 75,000 25%
75,001 100,000 34%
100,001 335,000 39%
335,001 10,000,000 34%
10,000,001 15,000,000 35%
15,000,001 18,333,333 38%
18,333,334 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: $ 200,000

Taxes: $ 61,250

The marginal tax rate will be:

Marginal tax rate: 39%

RWJ Excel Tip

To have Excel find the marginal tax rate at the requested level of income, we used VLOOKUP. This function is found
is VLOOKUP(lookup_value,table_array,col_index_num,range_lookup). The lookup_value is the number we want to fi
where we want to look for the number, col_index_num is the column in the selected data we want the answer retu
answer only for an exact match (if FALSE is entered) or an approximate match (the default, or if TRUE is entered.) In
with the net income amount as the lookup_value, and entered "3" as the col_index_num since we wanted the num
answer. Since we did not enter a value for range_lookup, the default option was to look for the closest number and
income tax rate 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: 30.625%

Of course, you could create a spreadsheet to calculate the total tax bill and average tax rate for a given level of taxa
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
kup_value is the number we want to find, in this case the taxable income. The table_array is
lected data we want the answer returned from, and range_lookup allows you to request an
the default, or if TRUE is entered.) In this case, we highlighted the entire table, used the cell
ndex_num since we wanted the number from the 3rd column we highlighted returned as our
as to look for the closest number and return the value from the column. Click on the marginal
rage tax rate for a given level of taxable income. In fact, the Master It! problem at the end of
 Chapter 2 - Section 4
Net Working Capital

Net working capital is current assets minus current liabilities. When we calculate the net working capital, we are goi
previous worksheets so we do not have to enter the balance sheet 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 cur
corresponds to the worksheet you want. Go to the cell that contains the desired data, left click your mouse, and pre
click on the appropriate worksheet tab at the bottom of the spreadsheet.

U.S. Composite Corporation

Net Working Capital

Current Current Net Working

assets liabilities Capital
2015 $761 $486 $275
2014 707 455 252

We can calculate the change in net working capital, which is the firm's investment in net working capital for the yea

Change in net working capital: $23

te the net working capital, we are going to reference inputs and calculations from the

u 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

ent in net working capital for the year. The change in net working capital is:
 Chapter 2 - Section 5
Financial Cash Flow

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

The cash flow from operations is the cash flow generated by the business activities of the firm. For the U.S. Compos

U.S. Composite Corporation

2015 Operating Cash Flow
Earnings before interest and taxes $ 219
+ Depreciation 90
- Current taxes 71
Operating cash flow $ 238

RWJ Excel Tip

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

Capital spending is the amount a company spends on fixed assets. For the first method of calculating, we need the d
the sale of fixed assets. Since these are amounts we need to know outside the spreadsheet, we have made these ce
capital spending, we need numbers from the balance sheet. Below you will see both calculations for capital spendin

U.S. Composite Corporation

2015 Capital Spending
Acquisition of fixed assets $ 198
- Sales of fixed assets 25
Net capital spending $ 173

To calculate the total cash flows of the firm, we also need the change in net working capital, which we previously ca
the firm for U.S. Composite Corporation. The cash flow from the firm is the operating cash flow less the capital spen
is:

U.S. Composite Corporation

2015 Cash Flow from Assets
Operating cash flow $ 238
 - Net capital spending 173
- Change in NWC 23
Cash flow from assets $ 42

The cash flow to creditors can be calculated as interest plus retirement of debt minus the proceeds of new debt, or
borrowing is simply the difference between the ending long-term debt and the beginning long-term debt. Below, we
methods.

U.S. Composite Corporation

2015 Cash Flow to Creditors
Interest paid $ 49
+ Retirement of debt 73
Debt service $ 122
- Proceeds from long-term debt sales 86
Cash flow to creditors $ 36

The cash flow to stockholders can also be calculated in two ways. Below, we show the calculations for both method

U.S. Composite Corporation

2015 Cash Flow to Stockholders
Dividends paid $ 43
+ Repurchase of stock 6
Cash to stockholders $ 49
- Proceeds from new stock issue 43
Cash flow to stockholders $ 6
mposite Corporation. When we calculate the cash flows, we are going to reference inputs and
nce sheet and income statements again.

ities of the firm. For the U.S. Composite Corporation, the operating cash flow is:

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

method of calculating, we need the dollar amounts for the purchases of new fixed assets and
spreadsheet, we have made these cells inputs. For the second method of calculating the
both calculations for capital spending.

U.S. Composite Corporation

2015 Capital Spending
Ending fixed assets $ 1,118
- Beginning fixed assets 1,035
+ Depreciation 90
Net capital spending $ 173

orking capital, which we previously calculated. Now we are ready to calculate the cash flow of
erating cash flow less the capital spending less the change in NWC. The cash flow from the firm
minus the proceeds of new debt, or as the interest paid minus net new borrowing. Net new
beginning long-term debt. Below, we calculate the cash flow to creditors using both

U.S. Composite Corporation

2015 Cash Flow to Creditors
Interest paid $ 49
- Net new borrowing 13
Cash flow to creditors $ 36

ow the calculations for both methods.

U.S. Composite Corporation

2015 Cash Flow to Stockholders
Dividends paid $ 43
- Net new equity 37
Cash flow to stockholders $ 6
 Chapter 2 - Section 6
The Accounting Statement of Cash Flows

The accounting statement of cash flows has three sections. The first section includes cash flow that results from the
includes the cash flows from the firms investing activities, and the third section is the cash flow from the firm's finan
statement of cash flows for the U.S. Composite Corporation.

U.S. Composite Corporation

2015 Statement of Cash Flows

Operations
Net income $ 86
Depreciation 90
Deferred taxes 13
Changes in assets and liabilities
Accounts receivable (24)
Inventories 11
Accounts payable 16
Accrued expenses 18
Other (8)
Total cash flow from operations $ 202

Investing activities
Acquisition of fixed assets $ (198)
Sale of fixed assets 25
Total cash flow from investing activities $ (173)

Financing activities
Retirement of long-term debt $ (73)
Proceeds from long-term debt sales 86
Change in notes payable (3)
Dividends (43)
Repurchase of stock (6)
Proceeds from new stock issue 43
Total cash flow from financing activities 4
Change in cash (on balance sheet) $ 33
 ludes cash flow that results from the firm's normal operating activities. The second section
n is the cash flow from the firm's financing activities. Below, we show the accounting
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 diffi
Below we have shown a copy of the IRS tax table for an individual. Often, tax tables are presented in this format.

If taxable
income is But not
over -- over -- The tax is:
$0 $9,225 10% of the amount over $0
9,226 37,450 $922.50 plus 15% of the amount over $9,225
37,451 90,750 $5,126.25 plus 25% of the amount over $37,450
90,751 189,300 $18,4813.25 plus 28% of the amount over $90,750
189,301 411,500 $46,075.25 plus 33% of the amount over $189,300
411,501 413,200 $119,402.25 plus 35% of the amount over $411,500
413,201 $119,996.25 plus 39.6% of the amount over $413,201

In reading this table, the marginal tax rate for taxable income less than $9,225 is 10%. If the taxable income is between $9,225 and $37,450, the tax
$922.50 plus the marginal taxes. The marginal taxes are calculated as the taxable income minus $9,225 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… Tax rate
$ - $ 50,000 15%
50,001 75,000 25%
75,001 100,000 34%
100,001 335,000 39%
335,001 10,000,000 34%
10,000,001 15,000,000 35%
15,000,001 18,333,333 38%
18,333,334 35%

a. Create a tax table for corporate taxes similar to the individual tax table shown above.

b. For a given taxable income, what is the marginal tax rate?

c. For a given taxable income, what is the total tax bill?

d. For a given taxable income, what is the average tax rate?

he total tax bill is a little more difficult.

ween $9,225 and $37,450, the tax bill is

marginal tax rate of 15%.
 Master It! Solution

If taxable
income is But not
a. over -- over -- The tax is:
$ - $ 50,000 15% of the amount over
$ 50,001 $ 75,000 $ 7,500 plus 25% of the amount over
$ 75,001 $ 100,000 13,750 plus 34% of the amount over
$ 100,001 $ 335,000 22,249 plus 39% of the amount over
$ 335,001 $ 10,000,000 113,899 plus 34% of the amount over
$ 10,000,001 $ 15,000,000 3,399,999 plus 35% of the amount over
$ 15,000,001 $ 18,333,333 5,149,998 plus 38% of the amount over
$ 18,333,334 $ - 6,416,664 plus 35% of the amount over

b. The marginal tax rate is: 34%

c. The total tax bill is:

Tax on the bottom of marginal tax bracket: $ 113,899

Amount of income in marginal tax bracket: $ 1,014,999
Total tax: $ 458,999

d. The average tax rate is: 34%

$ -
$ 50,001
$ 75,001
$ 100,001
$ 335,001
$ 10,000,001
$ 15,000,001
$ 18,333,334