Business 2019, Spring 2003

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1 Business 2019, Spring 2003 Assignment 1 Due Monday, May 12, 2003, 5:00pm (beginning of class) Can be done in groups of at most FOUR 1. Financial Statements and Cash Flow Answer the following questions using Table 1. Bed Rock s tax rate in 2002 was 34%. (a) (6 points) Complete Bed Rock s balance sheets and income statement. (b) (2 points) Compute Bed Rock s 2002 operating cash flow. (c) (3 points) Compute Bed Rock s 2002 cash flow from asset. (d) (2 points) Compute Bed Rock s 2002 cash flow to creditors. (e) (2 points) Compute Bed Rock s 2002 cash flow to stockholders. (f) (5 points) From your cash flow calculations, would you say that Bed Rock is a healthy firm? 2. Individual Tax Rates Using Canada s tax rates for 2002, answer to following questions. (a) (2 points) How much taxes would an individual with an income of $40,000 pay on a $2,500 interest payment? (b) (2 points) How much taxes would an individual with an income of $70,000 pay on a $2,500 dividend payment? 1

2 Bed Rock, Inc and 2001 Balance Sheets Assets Current assets 5,000 4,000 Net fixed assets 13,000 13,000 Total assets Current liabilities 4,000 3,500 Long-term debt 8,000 Common stock 2,500 Accum. retained earnings 3,000 Total liabilities and equity Bed Rock, Inc. Sales 5,000 Cost of goods sold (3,000) Depreciation Other expenses (500) EBIT Interest (100) Taxable income Taxes Net income 264 Dividend 104 Retained earnings Table 1: Balance sheets and income statement for Question 1. (c) (2 points) How much taxes would an individual with an income of $110,000 pay on a $2,500 capital gain? (d) (2 points) At which level of income would an individual be indifferent between a $2,500 dividend payment and a $2,500 interest payment? (e) (2 points) At which level of income would an individual be indifferent between a $2,500 dividend payment and a $2,500 capital gain? 3. Capital Cost Allowance Interblue Corporation bought new photocopiers (class 8, 20% CCA rate) for $200,000 in (a) (4 points) Suppose these new photocopiers are the only assets in class 8 for Interblue. Calculate, for years 2000 to 2005, the UCC at the beginning of the year, the CCA depreciation for the year and the UCC at the end of the year. (b) (2 points) Suppose these new photocopiers are the only assets in class 8 for Interblue. What would be the tax consequences for Interblue if the photocopiers were sold for $65,000 at the end of 2005? 2

3 (c) (2 points) Suppose these new photocopiers are the only assets in class 8 for Interblue. What would be the tax consequences for Interblue if the photocopiers were sold for $35,000 at the end of 2005? (d) (8 points) Redo (a), (b) and (c), assuming that Interblue already had class 8 assets worth $1,000,000 in 2000 prior to the new photocopiers purchase. Assume also that no class 8 assets are either sold or purchased between 2000 and Statement of Changes in Financial Position (10 points) Using the information in Table 2, produce a statement of changes in financial position for Instruments du Rhône, Inc.. Instrument du Rhône, Inc and 2001 Balance Sheets Assets Cash Accounts receivable Inventory Other Total current assets Net fixed assets 1,118 1,035 Total assets 1,879 1,742 Accounts payable Notes payable Accrued expenses Total current liabilities Deferred taxes Long-term debt Total long-term liabilities Common stock Accum. retained earnings Total equity Total liabilities and equity 1,879 1,742 Instrument du Rhône, Inc. Sales 2,291 Cost of goods sold (1,655) Selling, gen. and admin. (327) Depreciation (90) EBIT 219 Interest expense (49) Taxable income 170 Taxes (84) Current: 71 Deferred 13 Net income 86 Dividend 43 Retained earnings 43 Table 2: Balance sheets and income statement for Question 4. 3

4 5. Ratio Analysis Using the 2002 audited financial statements for Sleeman Breweries Ltd, answer the following questions. (a) (5 points) Analyze Sleeman s performance with respect to the three profitability ratios seen in class. How does Sleeman compare with Unibroue? (b) (5 points) Analyze Sleeman s capital structure using some short-term and longterm solvency ratios. How does Sleeman compare with Unibroue? (c) (4 points) Analyze Sleeman s stock price using the two market value ratios seen in class. How does Sleeman compare with Unibroue? (d) (4 points) Use some asset turnover ratios to analyze the efficiency of Sleeman s management and compare your numbers with those of Unibroue. (e) (2 points) Which company is better? Sleeman or Unibroue? 6. Financial Planning The most recent financial statements for Brick Enterprises are shown in Table 3. Sales for 2003 are projected to grow at a 15 percent rate. The tax rate and the dividend payout rate will remain constant. Costs, current assets and accounts payable increase in proportions with sales. (a) (2 points) If the firm operates at full capacity and no new debt or equity is issued, what is the external financing needed to support the projected growth rate? (b) (4 points) Suppose now that the firm operates at 75 percent of capacity in What is EFN now? (c) (4 points) Assume the firm operates at full capacity in If it wishes to keep a current ratio of at least 3 and a total debt ratio of at most 0.4, what is a possible financing plan? (d) (2 points) Find Brick s internal growth rate. (e) (2 points) Find Brick s sustainable growth rate. 4

5 Assets Brick Enterprises Balance Sheet as of December 31, 2002 Cash 160 Accounts payable 300 Accounts receivable 440 Notes payable 100 Inventory 600 Total current liabilities 400 Total current assets 1,200 Long-term debt 800 Net fixed assets 1,800 Common stock 800 Accum. retained earnings 1,000 Total assets 3,000 Total liabilities and equity 3,000 Brick Enterprises Sales 1,000 Costs (800) Taxable income 200 Taxes (34%) (68) Net income 132 Dividends 44 Earnings retained 88 Table 3: Financial statements for Question 6. 5

Business 2019, Spring 2003

Business 2019, Spring 2003 Assignment 1 Suggested Answers 1. Financial Statements and Cash Flow Answer the following questions using Table 1. Bed Rock s tax rate in 2002 was 34%. (a) (6 points) Complete