Chapter 3, Problem 14P

a.

Summary Introduction

To determine: The net operating working capital for 2018 and 2019.

Statement of Cash Flow: It is a part of financial statements that are included in the annual report of a company. It reports the cash generated or used by the business in a specified period.

Cash Flow from Operating Activities: The cash generated over and above required business operations is called and reported as cash flow from operating activities. Statement of cash flow reports the net cash flow generated or consumed by the business.

Answer to Problem 14P

The net operating working capital for 2018 is $42,000 and 2019 is $50,220.

Explanation of Solution

Determine the net operating working capital for 2018:

$\begin{array}{c}NetOperatingWorkingCapita{l}_{2018}=\left[OperatingCurrentAssets-OperatingCurrentLiabilities\right]\\ =\left[\left(\$71,000-\$14,000\right)-\left(\$20,050-\$5,050\right)\right]\\ =\left[\$57,000-\$15,000\right]\\ =\$42,000\end{array}$

Therefore the net operating working capital for 2018 is $42,000.

Determine the net operating working capital for 2019:

$\begin{array}{c}NetOperatingWorkingCapita{l}_{2019}=\left[OperatingCurrentAssets-OperatingCurrentLiabilities\right]\\ =\left[\left(\$83,320-\$15,000\right)-\left(\$25,100-\$7,000\right)\right]\\ =\left[\$68,320-\$18,100\right]\\ =\$50,220\end{array}$

Therefore the net operating working capital for 2019 is $50,220.

b.

Summary Introduction

To determine: The free cash flow in 2019 for Company A.

Answer to Problem 14P

The free cash flow in 2019 for Company A is $22,780.

Explanation of Solution

Determine the free cash flow in 2019 for Company A:

$\begin{array}{c}FreeCashFlo{w}_{2019}=\left[\left(EBIT\times \left(1-Taxes\right)+Depreciation\right)-\left(\begin{array}{l}CapitalExpenditure+\\ ChangeinNetOperating\\ WorkingCapital\end{array}\right)\right]\\ =\left[\left(\$44,000\times \left(1-25\%\right)+\$6,000\right)-\left(\begin{array}{l}\left(\$6,000+\$2,000\right)+\\ \left(\$50,220-\$42,000\right)\end{array}\right)\right]\\ =\left[\$39,000-\$16,220\right]\\ =\$22,780\end{array}$

Therefore, the free cash flow in 2019 for Company A is $22,780.

c.

Summary Introduction

To determine: The statement of stockholders equity for Company as 2019.

Explanation of Solution

The statement of stockholders equity for Company as on 2019 is as follows:

Excel Spreadsheet:

Excel Spreadsheet Workings:

d.

Summary Introduction

To determine: The EVA of Company A for 2019.

Answer to Problem 14P

The EVA of Company A for 2019 is $21,678.

Explanation of Solution

Determine the EVA of Company A for 2019:

$\begin{array}{c}EV{A}_{2019}=\left[\left(EBIT\times \left(1-Taxes\right)\right)-\left(\begin{array}{l}InvestedCapital\times \\ CostofCapital\end{array}\right)\right]\\ =\left[\left(\$44,000\times \left(1-25\%\right)\right)-\left(\left(\$86,220+\$20,000+\$7,000\right)\times 10\%\right)\right]\\ =\left[\$\text{33,000}-\$11,322\right]\\ =\$\text{21,678}\end{array}$

Therefore, the EVA of Company A for 2019 is $21,678.

e.

Summary Introduction

To determine: The MVA of Company A for 2019.

Answer to Problem 14P

The MVA of Company A for 2019 is $13,780.

Explanation of Solution

Determine the MVA of Company A for 2019:

$\begin{array}{c}MV{A}_{2019}=\left[\left(CurrentStock\mathrm{Pr}ice\times SharesOuts\tan ding\right)-AmountofCommonEquity\right]\\ =\left[\left(\$25\times 4,000\right)-\$86,220\right]\\ =\left[\$\text{100,000}-\$86,220\right]\\ =\$\text{13,780}\end{array}$

Therefore, the MVA of Company A for 2019 is $13,780.