Concept explainers
Balance Sheets as of December 31
2018 | 2017 | |
Assets | ||
Cash and equivalents | $ 15,000 | $ 14,000 |
Accounts receivable | 35,000 | 30,000 |
Inventories | 33,320 | 27,000 |
Total current assets | $83,320 | $71,000 |
Net plant and equipment | 48,000 | 46,000 |
Total assets | $131,320 | $117,000 |
Liabilities and Equity | ||
Accounts payable | $ 10,100 | $ 9,000 |
Accruals | 8,000 | 6,000 |
Notes payable | 7,000 | 5,050 |
Total current liabilities | $ 25,100 | $ 20,050 |
Long term bonds | 20,000 | $20,000 |
Total liabilities | $45,100 | $ 40,050 |
Common stock(4,000 shares) | 40,000 | 40,000 |
46,220 | 36,950 | |
Common equity | $ 86,220 | $ 76,950 |
Total liabilities and equity | $ 131,320 | $ 117,000 |
Income Statement for Year Ending December 31, 2018
Sales | $ 210,000 |
Operating cost excluding |
160,00 |
EBITDA | $ 50,000 |
Depreciation and amortization | 6000 |
EBIT | $ 44,000 |
interest | 5,350 |
EBT | 5,38,650 |
Taxes (40%) | 15,460 |
Net income | $ 23,190 |
Dividends paid | $13,920 |
- a. What was net operating working capital for 2017 and 2018? Assume that all cash is excess cash; i.e., this cash is not needed for operating purposes.
- b. What was .Arlington’s 2018 free cash flow?
- c. Construct Arlington’s 2018 statement of stockholders’ equity.
- d. What was Arlington’s 2018 EVA? Assume that its after tax cost of capital is 10%.
- e. What was Arlington’s MVA at year-end 2018? Assume that its stock price at December 31, 2018? Was $25.
a.
To compute: The net operating working capital of Company A.
Financial Statements:
A part of annual report that is attributed to the financials aspects of the company for an accounting period is called financial statements. These include balance sheet, statement of retained earnings, income statement, and cash flow statement.
Net Operating Working Capital:
The difference of current assets and current liabilities is called as the working capital. When only accounts payable and accruals are considered instead of total current liabilities, the difference is called as the net operating working capital.
Explanation of Solution
Given information (for 2017)
Cash and equivalents is $14,000.
Note payable is $5,050.
Current assets are $71,000.
Current liabilities is $20,050.
Formula to compute operating current assets is as follows:
Compute operating current assets is as follows:
Hence, the operating current asset is $57,000.
Formula to compute operating current liabilities is as follows:
Compute operating current liabilities is as follows:
Hence, the operating current liabilities is $15,000.
Formula to compute net operating working capital is as follows:
Compute net operating working capital is as follows:
Hence, the net operating working capital for 2017 is $42,000.
Given information (for 2018)
Cash and equivalents is $15,000.
Note payable is $7,000.
Current liabilities is $25,100.
Current assets are $83,320.
Formula to compute operating current assets:
Compute operating current assets:
Hence, the operating current asset is $68,320.
Formula to compute operating current liabilities:
Compute operating current liabilities:
Hence, the operating current liabilities is $18,100.
Formula to compute net operating working capital is as follows:
Compute net operating working capital is as follows:
Hence, the net operating working capital for 2018 is $50,220.
Therefore, Company A has net operating working capital of $42,000 and $50,220 in 2017 and 2018, respectively.
b.
To compute: The free cash flow in 2018 for Company A.
Free Cash Flow: The cash generated over and above required by the business operations and capital expenditure known as free cash flow. Statement of cash flow reports the cash flow generated or consumed by the business.
Explanation of Solution
Given information:
EBIT is $44,000.
Depreciation is $6,000.
Capital expenditure is $8,000.
Tax rate is 40%.
Change in net operating working capital is $8,220
Formula to compute free cash flow is as follows:
Compute free cash flow is as follows:
Substitute $44,000 for EBIT, 40% for tax rate, $6,000 for depreciation, $8,000 for capital expenditure and $9,220 for change in net operating working capital.
Hence, the free cash flow is $16,180.
Therefore, Company A’s free cash flow for 2016 is $16,180.
c.
To prepare: The statement of stockholders’ equity of Company A for 2018.
Statement of Stockholders’ Equity: Statement of stockholders’ equity shows the opening and closing balance of stockholder’s equity with the changes occurred during the accounting period.
Explanation of Solution
Statement of stockholders’ equity:
Shares | Amount | Retained Earnings | Total Stockholders’ Equity | |
Balances, December 31, 2017 | 4,000 | 40,000 | 36,950 | 76,950 |
2018 Net income | 23,190 | |||
Cash dividends | (13,920) | |||
Additional to retained earnings | 9,270 | |||
Balances, December 31, 2018 | 4,000 | 40,000 | 46,220 | 86,220 |
Therefore, Company A has stockholders’ equity of $86,220 at the end of year 2018.
d.
To compute: The economic value added for Company A for 2018.
Economic Value Added (EVA): It is a measure along with market value added to evaluate the management’s performance. It considers the opportunity costs of capital invested in the business and the net operating profit generated by the business.
Explanation of Solution
Given information:
EBIT is $44,000.
Tax rate is 40%.
Total invested capital $113,220 (working note).
After tax percentage cost of capital is 10%.
Formula to compute economic value added is as follows:
Substitute $44,000 for EBIT, 40% for tax rate, $113,220 for invested capital and 10% for after tax percentage cost of capital.
Compute economic value added is as follows:
Hence, the economic value added is $15,078.
Working note:
Calculation of total invested capital is as follows:
Hence, the total invested capital is $113,220.
Therefore, the economic value added of Company A for the year 2018 is $15,078.
e.
To compute: The market value added for Company A for the year 2018.
Market Value Added: The measure to evaluate management’s performance in a company’s operations and growth, market value added considers the market value of company’s outstanding shares. It reports the market value over and above the book value of those outstanding shares.
Explanation of Solution
Given information:
Book value of common equity is $86,220.
Stock price is $25 per share.
Number of shares outstanding are 4,000.
Formula to compute market value added is as follows:
Substitute $86,220 for book value of common equity, $25 for stock price and 4,000 for number of shares outstanding.
Compute market value added is as follows:
Hence, the market value is $13,780.
Therefore, the market value added for Company A for the year 2018 is $13,780.
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