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Corporate Finance
Here are book and market value balance sheets of the United Frypan Company (UF):
Book
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Net working capital $ 20 $ 40 Debt
Long-term assets 80 60 Equity
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$100 $100
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Market
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Net working capital $ 20 $ 40 Debt
Long-term assets 140 120 Equity
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$160 $160
________________________________________________________________________________ ________________________________________________________________________________
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Assume that MM’s theory holds with taxes. There is no growth, and the $40 of debt is expected to be permanent. Assume a 40% corporate tax rate.
a.How much of the firm’s value is accounted for by the debt-generated tax shield?
PV tax shield $
b.How much better off will UF’s shareholders be if the firm borrows $20 more and uses it to repurchase stock?
Increase in equity value $
a. What is the relative tax advantage of corporate debt if the corporate tax rate is Tc = 0.35, the personal tax rate is Tp = 0.35, but all equity income is received as capital gains and escapes tax entirely (TpE = 0)?
Relative tax advantage
b. How does the relative tax advantage change if the company decides to pay out all equity income as cash dividends that are taxed at 15%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Relative tax advantage
Construct a balance sheet for Galactic Enterprises given the following data:
Cash balances $ 25,000
Inventories $ 30,000
Net plant and equipment $ 140,000
Accounts receivable $ 35,000
Accounts payable $ 24,000
Long-term debt $ 130,000
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What is shareholders’ equity?
Shareholders’ equity $
The following table gives abbreviated balance sheets and income statements for Estée Lauder Companies. Assume a corporate tax rate of 35%.
($ in millions)
End of Year Start of Year
Balance Sheet
Assets
Current assets:
Cash and marketable securities $1,253 $1,121
Accounts receivable 946 746
Inventories 996 827
Other current assets 492 428
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Total current assets 3,687 3,121
Fixed assets:
Tangible fixed assets
Property, plant, and equipment 2,862 2,525
Less accumulated depreciation 1,719 1,501
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Net fixed assets 1,143 1,024
Other long-term assets 1,444 1,191
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Total assets $6,274 $5,336
________________________________________________________________________________ ________________________________________________________________________________
Liabilities and Shareholders’ Equity
Current liabilities:
Debt due for repayment $ 138 $ 23
Accounts payable 1,805 1,549
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Total current liabilities 1,943 1,572
Long-term debt 1,080 1,205
Other long-term liabilities 621 610
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Total liabilities 3,627 3,370
Total shareholders’ equity 2,629 1,948
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Total liabilities and shareholders’ equity $6,274 $5,336
________________________________________________________________________________ ________________________________________________________________________________
Income Statement
Net sales $8,810
Cost of goods sold 1,937
Selling, general, and administrative expenses 5,486
Depreciation 298
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Earnings before interest and taxes (EBIT) 1,089
Interest expense 64
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Taxable income 1,025
Tax 322
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Net income $ 703
________________________________________________________________________________
Dividends 148
Addition to retained earnings 555
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Where appropriate use assets at start of year rather than average assets.
a. Calculate the return on assets. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Return on assets %
b. Calculate the operating profit margin. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Operating profit margin %
c. Calculate the sales-to-assets ratio. (Round your answer to 2 decimal places.)
Sales-to-assets ratio
d. Calculate the inventory turnover. (Round your answer to 2 decimal places.)
Inventory turnover
e. Calculate the debt-equity ratio. (Round your answer to 2 decimal places.)
Debt-equity ratio
f. Calculate the current ratio. (Round your answer to 3 decimal places.)
Current ratio
g. Calculate the quick ratio. (Round your answer to 4 decimal places.)
Quick ratio
The following table gives abbreviated balance sheets and income statements for Estée Lauder Companies.
($ in millions)
End of Year Start of Year
Balance Sheet
Assets
Current assets:
Cash and marketable securities $1,253 $1,121
Accounts receivable 946 746
Inventories 996 827
Other current assets 492 428
________________________________________ ________________________________________
Total current assets 3,687 3,121
Fixed assets:
Property, plant, and equipment 2,862 2,525
Less accumulated depreciation 1,719 1,501
________________________________________ ________________________________________
Net fixed assets 1,143 1,024
Other long-term assets 1,444 1,191
________________________________________ ________________________________________
Total assets $6,274 $5,336
________________________________________________________________________________ ________________________________________________________________________________
Liabilities and Shareholders’ Equity
Current liabilities:
Debt due for repayment $ 138 $ 23
Accounts payable 1,805 1,549
________________________________________ ________________________________________
Total current liabilities 1,943 1,572
Long-term debt 1,080 1,205
Other long-term liabilities 621 610
________________________________________ ________________________________________
Total liabilities 3,627 3,370
Total shareholders’ equity 2,629 1,948
________________________________________ ________________________________________
Total liabilities and shareholders’ equity $6,274 $5,336
________________________________________________________________________________ ________________________________________________________________________________
Income Statement
Net sales $8,810
Cost of goods sold 1,937
Selling, general, and administrative expenses 5,486
Depreciation 298
________________________________________
Earnings before interest and taxes (EBIT) 1,089
Interest expense 64
________________________________________
Taxable income 1,025
Tax 322
________________________________________
Net income $ 703
________________________________________________________________________________
Dividends 148
Addition to retained earnings 555
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At the end of fiscal 2011 Estée Lauder had 197 million shares outstanding21 with a share price of $105. The company’s weighted-average cost of capital was about 10%.
a. Calculate the market value added. (Enter your answer in millions.)
Market value added $ million
b. Calculate the market-to-book ratio. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Market-to-book ratio
c. Calculate the economic value added. (Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)
Economic value added $ million
d. Calculate the return on capital. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Return on capital
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