Summary Week 1 Homework

An Overview of Financial Management and the Financial Environment: Forms of Business Organization The basic concepts of financial management are the same for all businesses, regardless of how they are organized. However, a firm's legal structure affects its operations. The main forms of business organizations are: (1) proprietorships, (2) partnerships, (3) corporations, and (4) limited liability companies (LLCs) and limited liability partnerships (LLPs). In terms of numbers, most businesses are . However, based on the dollar value of sales, most business is done by . Businesses are frequently started as and then converted to when their growth results in disadvantages outweighing advantages. A proprietorship has three important advantages: (1) It is easily and inexpensively formed, (2) it is subject to government regulations, and (3) it is subject to lower income taxes than are . However, a proprietorship also has three important limitations: (1) A proprietor has personal liability for the business' debts. (2) The life of the business is limited to the life of the individual who created it. (3) A proprietorship has difficulty obtaining large sums of capital so proprietorships are used primarily for small businesses. A partnership has two important advantages: (1) It is easily and inexpensively formed and (2) its income is allocated on a pro rata basis to partners and taxed on a(n) basis so the partnership avoids higher income taxes. A partnership has four important disadvantages: (1) personal liability, (2) life, (3) difficulty of transferring ownership, and (4) difficulty of raising large amounts of capital. A corporation has the following advantages: (1) life, (2) ownership that is easily transferred through the exchange of stock, (3) liability, and (4) can raise large amounts of capital to operate large businesses. Its disadvantages are: (1) Corporate earnings may be subject to taxation and (2) setting up a corporation and filing required state and federal reports, which is more complex and time-consuming. Large corporations are known as C corporations. However, as an aid to small businesses Congress created S corporations. Limited liability companies (LLCs) and limited liability partnerships (LLPs) have limited liability protection like but are taxed like . Investors in an LLC or LLP have votes in proportion to their ownership interest. LLCs and LLPs have been gaining in popularity, but large companies still find it advantageous to be corporations because of advantages in raising capital for growth.   Statement of Retained Earnings In its most recent financial statements, Del-Castillo Inc. reported $60 million of net income and $990 million of retained earnings. The previous retained earnings were $980 million. How much in dividends did the firm pay to shareholders during the year? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. Solution: 5000,000,0 Corporate Tax Liability The Talley Corporation had taxable operating income of $490,000 (i.e., earnings from operating revenues minus all operating costs). Talley also had (1) interest charges of $60,000, (2) dividends received of $5,000, and (3) dividends paid of $15,000. Its federal tax rate was 21% (ignore any possible state corporate taxes). Recall that 50% of dividends received are tax exempt. What is the firm’s taxable income? Round your answer to the nearest dollar. $ What is the tax expense? Round your answers to the nearest dollar. $ What is the after-tax income? Round your answers to the nearest dollar. $ Corporate Tax Liability The Wendt Corporation reported $50 million of taxable income. Its federal tax rate was 21% (ignore any possible state corporate taxes). a. What is the company's federal income tax bill for the year? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. $ b. Assume the firm receives an additional $4 million of interest income from some bonds it owns. What is the additional tax on this interest income? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. $ c. Now assume that Wendt does not receive the interest income but does receive an additional $4 million as dividends on some stock it owns. Recall that 50% of dividends received are tax exempt. What is the additional tax on this dividend income? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. $ Free Cash Flows Rhodes Corporation’s financial statements are shown below. Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars) 2020 2019 Sales $ 12,000 $ 10,000 Operating costs excluding depreciation 10,578 8,716 Depreciation and amortization 390 360 Earnings before interest and taxes $ 1,032 $ 924 Less interest 280 200 Pre-tax income $ 752 $ 724 Taxes (25%) 188 181 Net income available to common stockholders $ 564 $ 543 Common dividends $ 202 $ 200 Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars) 2020 2019 Assets Cash $ 650 $ 600 Short-term investments 120 100 Accounts receivable 2,750 2,500 Inventories 1,250 1,200 Total current assets $ 4,770 $ 4,400 Net plant and equipment 3,850 3,500 Total assets $ 8,620 $ 7,900 Liabilities and Equity Accounts payable $ 1,300 $ 1,200 Accruals 650 600 Notes payable 176 100 Total current liabilities $ 2,126 $ 1,900 Long-term debt 1,300 1,200 Total liabilities $ 3,426 3,100 Common stock 3,532 3,500 Retained earnings 1,662 1,300 Total common equity $ 5,194 $ 4,800 Total liabilities and equity $ 8,620 $ 7,900 Suppose the federal-plus-state tax corporate tax is 25%. Answer the following questions. a. What is the net operating profit after taxes (NOPAT) for 2020? Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answer to the nearest whole number. $ million b. What are the amounts of net operating working capital for both years? Enter your answers in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answers to the nearest whole number. 2020: $ million 2019: $ million c. What are the amounts of total net operating capital for both years? Enter your answers in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answers to the nearest whole number. 2020: $ million 2019: $ million d. What is the free cash flow for 2020? Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Cash outflow, if any, should be indicated by a minus sign. Round your answer to the nearest whole number. $ million e. What is the ROIC for 2020? Round your answer to two decimal places. % f. How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) Enter your answers in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answers to the nearest whole number. After-tax interest payment $ million Reduction (increase) in debt $ million Payment of dividends $ million Repurchase (Issue) stock $ million Purchase (Sale) of short-term investments $ million