Case Solutions
Fundamentals of Corporate Finance
Ross, Westerfield, and Jordan
13th edition
XX/XX/2020
Prepared by
Brad Jordan
University of Kentucky
Joe Smolira
Belmont University
,CHAPTER 1
THE McGEE CAKE COMPANY
1. The advantages to an LLC are: (a) Reduction of personal liability. A sole proprietor has unlimited
liability, which can include the potential loss of all personal assets. (b) Taxes. Forming an LLC may
mean that more expenses can be considered business expenses and be deducted from the company’s
income. (c) Improved credibility. The business may have increased credibility in the business world
compared to a sole proprietorship. (d) Ability to attract investment. Corporations, even LLCs, can
raise capital through the sale of equity. (e) Continuous life. Sole proprietorships have a limited life,
while corporations have a potentially perpetual life. (f) Transfer of ownership. It is easier to transfer
ownership in a corporation through the sale of stock.
The biggest disadvantage is the potential cost, although the cost of forming an LLC can be relatively
small. There are also other potential costs, including more expansive record-keeping.
2. Forming a corporation has the same advantages as forming an LLC, but the costs are likely to be
higher.
3. As a small company, changing to a LLC is probably the most advantageous decision at the current
time. If the company grows, and Doc and Lyn are willing to sell more equity ownership, the
company can reorganize as a corporation at a later date. Additionally, forming an LLC is likely to be
less expensive than forming a corporation.
,CHAPTER 2
CASH FLOWS AND FINANCIAL
STATEMENTS AT SUNSET BOARDS
Below are the financial statements that you are asked to prepare.
1. The income statement for each year will look like this:
Income Statement
2020 2021
Sales $601,729 $733,469
Cost of goods sold 306,726 387,290
Selling and administrative 60,322 78,732
Depreciation 86,590 97,871
EBIT $148,091 $169,576
Interest 18,824 21,576
EBT $129,267 $148,000
Taxes 27,146 31,080
Net income $102,121 $116,920
Dividends $40,848 $46,768
Addition to retained earnings $61,273 $70,152
2. The balance sheet for each year will be:
Balance Sheet as of Dec. 31, 2020
Cash $44,261 Accounts payable $31,423
Accounts receivable 31,363 Notes payable 35,654
Inventory 60,382 Current liabilities $67,077
Current assets $136,006
Long-term debt $192,827
Net fixed assets $382,014 Owners' equity $258,116
Total assets $518,020 Total liab. and equity $518,020
In the first year, equity is not given. Therefore, we must calculate equity as a plug variable. Since
total liabilities and equity is equal to total assets, equity can be calculated as:
Equity = $518,020 – 67,077 – 192,827
Equity = $258,116
, C-2 CASE SOLUTIONS
Balance Sheet as of Dec. 31, 2021
Cash $66,870 Accounts payable $53,181
Accounts receivable 40,681 Notes payable 38,929
Inventory 81,209 Current liabilities $92,110
Current assets $188,760
Long-term debt $210,408
Net fixed assets $465,426 Owners' equity $351,668
Total assets $654,186 Total liab. and equity $654,186
The owner’s equity for 2021 is the beginning of year owners’ equity, plus the addition to retained
earnings, plus the new equity, so:
Equity = $258,116 + 70,152 + 23,400
Equity = $351,668
3. Using the OCF equation:
OCF = EBIT + Depreciation – Taxes
The OCF for each year is:
OCF2020 = $148,091 + 86,590 – 27,146
OCF2020 = $207,535
OCF2021 = $169,576 + 97,871 – 31,080
OCF2021 = $236,367
4. To calculate the cash flow from assets, we need to find the capital spending and change in net
working capital. The capital spending for the year was:
Capital spending
Ending net fixed assets $465,426
– Beginning net fixed assets 382,014
+ Depreciation 97,871
Net capital spending $181,283
And the change in net working capital was:
Change in net working capital
Ending NWC $96,650
– Beginning NWC 68,929
Change in NWC $27,721
Fundamentals of Corporate Finance
Ross, Westerfield, and Jordan
13th edition
XX/XX/2020
Prepared by
Brad Jordan
University of Kentucky
Joe Smolira
Belmont University
,CHAPTER 1
THE McGEE CAKE COMPANY
1. The advantages to an LLC are: (a) Reduction of personal liability. A sole proprietor has unlimited
liability, which can include the potential loss of all personal assets. (b) Taxes. Forming an LLC may
mean that more expenses can be considered business expenses and be deducted from the company’s
income. (c) Improved credibility. The business may have increased credibility in the business world
compared to a sole proprietorship. (d) Ability to attract investment. Corporations, even LLCs, can
raise capital through the sale of equity. (e) Continuous life. Sole proprietorships have a limited life,
while corporations have a potentially perpetual life. (f) Transfer of ownership. It is easier to transfer
ownership in a corporation through the sale of stock.
The biggest disadvantage is the potential cost, although the cost of forming an LLC can be relatively
small. There are also other potential costs, including more expansive record-keeping.
2. Forming a corporation has the same advantages as forming an LLC, but the costs are likely to be
higher.
3. As a small company, changing to a LLC is probably the most advantageous decision at the current
time. If the company grows, and Doc and Lyn are willing to sell more equity ownership, the
company can reorganize as a corporation at a later date. Additionally, forming an LLC is likely to be
less expensive than forming a corporation.
,CHAPTER 2
CASH FLOWS AND FINANCIAL
STATEMENTS AT SUNSET BOARDS
Below are the financial statements that you are asked to prepare.
1. The income statement for each year will look like this:
Income Statement
2020 2021
Sales $601,729 $733,469
Cost of goods sold 306,726 387,290
Selling and administrative 60,322 78,732
Depreciation 86,590 97,871
EBIT $148,091 $169,576
Interest 18,824 21,576
EBT $129,267 $148,000
Taxes 27,146 31,080
Net income $102,121 $116,920
Dividends $40,848 $46,768
Addition to retained earnings $61,273 $70,152
2. The balance sheet for each year will be:
Balance Sheet as of Dec. 31, 2020
Cash $44,261 Accounts payable $31,423
Accounts receivable 31,363 Notes payable 35,654
Inventory 60,382 Current liabilities $67,077
Current assets $136,006
Long-term debt $192,827
Net fixed assets $382,014 Owners' equity $258,116
Total assets $518,020 Total liab. and equity $518,020
In the first year, equity is not given. Therefore, we must calculate equity as a plug variable. Since
total liabilities and equity is equal to total assets, equity can be calculated as:
Equity = $518,020 – 67,077 – 192,827
Equity = $258,116
, C-2 CASE SOLUTIONS
Balance Sheet as of Dec. 31, 2021
Cash $66,870 Accounts payable $53,181
Accounts receivable 40,681 Notes payable 38,929
Inventory 81,209 Current liabilities $92,110
Current assets $188,760
Long-term debt $210,408
Net fixed assets $465,426 Owners' equity $351,668
Total assets $654,186 Total liab. and equity $654,186
The owner’s equity for 2021 is the beginning of year owners’ equity, plus the addition to retained
earnings, plus the new equity, so:
Equity = $258,116 + 70,152 + 23,400
Equity = $351,668
3. Using the OCF equation:
OCF = EBIT + Depreciation – Taxes
The OCF for each year is:
OCF2020 = $148,091 + 86,590 – 27,146
OCF2020 = $207,535
OCF2021 = $169,576 + 97,871 – 31,080
OCF2021 = $236,367
4. To calculate the cash flow from assets, we need to find the capital spending and change in net
working capital. The capital spending for the year was:
Capital spending
Ending net fixed assets $465,426
– Beginning net fixed assets 382,014
+ Depreciation 97,871
Net capital spending $181,283
And the change in net working capital was:
Change in net working capital
Ending NWC $96,650
– Beginning NWC 68,929
Change in NWC $27,721
