1–2 Marginal analysis and economic value added (EVA) Ken Allen, capital budgeting analyst for Bally Gears, Inc., has been asked to evaluate a proposal. The manager of the automotive division believes that replacing the robotics used on the heavy truck gear line will produce total benefits of $560,000 (in today’s dollars) over the next 5 years. The existing robotics would produce benefits of $400,000 (also in today’s dollars) over that same time period. An initial cash investment of $220,000 would be required to install the new equipment. The manager estimates that the existing robotics can be sold for $70,000.
Show how Ken will apply marginal analysis techniques to determine the following:
a. The marginal (added) benefits of the proposed new robotics.
b. The marginal (added) cost of the proposed new robotics.
c. The net benefit of the proposed new robotics.
d. What Ken Allen should recommend that the company do, and why.
e. The factors besides the costs and benefits that should be considered before the final decision is made.
f. Now assume that Bally Gears acquired the robotics equipment. During the next fiscal year the company generated before-tax operating profits of $345,000. The company’s tax rate is 25 percent. The total capital invested in the business is $1,500,000. Bally’s cost of financing (the cost of the capital) is 13.6 percent. What was Bally’s economic value added (EVA) for the year? What does your answer for EVA mean?
(Hennessey 42)
Hennessey, Lawrence J. Gitman and Sean M. Principles of Corporate Finance VitalSource eBook for Athabasca University. Pearson Learning Solutions. VitalBook file.
The citation provided is a guideline. Please check each citation for accuracy before use.
2–5 Calculation of EPS and retained earnings Philagem, Inc., ended the 2008 fiscal year with earnings before taxes of $218,000. The company is subject to a 40 percent tax rate and must pay $32,000 in preferred share dividends before distributing any earnings on the 85,000 common shares currently outstanding.
a. Calculate Philagem’s 2008 earnings per share (EPS).
b. If the firm paid common share dividends of $0.80 per share, how many dollars would go to retained earning
(Hennessey 93)
Hennessey, Lawrence J. Gitman and Sean M. Principles of Corporate Finance VitalSource eBook for Athabasca University. Pearson Learning Solutions. VitalBook file.
The citation provided is a guideline. Please check each citation for accuracy before use.
2–9 Financial statement preparation The balance sheet for Rogers Industries for March 31, 2008, appears below. Information relevant to Rogers Industries’ operations for the 2009 fiscal year is given following the balance sheet. Using the data presented:
a. Prepare in good form an income statement for Rogers Industries for the year ended March 31, 2009. Be sure to show earnings per share (EPS).
b. Prepare in good form a balance sheet for Rogers Industries for March 31, 2009.
c. Determine Rogers’ free cash flow from operations (FCFO) for the 2009 fiscal year.
Balance Sheet ($000) Rogers Industries March 31, 2008
Assets
Liabilities and shareholders’ equity
Cash
$ 40
Accounts payable
$50
Marketable securities
10
Line of credit
80
Accounts receivable
80
Accruals
10
Inventories
100
Total current liabilities
$140
Total current assets
$230
Long-term debt
$270
Gross fixed assets
$890
Preferred shares
$ 40
Less: Accumulated amortization
240
Common shares (119,000 shares outstanding)
320
Net fixed assets
$650
Total assets
$880
Retained earnings
110
Total shareholders’ equity
$470
Total liabilities and shareholders’ equity
$880
Rogers Industries
Relevant information for the 2009 fiscal year
1. Sales were $1,200,000.
2. Cost of goods sold equals 60 percent of sales.
3. Operating expenses equal 15 percent of sales; amortization expense of $20,000 is included in this percentage.
4. Interest expense is 10 percent of the total beginning balance of the line of credit and long-term debt.
5. The firm pays 40 percent taxes on taxable income.
6. Preferred share dividends of $4,000 were paid.
7. Cash and marketable securities are unchanged.
8. Accounts receivable equal 8 percent of sales.
9. Inventory equals 10 percent of sales.
10. The firm acquired $30,000 of additional fixed assets in 2009.
11. Accounts payable equal 5 percent of sales.
12. Line of credit, long-term debt, preferred shares, and common shares remain unchanged.
13. Accruals are unchanged.
14. Cash dividends of $1 per common share were paid to common shareholder
(Hennessey 94-95)
Hennessey, Lawrence J. Gitman and Sean M. Principles of Corporate Finance VitalSource eBook for Athabasca University. Pearson Learning Solutions. VitalBook file.
The citation provided is a guideline. Please check each citation for accuracy before use.
2–13 Understanding financial statements Montague Corporation’s financial statements are provided below. Use these statements to determine the following:
a. The total investment in assets made during 2008.
b. The sources of the funds invested.
c. Total investment in fixed assets during 2008.
d. The total dividends paid in 2008.
e. The average issue price per common share during 2008.
f. The book value per common share in 2007 and 2008.
Montague Corporation Income Statement for the year ended December 31, 2008
Sales
$8,750,000
Cost of goods sold
6,200,000
Gross margin
2,550,000
General and administrative expense
830,000
Amortization
550,000
EBIT
1,170,000
Interest
300,000
Earnings before taxes
870,000
Taxes
304,500
Net income after taxes
$ 565,500
Montague Corporation Balance Sheet as at December 31
2007
2008
Cash
$ 300,000
$ 350,000
Accounts receivable
690,000
560,000
Inventory
1,020,000
1,400,000
Total current assets
2,010,000
2,310,000
Net fixed assets
5,600,000
6,200,000
Total assets
$7,610,000
$8,510,000
Accounts payable
$ 500,000
$ 450,000
Accruals
130,000
175,000
Total current liabilities
630,000
625,000
Long-term debt
4,600,000
5,100,000
Preferred equity
550,000
575,000
Common shares*
1,400,000
1,450,000
Retained earnings
430,000
760,000
Total liabilities and shareholders’ equity
$7,610,000
$8,510,000
*There were 40,000 shares outstanding at the end of 2007 and 41,250 outstanding at the end of 2008.