Financial Statement Analysis: Solved Problems

Economic Value Added (EVA)

EVA: The industry has an operating income for the year of $3,500,000 and a 36% tax rate. Its total invested capital is $20,000,000, and its after-tax percentage cost of capital is 8%. What is the firm's EVA?

EVA = $3,500,000 (0.64) – ($20,000,000 x 0.08)

$2,240,000 – $1,600,000 = $640,000

Personal Taxes

A married couple files a joint income tax return, where the tax rates are based on the tax tables presented in the chapter. Assume that their taxable income was $375,000.

What is their federal tax liability? $51,577.50 + ($375,000 – $230,450) * 0.33

= $51,577.50 + $47,701.50 = $99,279.00

What's their marginal tax rate? 33%

What is their average tax rate? $99,279.00 / $375,000 = 26.47%

Statement of Stockholders' Equity

The company paid out $22.4 million in total common dividends and reported $144.7 million of retained earnings at year-end. The prior year's retained earnings were $95.5 million. What was the net income? Assume that all dividends declared were actually paid.

$144,700,000 = $95,500,000 + Net Income – $22,400,000

$144,700,000 = $73,100,000 + Net Income. Net Income = $71,600,000

Economic Value Added (EVA) - 2016

For 2016, the company reported $22 million of sales and $19 million of operating costs (including depreciation). The company has $15 million of total invested capital. Its after-tax cost of capital is 10%, and its federal plus state income tax rate was 36%. What was the firm's economic value added? How much value did management add to stockholders' wealth during 2016?

Sales $22 million – $19 million operating cost = $3 million

$3,000,000 (0.64) – ($15,000,000) (0.10)

$1,920,000 – $1,500,000 = $420,000

Statement of Cash Flow

The company had $39,000 in cash at the end of 2015 and $11,000 in cash at the end of 2016. The firm invested in property, plant, and equipment totaling $210,000. Cash flow from financing activities totaled $120,000.

What was the cash flow from operating activities?

$11,000 – $39,000 = -$28,000

$120,000 + (-$28,000) = $92,000

$210,000 - $92,000 = $118,000

If accruals increased by $15,000, receivables and inventories increased by $50,000, and depreciation and amortization totaled $25,000, what was the firm's net income?

$25,000 + $15,000 – $50,000 = -$10,000

-$10,000 + $118,000 = $108,000