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1、Case Solutions Fundamentals of Corporate Finance Ross, Westerfield, and Jordan 9 theditionCHAPTER 1 THE McGEE CAKE COMPANY 1. The advantages to a LLC are: 1) Reduction of personal liability. A sole proprietor has unlimited liability, which can include the potential loss of all personal assets. 2) Ta

2、xes. Forming an LLC may mean that more expenses can be considered business expenses and be deducted from the companys income. 3) Improved credibility. The business may have increased credibility in the business world compared to a sole proprietorship. 4) Ability to attract investment. Corporations,

3、even LLCs, can raise capital through the sale of equity. 5) Continuous life. Sole proprietorships have a limited life, while corporations have a potentially perpetual life. 6) Transfer of ownership. It is easier to transfer ownership in a corporation through the sale of stock. The biggest disadvanta

4、ge is the potential cost, although the cost of forming a 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 a LLC, but the costs are likely to be higher. 3. As a small company, chang

5、ing 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 a LLC is likely to be less expensive than forming a corpora

6、tion.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 2008 2009Sales $247,259 $301,392Cost of goods sold 126,038 159,143Selling & administrative

7、 24,787 32,352Depreciation 35,581 40,217EBIT $60,853 $69,680Interest 7,735 8,866EBT $53,118 $60,814Taxes 10,624 12,163Net income $42,494 $48,651Dividends $21,247 $24,326Addition to retained earnings 21,247 24,326 2. The balance sheet for each year will be:Balance sheet as of Dec. 31, 2008Cash $18,18

8、7 Accounts payable $32,143Accounts receivable 12,887 Notes payable 14,651Inventory 27,119 Current liabilities $46,794Current assets $58,193 Long-term debt $79,235Net fixed assets $156,975 Owners equity 89,139Total assets $215,168 Total liab. & equity $215,168 In the first year, equity is not given.

9、Therefore, we must calculate equity as a plug variable. Since total liabilities & equity is equal to total assets, equity can be calculated as:Equity = $215,168 46,794 79,235 Equity = $89,139 Balance sheet as of Dec. 31, 2009Cash $27,478 Accounts payable $36,404Accounts receivable 16,717 Notes payab

10、le 15,997Inventory 37,216 Current liabilities $52,401Current assets $81,411 Long-term debt $91,195Net fixed assets $191,250 Owners equity 129,065Total assets $272,661 Total liab. & equity $272,661 The owners equity for 2009 is the beginning of year owners equity, plus the addition to retained earnin

11、gs, plus the new equity, so: Equity = $89,139 + 24,326 + 15,600 Equity = $129,065 3. Using the OCF equation: OCF = EBIT + Depreciation Taxes The OCF for each year is: OCF2008 = $60,853 + 35,581 10,624 OCF2008 = $85,180 OCF2009 = $69,680 + 40,217 12,163 OCF2009 = $97,734 4. To calculate the cash flow

12、 from assets, we need to find the capital spending and change in net working capital. The capital spending for the year was: Capital spendingEnding net fixed assets $191,250 Beginning net fixed assets 156,975+ Depreciation 40,217Net capital spending $74,492 And the change in net working capital was:

13、Change in net working capitalEnding NWC $29,010 Beginning NWC 11,399Change in NWC $17,611So, the cash flow from assets was:Cash flow from assetsOperating cash flow $97,734 Net capital spending 74,492 Change in NWC 17,611Cash flow from assets $ 5,631 5. The cash flow to creditors was:Cash flow to cre

14、ditors Interest paid $8,866 Net new borrowing 11,960 Cash flow to creditors $3,094 6. The cash flow to stockholders was:Cash flow to stockholders Dividends paid $24,326 Net new equity raised 15,600 Cash flow to stockholders $8,726 Answers to questions 1. The firm had positive earnings in an accounti

15、ng sense (NI 0) and had positive cash flow from operations. The firm invested $17,611 in new net working capital and $74,492 in new fixed assets. The firm gave $5,631 to its stakeholders. It raised $3,094 from bondholders, and paid $8,726 to stockholders. 2. The expansion plans may be a little risky

16、. The company does have a positive cash flow, but a large portion of the operating cash flow is already going to capital spending. The company has had to raise capital from creditors and stockholders for its current operations. So, the expansion plans may be too aggressive at this time. On the other hand, companies do need capital to grow. Before investing or loaning the company money, you would want to know where the current capital spending is going, and why the company is spending so much in this area already.