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    Sanjoy Das 23-021: Ans of Question 01 Ans of A

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    The document provides calculations related to cash flow from operations and leverage ratios for a company. It computes cash flow from operations as $19,340 by taking net income and adjusting for non-cash expenses and changes in working capital accounts. It also calculates that the company's return on capital employed is 14% with its current leverage, but would be 10.25% without leverage, showing that leverage is beneficial to shareholders. The optimal capital structure that maximizes return is then shown to match the calculated return with leverage.

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    Sanjoy Das 23-021: Ans of Question 01 Ans of A

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    The document provides calculations related to cash flow from operations and leverage ratios for a company. It computes cash flow from operations as $19,340 by taking net income and adjusting for non-cash expenses and changes in working capital accounts. It also calculates that the company's return on capital employed is 14% with its current leverage, but would be 10.25% without leverage, showing that leverage is beneficial to shareholders. The optimal capital structure that maximizes return is then shown to match the calculated return with leverage.

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    The document provides calculations related to cash flow from operations and leverage ratios for a company. It computes cash flow from operations as $19,340 by taking net income and adjusting for non-cash expenses and changes in working capital accounts. It also calculates that the company's return on capital employed is 14% with its current leverage, but would be 10.25% without leverage, showing that leverage is beneficial to shareholders. The optimal capital structure that maximizes return is then shown to match the calculated return with leverage.

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    © All Rights Reserved
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    19 views2 pages

    Sanjoy Das 23-021: Ans of Question 01 Ans of A

    Uploaded by

    Sanjoy das
    The document provides calculations related to cash flow from operations and leverage ratios for a company. It computes cash flow from operations as $19,340 by taking net income and adjusting for non-cash expenses and changes in working capital accounts. It also calculates that the company's return on capital employed is 14% with its current leverage, but would be 10.25% without leverage, showing that leverage is beneficial to shareholders. The optimal capital structure that maximizes return is then shown to match the calculated return with leverage.

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    © All Rights Reserved
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    of 2

    Sanjoy Das 23-021

    Ans of Question 01

    Ans of a.

    Cash Flows from Operations Computation:

    Net Income $10000


    Add / deduct items to convert to cash basis
    Depreciation and amortization $8000
    Deferred Income Taxes 400
    Amortization of bond discounts 50
    Increase in accounts payable 1200
    Decrease in inventories 850
    10500
    Undistributed earnings of the unconsolidated $20500
    Subsidiaries and affiliates (200)
    Amortization of premium on bonds payable (60)
    Increase in accounts receivables (900)
    (1160)
    Cash provided by operations $19340

    Ans of b.

    1. The issuance of treasury stock for employee’s stock plans as compensation requires
    an addback to net income because it is an expense not using the cash.
    2. The cash outflows for interest is not included in expenses and must included as cash
    outflows in investing activities as it is part of outlays for property.
    3. If the difference between pension expense and actual funding is an accrued liability,
    the unpaid portion must be added back to income as an expense not recurring cash. If
    the amount funded exceeds pension expense, then net income must be reduced by that
    excess amount.

    Answer of Question 02

    Ans of a.

    In current level of debt, ROCE is = $157500/ $1125000 = 14%

    Net Income with Leverage $157500

    Plus Interest Saved = $675000*8% = $54000

    1
    Sanjoy Das 23-021

    Less Tax effect of Interest Expense = $27000

    Net Income without Leverage =$184500

    So, ROCE without leverage = $184500 / $1800000

    = 10.25%

    So, leverage is beneficial for Rose’s shareholders as it provides 14% compare to 10.25%
    without leverage

    Ans of b.

    NOPAT = $157500+ {$675000*8%*(1-0.50)]

    = $184500

    RNOA = $184500 / ($2000000-$200000)

    = 10.25%

    Ans of c.

    The company is utilizing borrowed funds in the capital structure. As ROCE is higher than
    RNOA, the use of financial leverage is beneficial to stockholders.

    The After cost of debt is 4% and financial leverage is $675000 / $1125000 = 60%

    Therefore,

    10.25%+0.60* (10.25%-4%)

    =14% which is similar

    However, the favourable effect of financial leverage is {.60* (10.25%-4%)} = 3.75%

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