Question

South Sea Baubles has the following (incomplete) balance sheet and income statement. Assets Current assets Net fixed assets BALANCE SHEET AT END OF YEAR (Figures in $ millions) 2018 2019 Liabilities and Shareholders' Equity $ 98 $ 180 Current liabilities 880 980 Long-term debt 2018 $ 66 640 2019 $ 84 830 INCOME STATEMENT, 2019 (Figures in $ millions) Revenue $ 1,990 Cost of goods sold 1,070 Depreciation Interest expense 390 248 a&b. What is shareholders' equity in 2018 and 2019? c&d. What is net working capital in 2018 and 2019? e. What are taxes paid in 2019? Assume the firm pays taxes equal to 21% of taxable income. f. What is cash provided by operations during 2019? I g. Net fixed assets increased from $880 million to $980 million during 2019. What must have been South Sea's gross investment in fixed assets during 2019?

Answer 1

Answer a & b.

2018:

Owners’ Equity = Total Assets - Total Liabilities
Owners’ Equity = (Current Assets + Net Fixed Assets) - (Current Liabilities + Long-term Debt)
Owners’ Equity = ($98 + $880) - ($66 + $640)
Owners’ Equity = $272

2019:

Owners’ Equity = Total Assets - Total Liabilities
Owners’ Equity = (Current Assets + Net Fixed Assets) - (Current Liabilities + Long-term Debt)
Owners’ Equity = ($180 + $980) - ($84 + $830)
Owners’ Equity = $246

Answer c & d.

2018:

Net Working Capital = Current Assets - Current Liabilities
Net Working Capital = $98 - $66
Net Working Capital = $32

2019:

Net Working Capital = Current Assets - Current Liabilities
Net Working Capital = $180 - $84
Net Working Capital = $96

Answer e.

EBIT = Revenue - Cost of Goods Sold - Depreciation
EBIT = $1,990 - $1,070 - $390
EBIT = $530

EBT = EBIT - Interest Paid
EBT = $530 - $248
EBT = $282

Taxes Paid = EBT * Tax Rate
Taxes Paid = $282 * 21%
Taxes Paid = $59.22

Answer f.

Cash Provided by Operations = EBIT + Depreciation - Taxes
Cash Provided by Operations = $530 + $390 - $59.22
Cash Provided by Operations = $860.78

Answer g.

Gross Investment = Net Fixed Assets, 2019 + Depreciation - Net Fixed Assets, 2018
Gross Investment = $980 + $390 - $880
Gross Investment = $490