By Stephen A. Ross, Randolph W. Westerfield, Jeffrey Jaffe
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Extra info for Instructor's Manual to accompany Corporate Finance, Sixth Edition
7 The Stancil Corporation provided the following current information. Proceeds from short-term borrowing Proceeds from long-term borrowing Proceeds from the sale of common stock Purchases of fixed assets Purchases of inventories Payment of dividends $ 6,000 20,000 1,000 1,000 4,000 22,000 Determine the cash flow for the Stancil Corporation. 8 Ritter Corporation’s accountants prepared the following financial statements for year-end 20X2. RITTER CORPORATION Income Statement 20X2 Revenue Expenses Depreciation Net income Dividends $400 250 50 ____ $100 $ 50 RITTER CORPORATION Balance Sheets December 31 20X2 20X1 Assets Current assets Net fixed assets Total assets $150 200 ____ $350 $100 100 ____ $200 Liabilities and Equity Current liabilities Long-term debt Stockholders’ equity Total liabilities and equity $ 75 75 200 ____ $350 $ 50 0 150 ____ $200 39 40 Ross−Westerfield−Jaffe: Corporate Finance, Sixth Edition I.
Operating cash flow, defined as earnings before interest and depreciation minus taxes, measures the cash generated from operations not counting capital spending or working capital requirements. It should usually be positive; a firm is in trouble if operating cash flow is negative for a long time because the firm is not generating enough cash to pay operating costs. Total cash flow of the firm includes adjustments for capital spending and additions to net working capital. It will frequently be negative.
Suppose a firm selling pneumatic equipment is thinking about providing customers with more liberal credit terms. This will probably decrease asset turnover (because receivables would increase more than sales). Thus, the margins will have to go up to keep ROA from falling. S. 27% Average stockholders' equity 765 805 ϩ 725 Average stockholders' equity ϭ ϭ 765 2 ROE ϭ The most important difference between ROA and ROE is due to financial leverage. 36 From the preceding numbers, it would appear that financial leverage always magnifies ROE.