[SOLUTION MANUAL) Fundamentals of Corporate Finance 12th Edition By Stephen Ross and Randolph Westerfield and Bradford Jordan

[SOLUTION MANUAL) Fundamentals of Corporate Finance 12th Edition By Stephen Ross and Randolph Westerfield and Bradford Jordan The market value of shareholders’ equity cannot be negative. A negative market value in this case would imply that the company would pay you to own the stock. The market value of shareholders’ equity can be stated as: Shareholders’ equity = Max [(TA – TL), 0]. So, if TA is $11,900, equity is equal to $1,200, and if TA is $9,400, equity is equal to $0. We should note here that while the market value of equity cannot be negative, the book value of shareholders’ equity can be negative. 17. Income Statement Sales $630,000 COGS 465,000 A&S expenses 85,000 Depreciation 135,000 EBIT –$55,000 Interest 70,000 Taxable income –$125,000 Taxes (21%) 0 a. Net income –$125,000 b. OCF = EBIT + Depreciation – Taxes OCF = –$55,000 + 135,000 – 0 OCF = $80,000 c. Net income was negative because of the tax deductibility of depreciation and interest expense. However, the actual cash flow from operations was positive because depreciation is a non-cash expense and interest is a financing expense, not an operating expense. 18. A firm can still pay out dividends if net income is negative; it just has to be sure there is sufficient cash flow to make the dividend payments. Change in NWC = Net capital spending = Net new equity = 0. (Given) Cash flow from assets = OCF – Change in NWC – Net capital spending Cash flow from assets = $80,000 – 0 – 0 = $80,000 Cash flow to stockholders = Dividends – Net new equity Cash flow to stockholders = $34,000 – 0 = $34,000 Cash flow to creditors = Cash flow from assets – Cash flow to stockholders Cash flow to creditors = $80,000 – 34,000 Cash flow to creditors = $46,000 Cash flow to creditors is also: Cash flow to creditors = Interest – Net new LTD So: Net new LTD = Interest – Cash flow to creditors Net new LTD = $70,000 – 46,000 Net new LTD = $24,000