7 240.3 A B D E 1 Chapter 6 Problem 15 2 Using the financial statements provided below to answer the following questions: a What was the book value of Nova's shareholders' equity from 2015 to 2017? What were Nova's debt-to-assets and times-interest-earned ratios in these years? (Use pretax income plus interest expense as EBIT.) What do these figures suggest about Nova's use 4 of financial leverage? Consultina Table 6-5 in the text what bond rating would Nova b What percentage decline in EBIT could Nova have suffered in each year before Nova 5 would have been unable to make its interest payments out of operating income? c Assuming a 35 percent corporate tax rate, and 2016 earnings before interest and taxes 6 of $895 million, by how much did Nova's $60 million interest expense reduce taxes? d Answer question (a) and (b) again for 2016 assuming the company had borrowed an additional $3 billion in debt at 8 percent interest at the start of the year and distributed the proceeds to shareholders as a special dividend. You may ignore the effect of added 7 interest expense on Nova's balance sheet. Might shareholders benefit from such an e Based on your analysis, is Nova heavily or modestly indebted? Should the company acquire more debt, or shed existing debt? Why? 9 10 NOVA PRODUCTS 11 INCOME STATEMENT ($ millions) 12 2015 2016 2017 13 Sales 5,957.8 6,228.3 6,876.0 14 Cost of Goods Sold 2,156.9 2.217.6 2,481.8 15 Gross Profit 3,800.8 4,010.7 4,394.2 16 17 Selling, General, & Administrative Expense 2,889.5 2,979.6 3,213.6 18 Operating Income Before Depreciation 911.4 1,0311 1,180.6 19 20 Depreciation, Depletion, & Amortization 109.0 124.8 123.5 21 Operating Profit 802.4 906.3 1,057.1 22 23 Interest Expense 71.1 59.7 49.0 24 Non-Operating Income!Expense 36.3 25.3 (0.3) 25 Special Items (77.9) (36.3) (14.3) 26 Pretax Income 689.7 835.6 993.5 27 28 Total Income Taxes 292.3 318.9 29 Minority Interest 4.5 8.7 9.8 30 Income Before Extraordinary Items & Discontinued 444.9 534.6 664.8 31 32 Extraordinary Items (0.3) 0.0 0.0 33 Discontinued Operations 0.0 0.0 0.0 34 Adjusted Net Income 444.6 534.6 664.8 35 36 BALANCE SHEET($ millions) 37 2015 2016 2017 ASSETS 39 Cash & Short-Term Investments 508.5 606.8 694.0 40 Net Receivables 519.5 555.4 599.8 41 Inventories 612.5 614.7 653.4 42 Other Current Assets 248.6 271.3 278.9 43 Total Current Assets 1,889.1 2,048.2 44 45 Gross Plant, Property & Equipment 1,5524 1.548.4 1,728.9 46 Accumulated Depreciation 779.7 779,3 873.3 47 Net Plant, Property & Equipment 772.7 769.1 855.6 48 Intangibles 00 20.6 46.2 49 Deferred Charges 0.0 0.0 0.0 50 Other Assets 530.8 489.6 434.4 51 52 TOTAL ASSETS 3,192.6 3,327.5 3,562.3 53 54 LIABILITIES 55 Long Term Debt Due In One Year 1.2 3.1 4.4 56 Notes Payable 87.6 602.1 239.7 57 Accounts Payable 404.1 379.9 400.1 58 Taxes Payable 375.9 353.0 321.9 59 Other Current Liabilities 592.2 637.4 621.6 60 Total Current Liabilities 1.461.0 1,975.5 1,587.7 61 62 Long Term Debt 1,236.3 767.0 877.7 63 Deferred Taxes 30.6 35.4 50.6 64 Investment Tax Credit 0.0 0.0 0.0 65 Minority Interest 29.0 37.0 46.0 66 Other Liabilities 510.8 640.3 629.0 67 68 TOTAL LIABILITIES 3,267.7 3,455.2 3,191.0 69 70 EQUITY 71 72 Common Stock 89.1 89.6 90.3 73 Capital Surplus 938,0 1,019.5 1,188.4 74 Retained Earnings 899.9 943.9 1.473.0 75 Less: Treasury Stook 2,002.1 2,180.7 2,380.4 76 77 TOTAL EQUITY (75.1) (127.7) 371.3 78 79 TOTAL LIABILITIES & EQUITY 3,1926 3,327.5 3,562.3 80 2.226.1 7 240.3 A B D E 1 Chapter 6 Problem 15 2 Using the financial statements provided below to answer the following questions: a What was the book value of Nova's shareholders' equity from 2015 to 2017? What were Nova's debt-to-assets and times-interest-earned ratios in these years? (Use pretax income plus interest expense as EBIT.) What do these figures suggest about Nova's use 4 of financial leverage? Consultina Table 6-5 in the text what bond rating would Nova b What percentage decline in EBIT could Nova have suffered in each year before Nova 5 would have been unable to make its interest payments out of operating income? c Assuming a 35 percent corporate tax rate, and 2016 earnings before interest and taxes 6 of $895 million, by how much did Nova's $60 million interest expense reduce taxes? d Answer question (a) and (b) again for 2016 assuming the company had borrowed an additional $3 billion in debt at 8 percent interest at the start of the year and distributed the proceeds to shareholders as a special dividend. You may ignore the effect of added 7 interest expense on Nova's balance sheet. Might shareholders benefit from such an e Based on your analysis, is Nova heavily or modestly indebted? Should the company acquire more debt, or shed existing debt? Why? 9 10 NOVA PRODUCTS 11 INCOME STATEMENT ($ millions) 12 2015 2016 2017 13 Sales 5,957.8 6,228.3 6,876.0 14 Cost of Goods Sold 2,156.9 2.217.6 2,481.8 15 Gross Profit 3,800.8 4,010.7 4,394.2 16 17 Selling, General, & Administrative Expense 2,889.5 2,979.6 3,213.6 18 Operating Income Before Depreciation 911.4 1,0311 1,180.6 19 20 Depreciation, Depletion, & Amortization 109.0 124.8 123.5 21 Operating Profit 802.4 906.3 1,057.1 22 23 Interest Expense 71.1 59.7 49.0 24 Non-Operating Income!Expense 36.3 25.3 (0.3) 25 Special Items (77.9) (36.3) (14.3) 26 Pretax Income 689.7 835.6 993.5 27 28 Total Income Taxes 292.3 318.9 29 Minority Interest 4.5 8.7 9.8 30 Income Before Extraordinary Items & Discontinued 444.9 534.6 664.8 31 32 Extraordinary Items (0.3) 0.0 0.0 33 Discontinued Operations 0.0 0.0 0.0 34 Adjusted Net Income 444.6 534.6 664.8 35 36 BALANCE SHEET($ millions) 37 2015 2016 2017 ASSETS 39 Cash & Short-Term Investments 508.5 606.8 694.0 40 Net Receivables 519.5 555.4 599.8 41 Inventories 612.5 614.7 653.4 42 Other Current Assets 248.6 271.3 278.9 43 Total Current Assets 1,889.1 2,048.2 44 45 Gross Plant, Property & Equipment 1,5524 1.548.4 1,728.9 46 Accumulated Depreciation 779.7 779,3 873.3 47 Net Plant, Property & Equipment 772.7 769.1 855.6 48 Intangibles 00 20.6 46.2 49 Deferred Charges 0.0 0.0 0.0 50 Other Assets 530.8 489.6 434.4 51 52 TOTAL ASSETS 3,192.6 3,327.5 3,562.3 53 54 LIABILITIES 55 Long Term Debt Due In One Year 1.2 3.1 4.4 56 Notes Payable 87.6 602.1 239.7 57 Accounts Payable 404.1 379.9 400.1 58 Taxes Payable 375.9 353.0 321.9 59 Other Current Liabilities 592.2 637.4 621.6 60 Total Current Liabilities 1.461.0 1,975.5 1,587.7 61 62 Long Term Debt 1,236.3 767.0 877.7 63 Deferred Taxes 30.6 35.4 50.6 64 Investment Tax Credit 0.0 0.0 0.0 65 Minority Interest 29.0 37.0 46.0 66 Other Liabilities 510.8 640.3 629.0 67 68 TOTAL LIABILITIES 3,267.7 3,455.2 3,191.0 69 70 EQUITY 71 72 Common Stock 89.1 89.6 90.3 73 Capital Surplus 938,0 1,019.5 1,188.4 74 Retained Earnings 899.9 943.9 1.473.0 75 Less: Treasury Stook 2,002.1 2,180.7 2,380.4 76 77 TOTAL EQUITY (75.1) (127.7) 371.3 78 79 TOTAL LIABILITIES & EQUITY 3,1926 3,327.5 3,562.3 80 2.226.1