by Brad Jordan and Joe SmoliraVersion 7.0

Chapter 2In these spreadsheets, you will learn how to use the following Excel functions:

The following conventions are used in these spreadsheets:

1) Given data in blue2) Calculations in red

NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-In" be installed in Excel.To install these, click on the Office button then "Excel Options," "Add-Ins" and select"Go." Check "Analysis ToolPak" and "Solver Add-In," then click "OK."

Ross, Westerfield, and Jordan's Spreadsheet MasterEssentials of Corporate Finance, 7th edition

Cell formatting

Trace Dependents/Precedents

VLOOKUP

Referencing across worksheets

In these spreadsheets, you will learn how to use the following Excel functions:

The following conventions are used in these spreadsheets:

NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-In" be installed in Excel.

Chapter 2 - Section 1The Balance Sheet

Example 2.1: Building a Balance Sheet

RWJ Excel Tip

Given the following information, what does the balance sheet look like? What is shareholders' equity? What is net working capital?

Current assets: $ 100 Net fixed assets: $ 500 Short-term debt: $ 70 Long-term debt: $ 200

RWJ Excel Tip

Assets Liabilities & Shareholders' EquityCurrent assets $ 100 Current liabilities Fixed assets 500 Long-term debt

Shareholders' equity Total liabilities and

Total assets $ 600 shareholders' equity

Spreadsheets are a very useful way to do financial calculations. Throughout these spreadsheets, we will use Excel to perform most of the calculations that are presented in the textbook. However, using Excel or any spreadsheet program is not a substitute for understanding the underlying calculations. The old adage "Garbage in - Garbage out" definitely applies to spreadsheets. You should realize that you do not need to understand these spreadsheets to understand Finance, but it is a useful tool for calculations. We would recommend that you first read the textbook to understand the concepts before you work through these spreadsheets. It might also be advantageous to work through the problems by hand or using a financial calculator. As with most calculations, there are often multiple ways to arrive at the correct solution. The spreadsheets show one method of solving the problem presented, not necessarily the only way to solve the problem with a spreadsheet.

Throughout these spreadsheets, Excel tips will be highlighted in blue. The tips will range from specific functions to formatting and displaying output. The first application we will use is building a basic balance sheet. Although we could build a balance sheet and enter the numbers directly into the balance sheet, in some cases, our preference is to create a column of variables and then refer to these input cells in the balance sheet. We also believe in the use of color to differentiate input cells and calculation cells. In these spreadsheets, if the number is blue, it is an input cell. If the number is red, the cell is a calculation or references an input cell.

In order to make a spreadsheet more presentable, cell formatting is important. To make the numbers in a cell appear the way you would like them to, whether a dollar amount, percentage, or other format, select the cells you want to format, right-click, and select the "Format Cells" option. This will allow you to change the format of the numbers, the font, text color, cell background color, and lots of other options.

To calculate the shareholders' equity, realize that total liabilities and shareholders' equity equals both total assets and current liabilities plus long-term debt plus shareholders' equity. Using these relationships, we can solve for shareholders' equity.

Net working capital = Current assets - Current liabilitiesNet working capital = $ 30

Many of the examples in this chapter deal with the fictitious U.S. Corporation. The balance sheet for the company is below.

RWJ Excel Tip

Assets2009 2010

Current assets Cash $ 104 $ 160 Accounts receivable 455 688 Inventory 553 555 Total $ 1,112 $ 1,403

Fixed assets Net plant and equipment $ 1,644 $ 1,709

Total assets $ 2,756 $ 3,112

RWJ Excel Tip

We will be using this balance sheet in future calculations.

Example 2.2: Market Value versus Book Value

Note that we will enter the data for the balance sheet here, but reference the numbers across different sheets, a very handy tool in Excel. Also, even though we know the balance sheet balances, we will have Excel do the balance sheet calculations for us anyway. For example, total current assets will be calculated in Excel even though the number is given in the textbook.

U.S. Corporation2009 and 2010 Balance Sheets

($ in millions)

In the balance sheet, select the 2009 cash balance, go to Formulas, and select Trace Dependents. This will draw a line from the cash balance cell to the 2009 total current liabilities. This function draws an arrow to any cell that uses the selected cell in a calculation. If you go to the total assets cell, and choose Trace Precedents from the same menu, Excel will draw a line to total current assets and net plant and equipment to total assets. Tracing precedents allows us to see which cells the cell we selected is using for the calculation in that cell. Both functions are useful for tracing where cells are used in future calculations or which cell or cells are used in the current calculation.

We are given the following information on Klingon Corporation:

Book value of fixed assets: $ 700 Market value of fixed assets: $ 1,000 Book value of net working capital: $ 400 Market value of net working capital: $ 600 Book value of long-term debt: $ 500 Market value of long-term debt: $ 500

Below we have both the book value and market value balance sheets for Klingon Corporation.

AssetsBook Market

Net working capital $ 400 $ 600 Net fixed assets 700 1,000

Total assets $ 1,100 $ 1,600

RWJ Excel Tip

Klingon CorporationBalance Sheets

Book Value and Market Value

Notice we used separate input cells for the market value and book value of debt even though the two numbers are the same. While they are the same in this case, they do not have to be the same. Using different input cells makes the spreadsheet more versatile.

Given the following information, what does the balance sheet look like? What is shareholders' equity? What is net working capital?

Liabilities & Shareholders' Equity Current liabilities $ 70 Long-term debt 200 Shareholders' equity 330 Total liabilities and shareholders' equity $ 600

Spreadsheets are a very useful way to do financial calculations. Throughout these spreadsheets, we will use Excel to perform most of the calculations that are presented in the textbook. However, using Excel or any spreadsheet program is not a substitute for understanding the underlying calculations. The old adage "Garbage in - Garbage out" definitely applies to spreadsheets. You should realize that you do not need to understand these spreadsheets to understand Finance, but it is a useful tool for calculations. We would recommend that you first read the textbook to understand the concepts before you work through these spreadsheets. It might also be advantageous to work through the problems by hand or using a financial calculator. As with most calculations, there are often multiple ways to arrive at the correct solution. The spreadsheets show one method of solving the problem presented, not necessarily the only way to solve the problem with a spreadsheet.

Throughout these spreadsheets, Excel tips will be highlighted in blue. The tips will range from specific functions to formatting and displaying output. The first application we will use is building a basic balance sheet. Although we could build a balance sheet and enter the numbers directly into the balance sheet, in some cases, our preference is to create a column of variables and then refer to these input cells in the balance sheet. We also believe in the use of color to differentiate input cells and calculation cells.

number is red, the cell is a calculation or references an input cell.

In order to make a spreadsheet more presentable, cell formatting is important. To make the numbers in a cell appear the way you would like them to, whether a dollar amount, percentage, or other format, select the cells you want to format, right-click, and select the "Format Cells" option. This will allow you to change the format of the

To calculate the shareholders' equity, realize that total liabilities and shareholders' equity equals both total assets and current liabilities plus long-term debt plus shareholders' equity. Using these relationships, we can solve for shareholders' equity.

Many of the examples in this chapter deal with the fictitious U.S. Corporation. The balance sheet for the company is below.

Liabilities and Owner's Equity2009 2010

Current liabilities Accounts payable $ 232 $ 266 Notes payable 196 123 Total $ 428 $ 389

Long-term debt $ 408 $ 454

Owner's equity Common stock and paid-in surplus $ 600 $ 640 Retained earnings 1,320 1,629 Total $ 1,920 $ 2,269

Total liabilities and owner's equity $ 2,756 $ 3,112

We will be using this balance sheet in future calculations.

Note that we will enter the data for the balance sheet here, but reference the numbers across different sheets, a very handy tool in Excel. Also, even though we know the balance sheet balances, we will have Excel do the balance sheet calculations for us anyway. For example, total current assets will be calculated in Excel even though the

U.S. Corporation2009 and 2010 Balance Sheets

($ in millions)

In the balance sheet, select the 2009 cash balance, go to Formulas, and select Trace Dependents. This will draw a line from the cash balance cell to the 2009 total current liabilities. This function draws an arrow to any cell that uses the selected cell in a calculation. If you go to the total assets cell, and choose Trace Precedents from the same menu, Excel will draw a line to total current assets and net plant and equipment to total assets. Tracing precedents allows us to see which cells the cell we selected is using for the calculation in that cell. Both functions are useful for tracing where cells are used in future calculations or which cell or cells are used in the current calculation.

Below we have both the book value and market value balance sheets for Klingon Corporation.

Liabilities and Owner's EquityBook Market

Long-term debt $ 500 $ 500 Shareholders' equity 600 1,100

Total liabilities and owner's equity $ 1,100 $ 1,600

Klingon CorporationBalance Sheets

Book Value and Market Value

Notice we used separate input cells for the market value and book value of debt even though the two numbers are the same. While they are the same in this case, they do not have to be the same. Using different input cells makes the spreadsheet more versatile.

Chapter 2 - Section 2The Income Statement

The income statement measures performance over time. The income statement for U.S. Corporation is:

Tax rate: 34%

Net sales $ 1,509 Cost of goods sold 750 Depreciation 65 Earnings before interest and taxes $ 694 Interest paid 70 Taxable income $ 624 Taxes (34%) 212 Net income $ 412

Dividends $ 103 Addition to retained earnings 309

We have the tax rate as an input cell. In this way, Excel will calculate the taxes automatically. The dividends are an input cell since the dividends are at management discretion.

Example 2.3: Calculating Earnings and Dividends per share

Suppose that the shares outstanding for U.S. Corporation in millions are: 200

What are the earnings per share and dividends per share?

Earnings per share = Net income / Total shares outstanding =Dividends per share = Total dividends / Total shares outstanding =

U.S. Corporation2010 Income Statement

($ in millions)

The income statement measures performance over time. The income statement for U.S. Corporation is:

We have the tax rate as an input cell. In this way, Excel will calculate the taxes automatically. The dividends are an input cell since the dividends are at management discretion.

Example 2.3: Calculating Earnings and Dividends per share

$ 2.06 $ 0.515

Chapter 2 - Section 3Taxes

The corporate income tax table currently in effect is:

Tax rate $ - $ 50,000 15% 50,001 75,000 25% 75,001 100,000 34% 100,001 335,000 39% 335,001 10,000,000 34% 10,000,001 15,000,000 35% 15,000,001 18,333,333 38% 18,333,334 35%

Taxable income: $ 200,000 Taxes: $ 68,000

The marginal tax rate will be:

Marginal tax rate: 39%

RWJ Excel Tip

Taxableincome is

greater thanor equal

to….

Butless

than or equal to…

Notice that we entered the minimum and maximum amount for each marginal tax rate in separate columns. Why we did this we will explain shortly. The marginal tax rate is the tax on the next dollar of income. Suppose we have gathered the following information from a company's income statement:

To have Excel find the marginal tax rate at the requested level of income, we used VLOOKUP. This function is found under Lookup & Reference. The format for this function is VLOOKUP(lookup_value,table_array,col_index_num,range_lookup). The lookup_value is the number we want to find, in this case the net income. The table_array is where we want to look for the number, index_number is the column in the selected data we want the answer returned from, and range_lookup allows you to request an answer only for an exact match (if FALSE is entered) or an approximate match (the default, or if TRUE is entered.) In this case, we highlighted the entire table, used the cell with the net income amount as the lookup_value, and entered "3" as the index_num since we wanted the number from the 3rd column we highlighted returned as our answer. Since we did not enter a value for range_lookup, the default option was to look for the closest number and return the value from the column. Click on the marginal income tax rate cell calculation cell to see the syntax we used.

The average tax rate is simply the total taxes divided by the taxable income, or:

Average tax rate: 34.00%

Of course, you could create a spreadsheet to calculate the total tax bill and average tax rate for a given level of taxable income. In fact, the Master it! problem at the end of this workbook asks you to create such a spreadsheet.

The corporate income tax table currently in effect is:

Notice that we entered the minimum and maximum amount for each marginal tax rate in separate columns. Why we did this we will explain shortly. The marginal tax rate is the tax on the next dollar of income. Suppose we have gathered the following information from a company's income statement:

To have Excel find the marginal tax rate at the requested level of income, we used VLOOKUP. This function is found under Lookup & Reference. The format for this function is VLOOKUP(lookup_value,table_array,col_index_num,range_lookup). The lookup_value is the number we want to find, in this case the net income. The table_array is where we want to look for the number, index_number is the column in the selected data we want the answer returned from, and range_lookup allows you to request an answer only for an exact match (if FALSE is entered) or an approximate match (the default, or if TRUE is entered.) In this case, we highlighted the entire table, used the cell with the net income amount as the lookup_value, and entered "3" as the index_num since we wanted the number from the 3rd column we highlighted returned as our answer. Since we did not enter a value for range_lookup, the default option was to look for the closest number and return the value from the column. Click on the marginal

Of course, you could create a spreadsheet to calculate the total tax bill and average tax rate for a given level of taxable income. In fact, the Master it! problem at the end of

Chapter 2 - Section 4Cash Flow

RWJ Excel Tip

Earnings before interest and taxes $ 694 + Depreciation 65 - Taxes 212 Operating cash flow $ 547

RWJ Excel Tip

Capital spending is the amount a company spends on fixed assets. For U.S. Corporation, the capital spending was:

Ending fixed assets $ 1,709 - Beginning fixed assets 1,644 + Depreciation 65 Net capital spending $ 130

Ending NWC $ 1,014 - Beginning NWC 684 Change in NWC $ 330

Now we are ready to calculate the financial cash flows for the fictitious U.S. Corporation. When we calculate the cash flows, we are going to reference inputs and calculations from the previous worksheets so we do not have to enter the balance sheet and income statements again.

To reference data in another worksheet, first enter an equal sign in the cell you want the data in, then move the cursor to the tab at the bottom of the spreadsheet that corresponds to the worksheet you want. Go to the cell that contains the desired data, left click your mouse, and press enter. To get back to the current worksheet, simply click on the appropriate worksheet tab at the bottom of the spreadsheet.

U.S. Corporation2010 Operating Cash Flow

Excel will not let you enter a mathematical operator ( = , + , - , etc.) at the beginning of a text cell. However, if you enter an apostrophe as the first character in a cell, Excel will consider anything in the cell as text, not a mathematical operation. This is how we entered the "+" before Depreciation.

U.S. Corporation2010 Capital Spending

The change in net working capital is the amount spent on current assets. Net working capital is current assets minus current liabilities. So, for U.S. Corporation, the change in net working capital was:

U.S. Corporation2010 Change in Net Working Capital

Operating cash flow $ 547 - Net capital spending 130 - Change in NWC 330 Cash flow from assets $ 87

Interest paid $ 70 - Net new borrowing 46 Cash flow to creditors $ 24

Dividends paid $ 103 - Net new equity 40 Cash flow to stockholders $ 63

Now we are ready to calculate the cash flow from assets for U.S. Corporation. The cash flow from assets is the operating cash flow less the capital spending less the change in NWC. The cash flow from assets is:

U.S. Corporation2010 Cash Flow from Assets

The cash flow to creditors is the interest paid minus net new borrowing. Net new borrowing is simply the difference between the ending long-term debt and the beginning long-term debt.

U.S. Corporation2010 Cash Flow to Creditors

The cash flow to stockholders is dividends paid minus net new equity. To find net new equity, we can subtract the beginning common stock and paid-in surplus from the ending common stock and paid-in surplus. So, the cash flow to stockholders was:

U.S. Corporation2010 Cash Flow to Stockholders

Capital spending is the amount a company spends on fixed assets. For U.S. Corporation, the capital spending was:

Now we are ready to calculate the financial cash flows for the fictitious U.S. Corporation. When we calculate the cash flows, we are going to reference inputs and calculations from the previous worksheets so we do not have to enter the balance sheet and income statements again.

To reference data in another worksheet, first enter an equal sign in the cell you want the data in, then move the cursor to the tab at the bottom of the spreadsheet that corresponds to the worksheet you want. Go to the cell that contains the desired data, left click your mouse, and press enter. To get back to the current worksheet, simply

Excel will not let you enter a mathematical operator ( = , + , - , etc.) at the beginning of a text cell. However, if you enter an apostrophe as the first character in a cell, Excel will consider anything in the cell as text, not a mathematical operation. This is how we entered the "+" before Depreciation.

The change in net working capital is the amount spent on current assets. Net working capital is current assets minus current liabilities. So, for U.S. Corporation, the change

Now we are ready to calculate the cash flow from assets for U.S. Corporation. The cash flow from assets is the operating cash flow less the capital spending less the change

The cash flow to creditors is the interest paid minus net new borrowing. Net new borrowing is simply the difference between the ending long-term debt and the beginning

The cash flow to stockholders is dividends paid minus net new equity. To find net new equity, we can subtract the beginning common stock and paid-in surplus from the ending common stock and paid-in surplus. So, the cash flow to stockholders was:

Chapter 2 - Master it!

The tax is:$0 $7,825 10% of the amount over $0

7,825 31,850 $782.50 plus 15% of the amount over $7,82531,850 77,100 $4,386.25 plus 25% of the amount over $31,85077,100 160,850 $15,698.75 plus 28% of the amount over $77,100

160,850 349,700 $39,148.75 plus 33% of the amount over $160,850349,700 $101,469.25 plus 35% of the amount over $349,700

Below, we have the tax table as shown in the textbook, as well as a taxable income.

Taxable income: $ 1,350,000

The corporate income tax table currently in effect is:

Tax rate $ - $ 50,000 15%

Using Excel to find the marginal tax rate can be accomplished using the VLOOKUP function. However, calculating the total tax bill is a little more difficult. Below we have shown a copy of the IRS tax table for an individual. Often, tax tables are presented in this format.

If taxable income is

over --But notover --

In reading this table, the marginal tax rate for taxable income less than $7,825 is 10%. If the taxable income is between $7,825 and $31,850, the tax bill is $782.50 plus the marginal taxes. The marginal taxes are calculated as the taxable income minus $7,825 times the marginal tax rate of 15%.

Taxableincome is

greater thanor equal

to….

Butless

than…

50,001 75,000 25% 75,001 100,000 34% 100,001 335,000 39% 335,001 10,000,000 34% 10,000,001 15,000,000 35% 15,000,001 18,333,333 38% 18,333,334 35%

a. Create a tax table for corporate taxes similar to the individual tax table shown above.

b. For a given taxable income, what is the marginal tax rate?

c. For a given taxable income, what is the total tax bill?

d. For a given taxable income, what is the average tax rate?

Below, we have the tax table as shown in the textbook, as well as a taxable income.

The corporate income tax table currently in effect is:

Using Excel to find the marginal tax rate can be accomplished using the VLOOKUP function. However, calculating the total tax bill is a little more difficult. Below

In reading this table, the marginal tax rate for taxable income less than $7,825 is 10%. If the taxable income is between $7,825 and $31,850, the tax bill is $782.50 plus the marginal taxes. The marginal taxes are calculated as the taxable income minus $7,825 times the marginal tax rate of 15%.

Create a tax table for corporate taxes similar to the individual tax table shown above.

For a given taxable income, what is the marginal tax rate?

For a given taxable income, what is the total tax bill?

For a given taxable income, what is the average tax rate?

Master it! Solution

a. The tax is:

plusplusplusplusplusplusplus

b. The marginal tax rate is:

c. The total tax bill is:

Tax on the bottom of marginal tax bracket:Amount of income in marginal tax bracket:Total tax:

d. The average tax rate is:

If taxable income is

over --But notover --

of the amount overof the amount overof the amount overof the amount overof the amount overof the amount overof the amount overof the amount over