Case Solutions

Fundamentals of Corporate Finance

Ross, Westerfield, and Jordan
9th edition

CHAPTER 1
THE McGEE CAKE COMPANY

1. The advantages to a LLC are: 1) Reduction of personal liability. A sole proprietor has unlimited liability, which can include the potential loss of all personal assets. 2) Taxes. Forming an LLC may mean that more expenses can be considered business expenses and be deducted from the company’s income. 3) Improved credibility. The business may have increased credibility in the business world compared to a sole proprietorship. 4) Ability to attract investment. Corporations, even LLCs, can raise capital through the sale of equity. 5) Continuous life. Sole proprietorships have a limited life,
Using the OCF equation:

OCF = EBIT + Depreciation – Taxes

The OCF for each year is:

OCF2008 = $60,853 + 35,581 – 10,624 OCF2008 = $85,180

OCF2009 = $69,680 + 40,217 – 12,163 OCF2009 = $97,734

4. To calculate the cash flow from assets, we need to find the capital spending and change in net working capital. The capital spending for the year was:

| |Capital spending | |
| |Ending net fixed assets |$191,250 |
| |– Beginning net fixed assets |156,975 |
| |+ Depreciation |40,217 |
| | Net capital spending |$74,492 |

And the change in net working capital was:

| |Change in net working capital |
| |Ending NWC |$29,010 |
| |– Beginning NWC | 11,399 |
| | Change in NWC |$17,611 |

So, the cash flow from assets was:

| |Cash flow from assets | |
| |Operating cash