Fin 534 Week 2 Homework
[INSTRUCTOR’S NAME]
[STUDENT’S NAME]
[COURSE]
[DATE]
- Free cash flow for 2013:
For calculating the free cash flow or FCF, following equation would be used.
EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure
EBIT = $17440
Tax at the rate of 40% = -$63424
Depreciation & Amortization = $116,960
Networking capital (2012) = current assets – current liabilities
= $1,124,000 - $481,600 = $6,424,00
Networking capital (2013) = current assets – current liabilities
= $1,946,802 - $1,328,960 = $6,178,42
Change in net working capital = net working capital 2012 – networking capital 2013
= $24558
Change in total assets = $2,886,592 - $1,468,800 = $1,417,792
Change in total liabilities = $2,886,592 - $1,468,800 = $1,417,792
Capital expenditure = change in total assets – change in total liabilities
= $1,417,792- $1,417,792 = $0
Now, replacing the values in the following equation to get the amount of free cash flow:
EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure
FCF = $17440 *( 1- (-$63424))+ $116,960- $24,558 -$0
= $17440* ($63425) + $116,960- $24,558 -$0
= $1,106,132,000 + $1,16,960- $24558 -$0
= $1,106,248,960 - $24558 -0
= $1,106,224,402
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- Suppose Congress changed the tax laws so that Berndt’s depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow?
In such case, when depreciation expenses are doubled due to increase in tax laws, the amount of net reported profit and net cash flow, both would go down. This decrease in net cash flow and reported profit would occur because the amount of depreciation is deducted as expense from gross profit.
- Calculate the 2013 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position in 2013?
Current ratio for the year 2013:
Current ratio =current assets /current liabilities
Current ratio = $1,946,802 / $1,328,960
= 1.46 or 1.5
Quick ratio = Cash in hand + Cash at Bank + Receivables + Marketable Securities / Current Liabilities
= $7,28 + $632,160 + $20,000 / $1,328,960
= 0.49 or 0.5
These ratios present that the company is enjoying a good state of liquidity. The current ratio is 1.5which shows that the company does not face any difficulty in paying its bills on time. Quick ratio (0.5) is lower than 1 and it indicates that the company relies heavily on inventory or other current assets to pay its long term liabilities.
- Calculate the 2013 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover.
Inventory turnover ratio= sales / inventory
= $5,834,400 / 1,287,360
= 4.5
Day sales outstanding = (Accounts Receivables / Total credit sales) *no.of days
= (632,160 / $5,834,400) * 365
= 39.6
Fixed assets turnover ratio = Sales Revenue / Total Fixed Assets
= $5,834,400 / $939,790
= 6.2
Total assets turnover ratio = net sales / average total assets
= $5,834,400 / $2,886,592
= 2.0
- Calculate the 2013 debt ratio, liabilities-to-assets ratio, times-interest-earned, and EBITDA coverage ratios. What can you conclude from these ratios?
Debt ratio = total debt / total assets
= $1728960 / $2,886,592
= 59.8 %
liabilities-to-assets ratio = total liabilities / total assets
= $2,328,960/ $2,886,592
= 80.70%
Times-interest-earned = EBIT / Interest expense
= $17,440 / $176,000