Question

1.4 Consider the following financial information for a company (in millions of dollars)

Partial income statement (latest year ending December 31, 2017):

Sales                                                                $900

Cost of goods sold                                          ($350)

Other expenses                                              ($200)

Depreciation                                                    ($120)

Interest expenses                                           ($30)

Partial balance sheet (as of December 31)

                                                              2016                             2017

Cash                                                    $30                                  $20

Receivables                                         $200                                $250

Inventories                                           $220                                $210

Net fixed assets                                   $500                                $520

Accounts payable                               $100                                 $120

Accruals                                                $80                                 $100

Short-term debt                                     $50                                  $10

Long-term debt                                      $270                                $270

a) Assuming an income tax rate of 25%, what were the income taxes paid and the net income after taxes in 2017?

b) What was the stockholders' equity in 2016 and 2017?

c) Assuming the company did not issue or repurchase any stock during 2017, and it had 10 million shares outstanding, what was its earnings per share and what dividend per share was paid?

d) What was the amount of fixed assets purchased or sold during 2017?

e) What was the working capital in 2016 and 2017 (assume all cash was used for operations)?

f) Set up the company's cash flow statement for the latest year. What was its net cash flow? What was its operating cash flow, free cash flow and free cash flow to equity?

1.5 Using the information from Problem 1.4, calculate the following financial ratios for 2017:

a) Current ratio and quick ratio;

b) Inventory turnover ratio, days sales outstanding, fixed assets turnover ratio, total assets turnover ratio (Hint: Use beginning and end-of-year averages, whenever ratios combine balance sheet and income statement figures);

c) Debt (leverage) ratio, debt to equity ratio, interest coverage ratio;

d) Net profit margin, return on assets, return on equity, dividend payout ratio;

e) Assuming the company's common stock is trading at $ 150 per share, calculate its price/earnings ratio, market/book ratio, earnings yield and dividend yield.

Answer 1

1.4

a) Income taxes paid = Net income before taxes*tax rate

Net income before taxes = Sales - cost of goods sold - other expenses - Depreciation - Interest expenses = $900 - $350 - $200 - $120 - $30 = $200‬

Income taxes paid = $200*25% = $50

Net income after taxes in 2017 = Net income before taxes - Income taxes paid = $200 - $50 = $150

b) stockholders' equity in 2016 = Total assets - accounts payable - accruals - short-term debt - Long-term debt

Total assets in 2016 = Cash + receivables + Inventories + Net Fixed Assets = $30 + $200 + $220 + $500 = $950‬

stockholders' equity in 2016 = $950 - $100 - $80 - $50 - $270 = $450‬

Total assets in 2017 = $20 + $250 + $210 + $520 = $1,000‬

stockholders' equity in 2017 = $1,000‬ - $120 - $100 - $10 - $270 = $500‬

c) earnings per share = Net income after taxes/no. of shares outstanding = $150/10 = $15‬

for dividend per share, first we calculate retained earnings in 2017.

retained earnings in 2017 = stockholders' equity in 2017 - stockholders' equity in 2016 = $500 - $450 = $50

so, dividend paid in 2017 = Net income after taxes in 2017 - retained earnings in 2017 = $150 - $50 = $100

dividend per share = dividend paid in 2017/no. of shares outstanding = $100/10 = $10

d) fixed assets purchased during 2017 = Net fixed assets 2017 + depreciation 2017 - Net fixed assets 2016

fixed assets purchased during 2017 = $520 + $120 - $500 = $140‬