Question

3. Use these financial statements to answer questions Cash Accounts receivable Inventory Net fixed assets Total assets Balance Sheet 2007 2008 $ 2,100 $ 2,300 Accounts payable 4,900 5,600 Long-term debt 9.800 11,400 Common stock 27,100 26.800 Retained earnings $43.900 $46,100 Total liabilities and equity 2007 2008 $ 3,600 $ 4,200 24,600 15,400 11,500 13,000 4,200 13,500 $43.900 $46,100 Income Statement Net Sales $61,800 Costs 39,200 Depreciation 5,200 EBIT 17,400 Interest 1,100 Taxable income 16,300 Taxes 5,500 Net Income $10,800 i ii. What is the cash flow to stockholders for 2008? What is the cash flow to creditor for 2008? What is the amount of the operating cash flow? What is the amount of the CFFA If the firm's expected net income is $25,000 and retention ratio is 40%. What is internal rate of growth in 2009? What is the sustainable rate of growth in 200

Answer 1

Ans. i)

Cash Flow to Stock Holders for 2008

= {[Net Income - (Retained earning of 2008 - Retained earning of 2007)] - [Common Stock of 2008 - Common stock of 2007]}

= {[$ 10,800 - ($ 13,500 - $ 4,200)] - [$ 13,000 - $ 11,500]}

= $ 1,500 - $ 1,500 = 0

Cash Flow to Creditors for 2008

= Interest paid - (Long term debt of 2008 (at end) - Long term debt of 2007 (at beginning))

= $ 1,100 - ( $15,400 - $ 24,600 ) = $ 10,300

ii)

Amount of Operating Cash Flow:

EBIT( Earning before interest and tax) + Depreciation - Taxes

$ 17,400 + $ 5,200 - $ 5,500 = $ 17,100

Amount of CFFA i.e. Cash Flow from Assets:

Operating Cash flow - Change in net working capital - Net capital spending

Operating Cash flow = $ 17,100 (calculated as above)

Change in net working capital = [Working Capital of 2008 (at end) - working Capital of 2007(at beginning)]

* Working Capital = Current Assets - Current Liabilities

= [($ 2,300 + $ 5,600 + $ 11,400 - $ 4,200 ) - ($ 2,100 + $ 4,900 + $ 9,800 - $ 3,600)]

= $ 15,100 - $ 13,200 = $ 1,900

Net capital spending = [Fixed assets 2008 (at end) - Fixed assets 2007 (at beginning)] + Depreciation

= [$26,800 - $ 27,100] + $ 5,200

=$ 4,900

Cash Flow from Assets =  Operating Cash flow - Change in net working capital - Net capital spending

= $ 17,100 - $ 1,900 - $ 4,900

= $ 10,300

iii)

Information given

Expected Net Income = $ 25,000

Retention Ratio = 40%

Internal Growth Rate in 2009 is calculated as

Return on Assets * Retention ratio

Return on Asset = Net Income / Average total Assets

Average total asset = ($ 43,900 + $ 46,100 ) / 2 = $ 90,000 / 2 = $ 45,000

Return on Asset = $ 25,000 / $ 45,000 = 0.55

Internal Growth Rate = 0.55 * 40% = 0.22 or 22% (approx)

Sustainable Growth Rate in 2009 is calculated as

Return on Equity * Retention Ratio

Return on Equity = Net Income / Average Shareholder's Equity

Shareholder's Equity is calculated as = Common Stock + Retained Earnings

Shareholder Equity at 2008 = $ 13,000 + $ 13,500 = $ 26,500

Shareholder Equity at 2007 = $ 11,500+ $ 4,200 = $ 15,700

Average Shareholder's Equity = ($26,500 + $ 15,700 )/2 = $ 42,200/2 = $ 21,100

Return on Equity = Net Income / Average Shareholder's Equity

= $ 25000 / $ 21,100 = 1.18

Sustainable Growth Rate = Return on Equity * Retention Ratio

= 1.18 * 40% = 0.47 or 47%