inding operating and free cash flows Consider the following balance sheets and
selected data from the income statement of Keith Corporation.
December 31
Assets 2015 2014
Cash $ 1,500 $ 1,000
Marketable securities 1,800 1,200
Accounts receivable 2,000 1,800
Inventories 2,900 2,800
Total current assets $ 8,200 $ 6,800
Gross fixed assets $29,500 $28,100
Less: Accumulated depreciation 14,700 13,100
Net fixed assets $14,800 $15,000
Total assets $23,000 $21,800
Liabilities and stockholdersâ equity
Accounts payable $ 1,600 $ 1,500
Notes payable 2,800 2,200
Accruals 200 300
Total current liabilities $ 4,600 $ 4,000
Long-term debt 5,000 5,000
Total liabilities $ 9,600 $ 9,000
Common stock $10,000 $10,000
Retained earnings 3,400 2,800
Total stockholdersâ equity $13,400 $12,800
Total liabilities and stockholdersâ equity $23,000 $21,800
Depreciation expense $1,600
Earnings before interest and taxes (EBIT) 2,700
Interest expense 367
Net profits after taxes 1,400
Tax rate 40%
Calculate the firmâs free cash flow (FCF) for the year ended December 31, 2015,
inding operating and free cash flows Consider the following balance sheets and
selected data from the income statement of Keith Corporation.
December 31
Assets 2015 2014
Cash $ 1,500 $ 1,000
Marketable securities 1,800 1,200
Accounts receivable 2,000 1,800
Inventories 2,900 2,800
Total current assets $ 8,200 $ 6,800
Gross fixed assets $29,500 $28,100
Less: Accumulated depreciation 14,700 13,100
Net fixed assets $14,800 $15,000
Total assets $23,000 $21,800
Liabilities and stockholdersâ equity
Accounts payable $ 1,600 $ 1,500
Notes payable 2,800 2,200
Accruals 200 300
Total current liabilities $ 4,600 $ 4,000
Long-term debt 5,000 5,000
Total liabilities $ 9,600 $ 9,000
Common stock $10,000 $10,000
Retained earnings 3,400 2,800
Total stockholdersâ equity $13,400 $12,800
Total liabilities and stockholdersâ equity $23,000 $21,800
Depreciation expense $1,600
Earnings before interest and taxes (EBIT) 2,700
Interest expense 367
Net profits after taxes 1,400
Tax rate 40%
Calculate the firmâs free cash flow (FCF) for the year ended December 31, 2015,
Related questions
Ratio Analysis
The Vanguard Group, Inc. has compiled the following financial statements and comparative financial ratios for the year-end review.
| Balance Sheet | ||
| Assets | ||
| Current assets | ||
| âCash | $ 118,750 | |
| âAccounts receivable | 296,250 | |
| âInventory | 303,750 | |
| âTotal current assets | $ 718,750 | |
| Gross fixed assets | $625,000 | |
| Less: Accumulated depreciation | 93,750 | |
| Net fixed assets | 531,250 | |
| Total assets | $1,250,000 | |
| Liabilities and stockholdersâ equity | ||
| Current liabilities | ||
| âAccounts payable | $ 111,250 | |
| âNotes payable | 211,250 | |
| âAccruals | 108,750 | |
| ââTotal current liabilities | $ 431,250 | |
| Long-term debt | 235,000 | |
| ââTotal liabilities | $ 666,250 | |
| Stockholdersâ equity | ||
| âCommon stock | 318,750 | |
| âRetained earnings | 265,000 | |
| ââTotal stockholdersâ equity | $ 583,750 | |
| Total liabilities and stockholdersâ equity | $1,250,000 | |
| Income Statement | |||
| Sales revenue | $1,680,000 | ||
| Cost of sales | 1,362,480 | ||
| Gross profits | $ 317,520 | ||
| Less: Operating expenses | |||
| Selling expense | $ 125,600 | ||
| General and administrative expense | 81,600 | ||
| Depreciation expense | 24,000 | ||
| âââTotal operating expense | $231,200 | ||
| Operating profits | $ 86,320 | ||
| Less: Interest expense | 15,600 | ||
| Net profits before taxes | $ 70,720 | ||
| Less: Taxes (40%) | 28,288 | ||
| Net profits after taxes | $ 42,432 | ||
| Historical and Industry Average Ratios | ||||
| Industry Average | ||||
| Ratio | 2005 | 2006 | 2007 | 2007 |
| Current ratio | 1.6 | 1.7 | â | 1.6 |
| Quick ratio | 0.9 | 1.0 | â | 0.9 |
| Inventory turnover | 6.0 | 5.0 | â | 8.4 |
| Average collection period | 40 days | 50 days | â | 40 days |
| Total asset turnover | 1.5 | 1.5 | â | 1.75 |
| Debt ratio | 60% | 56% | â | 50% |
| Times interest earned | 2.5 | 3.5 | â | 4.0 |
| Gross profit margin | 20% | 19.7% | â | 20% |
| Operating profit margin | 4.7% | 4.8% | â | 6% |
| Net profit margin | 2.0% | 2.3% | â | 3% |
| Return on investment | 3.0% | 3.5% | â | 5.25% |
| Return on equity | 7.5% | 7.95% | â | 10.5% |
1. Prepare an executive summary on the firmâs overall financial condition and performance. Your summary must be at least one page, but no more than 3 pages. Comment on the meaning of each ratio, discussing its trend and its comparison to the industry average.
The 2015 financial statements for Growth Industries are presented below:
| INCOME STATEMENT, 2015 | |||
| Sales | $ | 330,000 | |
| Costs | 215,000 | ||
| EBIT | $ | 115,000 | |
| Interest expense | 23,000 | ||
| Taxable income | $ | 92,000 | |
| Taxes (at 35%) | 32,200 | ||
| Net income | $ | 59,800 | |
| Dividends | $ 35,880 | ||
| Addition to retained earnings | 23,920 | | |
BALANCE SHEET, YEAR-END, 2015
| Assets | Liabilities | ||||
| Current assets | Current liabilities | ||||
| Cash | $ | 9,000 | Accounts payable | $ | 16,000 |
| Accounts receivable | 14,000 | Total current liabilities | $ | 16,000 | |
| Inventories | 37,000 | Long-term debt | 230,000 | ||
| Total current assets | $ | 60,000 | Stockholdersâ equity | ||
| Net plant and equipment | 270,000 | Common stock plus additional paid-in capital | 15,000 | ||
| Retained earnings | 69,000 | ||||
| Total assets | $ | 330,000 | Total liabilities and stockholdersâ equity | $ | 330,000 |
Sales and costs in 2016 are projected to be 30% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 75% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .60.
| What is the required external financing over the next year? |
Even if sales increase by 30%, the firm still has more than enough fixed assets to meet production. Only working capital will increase.
Net working capital of the firm in 2015 was $____
The increase in net working capital will be $____, which is less than the increase in the retained earnings.
Thus required external financing is $_____
A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchase shares, increase cash reserves, or fund future growth. This extra cash was primarily due to the firm's excess production capacity.
