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Assignment
Use the following information for Questions 1 through 4:
Assume that you recently graduated and have just reported to work as an investment advisor at the one of the firms on Wall Street. You have been presented and asked to review the following Income
Statement and Balance Sheets of one of the firm's clients. Your boss has developed the following set of questions you must answer.
Income Statements and Balance Sheet
Balance Sheet
2012
2013
2014
Cash
$9,000
$7,282
$14,000
Short-term investments
48,600
20,000
71,632
Accounts receivable
351,200
632,160
878,000
Inventories
715,200
1,287,360
1,716,480
Total current assets
$1,124,000
$1,946,802
$2,680,112
Gross fixed assets
491,000
1,202,950
1,220,000
Less: Accumulated depreciation
146,200
263,160
383,160
Net fixed assets
$344,800
$939,790
$836,840
Total assets
$1,468,800
$2,886,592
$3,516,952
Liabilities and Equity
Accounts payable
$145,600
$324,000
$359,800
Notes payable
200,000
720,000
300,000
Accruals
136,000
284,960
380,000
Total current liabilities
$481,600
$1,328,960
$1,039,800
Long-term debt
323,432
1,000,000
500,000
Common stock (100,000 shares)
460,000
1,680,936
Retained earnings
203,768
97,632
296,216
Total equity
$663,768
$557,632
$1,977,152
Total liabilities and equity
Income Statements
Sales
$3,432,000
$5,834,400
$7,035,600
Cost of goods sold except depr.
2,864,000
4,980,000
5,800,000
Depreciation and amortization
18,900
116,960
120,000
Other expenses
340,000
612,960
Total operating costs
$3,222,900
$5,816,960
$6,532,960
EBIT
$209,100
$17,440
$502,640
Interest expense
62,500
176,000
80,000
EBT
$146,600
($158,560)
$422,640
Taxes (40%)
58,640
-63,424
169,056
Net income
$87,960
($95,136)
$253,584
Ratio Analysis
Industry Average
Current
2.3
1.5
2.7
Quick
0.8
0.5
1.0
Inventory turnover
4
6.1
Days sales outstanding
37.3
39.6
32.0
Fixed assets turnover
10
6.2
7.0
Total assets turnover
2
2.5
Debt ratio
35.60%
59.60%
32.0%
Liabilities-to-assets ratio
54.80%
80.70%
50.0%
TIE
3.3
0.1
EBITDA coverage
2.6
8.0
Profit margin
2.60%
-1.6%
3.6%
Basic earning power
14.20%
0.60%
17.8%
ROA
6.00%
-3.3%
9.0%
ROE
13.30%
-17.1%
17.9%
Price/Earnings (P/E)
9.7
-6.3
16.2
Price/Cash flow
8
27.5
7.6
Market/Book
1.3
1.1
2.9
1. What is the free cash flow for 2014?
2. 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?
3. Calculate the 2014 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?
4. Use the extended DuPont equation to provide a summary and overview of company's financial condition as projected for 2014. What are the firm's major strengths and weaknesses?
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Computation of Free Cash Flow
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