Q1E - Therefore ABC’s interest expense for 1998 is the...

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QUIZ ONE: BUSINESS 312 NAME ___________________________________ Student Number__________________________ Instructions: Open book and open notes. Please work independently. Hand-in no additional sheets of paper; use the back of this quiz sheet if you need more space. If you would like your marked quiz returned, use pen rather than pencil for your answer. The following information is available on the financial accounts of ABC Corporation. 1998 depreciation $30 interest 10 1997 1998 Trade Capital 150 ? Short-term Debt ? 250 Net Fixed Assets 300 ? Equity 350 ? NOTES: “Equity” represents the sum of all of the accounting equity accounts (e.g., share-capital plus retained earnings). You can presume that depreciation for tax and for financial statement purposes is the same, and therefore, there is no deferred income tax in this problem (i.e., capital cost allowance is the same as financial statement depreciation). Any incremental short-term borrowing undertaken by ABC during 1998 was at the end of the year.
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Unformatted text preview: Therefore, ABC’s interest expense for 1998 is the interest rate on short-term debt times short-term debt at the beginning of 1998 (end of 1997). Alternatively, if instead, ABC paid down any short-term debt during 1998, this was also done at the end of 1998. ABC has financed its business activity with short-term debt and with common equity. In 1998, ABC’s rate of return on equity (ROE) was 20%. ROE is calculated with equity at the end of 1998. ABC paid dividends of $26 during 1998. ABC had no share issues or share repurchases during 1998. Also in 1998, ABC’s EBITDA margin was 25%. Their trade capital to sales ratio was 30%, both trade capital and sales are measured at the end of 1998. ABC’s tax rate is 40%. Required : Using both the operating and the financial definitions, find ABC’s free cash flow for 1998. Solution...
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