In this case, since the total value of NCS and NOWC is much greater than OCF, it means that the company business operations cannot cover the firm investmentin fixed assets and working capital. Since the CFFA is negative, the firm may be: i) In its early stages ii) Investing heavily
QUESTION 3 Creditors Cash Flow to Creditors = Interest Paid – Net New Borrowing = $1,830 – 0 = $1,830 D) CASH FLOW TO CREDITORS AND SHAREHOLDERS Positive cash flow to creditors means the company has to pay a certain sum of money to the creditors, either for interest or capital or both. Here, since the net borrowing is zero, there is no change in the capital. Hence, the company pays a total of $1,830 in interest in 2009.
QUESTION 3 D) CONT. Stockholders CFFA + Interest Tax Shield = Cash Flow to + Cash Flow to Stockholders and Creditors Interest Tax Shield= $1,830 * 0.34 = $622.20
QUESTION 3 D) CONT. CFFA + Interest Tax Shield = Cash Flow to Stockholders + Cash Flow to Creditors Cash Flow to Stockholders = CFFA + Interest Tax Shield – Cash Flow to Creditors = –$2,048 + $622.20 – $1,830 = –$3,255.80 A positive cash flow means that the company pays a sum of money to stockholders. In this case, negative cash flow to stockholders means that the company actually receives a net sum of money from them.
QUESTION 3 D) SUMMARYOF ACCOUNTS # Account Title Outcome 3A Net Income + 3B OCF + 3C CFFA – 3D CF to Creditors + CF to Stockholders –
The Ashwood Company has long-term debt ratio of 0.45 and a current ratio of 1.25 . Current liabilities are $875 , sales are $5,780 , profit margin is 9.5 percent , and ROE is 18.5 percent. What is the amount of the firm’s net fixed assets ? QUESTION 4 Net Fixed Assets = Total Assets – Current Assets
QUESTION 4 FINDING OUT CURRENT ASSETS: CurrentRatio = CurrentAssets/CurrentLiabilities 1.25 = CurrentAssets/$875 Current Assets = $1093.75
QUESTION 4 FINDING OUT TOTAL ASSETS: Total Assets = CurrentLiabilities + Long Term Debt + Equity $875 + Long Term Debt + Equity
QUESTION 4 FINDING OUT EQUITY: ROE = Net Income/TotalCommon Equity Profit margin = Net Income/Sales 9.50% = Net Income/$5,780 Net Income = $549.10
QUESTION 4 FINDING OUT EQUITY: ROE = Net Income/TotalCommon Equity 18.50% = $549.10/Total Common Equity Total CommonEquity = $2,968.11
aaa QUESTION 4 FINDING OUT LONG TERM DEBT: Long Term Debt Ratio = Long-term Debt/ (Long-term Debt + Total Equity) 0.45 = Long-term Debt/ (Long-term Debt + $2,968.11) 0.45Long-term Debt + $1,335.65 = Long-term Debt 0.55 Long-term Debt = $1,335.65 Long-term Debt = $2,428.45
aaa QUESTION 4 FINDING OUT TOTAL ASSETS: Total Assets = CurrentLiabilities + Long Term Debt + Equity = $875 + $2,428.45 + $2,968.11 = $6,271.56
QUESTION 4 FINDING OUT NET FIXED ASSETS: Net Fixed Assets = Total Assets - CurrentAssets = $6,271.56 - 1093.75 = $5,177.81
2008 2009 Current Ratio 56,260 38,963 = 1.44 60,550 43,235 = 1.40 S HORT - TERM SOLVENCY RATIOS a) Current Ratio = Current Assets Current Liabilities QUESTION 5 Current ratio is a measure of short-term liquidity important to short term creditors such as suppliers
2008 2009 Quick Ratio (56,260−23,084) 38,963 =0.85 (60,550−24,650) 43,235 = 0.83 b) Quick Ratio = Current Assets − Inventory Current Liabilities S HORT - TERM SOLVENCY RATIOS QUESTION 5 Measures liquidityof most liquidassets
2008 2009 Cash Ratio 21,860 38,963 = 0.56 22,050 43,235 = 0.51 c) Cash Ratio = Cash Current Liabilities S HORT - TERM SOLVENCY RATIOS QUESTION 5
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