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
longterm 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
=
Longterm Debt/ (Longterm Debt
+ Total Equity)
0.45
=
Longterm Debt/ (Longterm Debt
+ $2,968.11)
0.45Longterm Debt + $1,335.65
=
Longterm Debt
0.55 Longterm Debt
=
$1,335.65
Longterm 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
QUESTION 5
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 shortterm 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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 Spring '11
 tohmunheng
 Finance, Financial Ratio, Generally Accepted Accounting Principles