The firm invested $680 in new net working capital and $7,200 in new fixed assets. The firm had to raise funds from its stakeholders to support this new investment. In this problem, even though net income and OCF are positive, the firm invested heavily in both fixed assets and net working capital resulting in negative CFFA; it had to raise funds from its stockholders and creditors to make these investments. Given in the question (d), no new debt was raised during the year, the firm accomplished this by raising $4,555.80 in the form of new equity. After paying out $1,300 of this in the form of dividends to shareholders and $1,830 in the form of interest to creditors, $1,425.80 was left to meet the firm’s cash flow needs for investment.
9 #4: 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?
10 #4: The solution to this problem requires a number of steps. First, remember that CA + NFA = TA. So, if we find the CA and the TA, we can solve for NFA. Using the numbers given for the current ratio and the current liabilities, we solve for CA: CR = CA / CL CA = CR(CL) = 1.25($875) = $1,093.75 To find the total assets, we must first find the total debt and equity from the information given. So, we find the sales using the profit margin: PM = NI / Sales NI = PM(Sales) = 0.095($5,870) = $549.10 We now use the net income figure as an input into ROE to find the total equity: ROE = NI / TE TE = NI / ROE = $549.10 / 0.185 = $2,968.11
11 Next, we need to find the long-term debt. The long-term debt ratio is: Long-term debt ratio = 0.45 = LTD / (LTD + TE) Inverting both sides gives: 1/0.45 = (LTD + TE) / LTD = 1 + (TE / LTD) Substituting the total equity into the equation and solving for long-term debt gives the following: 2.222 = 1 + ($2,968.11 / LTD) LTD = $2,968.11 / 1.222 = $2,428.45
12 Now, we can find the total debt of the company: TD = CL + LTD = $875 + 2,428.45 = $3,303.45 And, with the total debt, we can find the TD&E, which is equal to TA: TA = TD + TE = $3,303.45 + 2,968.11 = $6,271.56 And finally, we are ready to solve the balance sheet identity as: NFA = TA – CA = $6,271.56 – 1,093.75 = $5,177.81
13 Calculate Short-term solvency (or Liquidity) ratios Calculate Asset Management (or Turnover/Efficiency) ratios Calculate Long-term solvency ( or Financial Leverage) ratios Calculate Profitability ratios #5: Measure the ability of the firm to pay its short-term bills when they come due Measure how efficient the firm manages its assets to generate sales Measure financial leverage.
- Spring '11
- Current Liabilities, Financial Ratio, Generally Accepted Accounting Principles