Homework BUS 534
Q1: What is the free cash flow for 2014?
Answer: FCF = EBIT (1-Tax Rate) + Depreciation & Amortization – Change in Net Working Capital – Capital Expenditure = $502,640(1-.4) + $120,000 - $1,022,470 - $17,050 = $421,584 - $1,005,420 = -$583,836
Q2: Under a doubled depreciation expense (no operating changes), what would happen to reported profit and to net cash flow?
Answer: It will decrease on paper the profit (before interest & tax) and increase the net cash flow, by an additional one single depreciation expense, compared to non-double (single) depreciation expense.
Debt Ratio (DR): [Note: Dear Client, please clarify what is being discussed in your class because as far as I know, and also confirmed by many print and web references, debt ratio is synonymous with liabilities-to-assets ratio. If you are taught they are different, please provide the formula for each so I can make the appropriate calculation based on what is taught in your classroom.]
Liabilities-to-Assets Ratio (LAR): LAR = Total Liabilities / Total Assets = $ 2,180,936 / $3,516,952 = 62.1% (vs. industry, 50%)
Times-Interest-Earned (TIE): TIE = EBIT / Total Interest Payable = $502,640 / $80,000 = 6.28 (vs. industry, 6.2)
EBITDA Coverage Ratio (ECR): ECR = EBITDA / Interest Payments = $622,640 / $80,000 = 7.78 (vs. industry, 8.0)
These ratios indicate that the Company is liquid enough to cover its total liabilities with total assets and its operating income to cover interest payments. Its debt burden is light.
Q4: Calculate the 2014 profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say about these ratios?
Profit Margin (PM): PM = Gross Profit / COGS = $1,235,600 / $5,800,000 = 21.3% (vs. industry, 3.6%)
Basic Earning Power (BEP): BEP = EBIT / Total Assets = $502,640 / $3,516,952 = 14.29% (vs. industry, 17.8%)
Return on Assets (ROA): ROA = (Net Income / Total Assets) *100 = ($253,584 / $3,516,952) *100 = 7.21% (vs. industry, 9.0%)
Return on Equity (ROE): ROE = Net Income / Shareholders’ Equity = ($253,584 / $1,977,152) *100 = 12.83% (vs. industry, 17.9%)
The profitability ratios indicate a relatively high profit margin and a little better earning power compared to the industry. However, profitability against total assets and equity are below industry average, indicating problems in managing its expenditures.
