Fundamental Concepts in Financial Management Chapter 3

BA 212: Assignment 3 – Chapter 3

Self Test Questions and Problems:

ST-2: Net Income and Cash Flow

a. What was the company’s net income? The company’s net income came out to be $2,400,000. To get this calculation I took the company’s (EBIT) which was $5,000,000 and took away their depreciation expense which was $1,000,000 and that gave me $4,000,000. Then after that I just deducted 40% for taxes and that is how I came up with the company’s net income.

b. What was its net working capital (NWC)? The company’s (NWC) ended up being $10,000,000. To get this calculation I took the company’s current assets which ended up being $14,000,000 and took away their account payables which were $3,000,000 and then I took away from that their accruals which turned out to be $1,000,000 which gave me the company’s (NWC).

c. By following the Free Cash Flow Formula as depicted on page 67 of the textbook(section 3-6) and by plugging in the amounts per the formula, the equation should read as follows which should lead to: FCF= {EBIT(1-T) + Depreciation} – { Capital expenditures + Increase in net working capital} = [$5,000,000(0.6) + $1,000,000] – [ $3,000,000 + 0] = $4,000,000 - $3,000,000 = $1,000,000

d. To achieve the retained earnings for the end of the year you would have to calculate as follows: First you would get the Balance of retained earnings which is $4,000,000 and then you would add the Net Income (which I got from part a) and that would be $2,400,000 and then you would have to subtract the total Common dividends which is $1,200,000 and that would give you the total retained earnings for the year which would be $5,700,000.

Questions:

3-1: What four financial statements are contained in most annual reports?

1. The Balance Sheet, which shows what assets the company owns and who has claims on those assets as of a given date.

2. The Income Statement, which shows the firm’s sales and costs (and thus profits) during some past period.

3....