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Introduction
Assume that you recently graduated and have just reported to work as an investment advisor at a Wall Street firm. You have been asked to review the following income statement and balance sheet of one of the firm’s clients.
Your supervisor has developed the given set of questions for you to answer:
- Please select two stocks and determine their free cash flow from 2017 and 2018. (you can find the free cash flows in Yahoo Finance). What inference can you draw from the companies’ free cash flow? Please present your findings in a table.
- Using the information and formulas from your textbook, please prepare two financial ratios for each stock, using the 2017 and 2018 financial statements, to include: liquidity ratios, asset management ratios, and profitability ratios. You should have a total of six ratios for each stock, per year (two ratios for each category per year). What challenges, strengths, or weaknesses do you see for each company? Please present your findings in a table.
- Using the following information, please calculate free cash flow in Excel for years 2015 and 2016:
(attached as Income Statement & Balance Sheet)
| Income Statements | 2014 | 2015 | 2016 |
| Sales | $3,432,000 | $5,834,400 | $7,035,600 |
| Cost of goods sold except depr. | 2,864,000 | 4,980,000 | 5,800,000 |
| Depreciation and amortization | 18,900 | 116,960 | 120,000 |
| Other expenses | 340,000 | 720,000 | 612,960 |
| Total operating costs | $3,222,900 | $5,816,960 | $6,532,960 |
| EBIT | $209,100 | $17,440 | $502,640 |
| Interest expense | 62,500 | 176,000 | 80,000 |
| EBT | $146,600 | ($158,560) | $422,640 |
| Taxes (40%) | 58,640 | -63,424 | 169,056 |
| Net income | $87,960 | ($95,136) | $253,584 |
| Other Data | 2012 | 2013 | 2014 |
| Stock price | $8.50 | $6.00 | $12.17 |
| Shares outstanding | 100,000 | 100,000 | 250,000 |
| EPS | $0.88 | ($0.95) | $1.10 |
| DPS | $0.22 | 0.11 | 0.22 |
| Tax rate | 40% | 40% | 40% |
| Book value per share | $6.64 | $5.58 | $7.91 |
| Lease payments | $40,000 | $40,000 | $40,000 |
| Balance Sheets | 2014 | 2015 | 2016 |
| Cash | $9,000 | $7,282 | $14,000 |
| Short-term investments | 48,600 | 20,000 | 71,632 |
| Accounts receivable | 351,200 | 632,160 | 878,000 |
| Inventories | 715,200 | 1,287,360 | 1,716,480 |
| Total current assets | $1,124,000 | $1,946,802 | $2,680,112 |
| Gross fixed assets | 491,000 | 1,202,950 | 1,220,000 |
| Less: Accumulated depreciation | 146,200 | 263,160 | 383,160 |
| Net fixed assets | $344,800 | $939,790 | $836,840 |
| Total assets | $1,468,800 | $2,886,592 | $3,516,952 |
| Liabilities and Equity | |||
| Accounts payable | $145,600 | $324,000 | $359,800 |
| Notes payable | 200,000 | 720,000 | 300,000 |
| Accruals | 136,000 | 284,960 | 380,000 |
| Total current liabilities | $481,600 | $1,328,960 | $1,039,800 |
| Long-term debt | 323,432 | 1,000,000 | 500,000 |
| Common stock (100,000 shares) | 460,000 | 460,000 | 1,680,936 |
| Retained earnings | 203,768 | 97,632 | 296,216 |
| Total equity | $663,768 | $557,632 | $1,977,152 |
| Total liabilities and equity | $1,468,800 | $2,886,592 | $3,516,952 |