Question

Consider the following information for Bethany Corporation:

      Revenues = $550 million

      Cost excluding depreciation = $70 million

      Depreciation = $30 million

      Interest Expense = $15 million

      Tax rate=21%

      Preferred Dividends= $2 million

      Common Dividends = $1 million.  

     There is an increase in receivables of $3 million and payables of $5 million over the period

 

1. Bethany’s Operating Margin is ----- %, and its Profit Margin is -------%.

 

2. Bethany’s change to cash-flow from operations for the year is --------.

Answer 1

For operating margin, we need to calculate the operating profit first:

Operating profit = Revenues - Costs - Depreciation expense

Operating profit = $550 - $70 - $30

Operating profit = $450

Now,

Operating margin = Operating profit / Sales * 100

putting the values in the above formula, we get,

Operating margin = $450 / $550 * 100

Operating margin = 81.82%

For profit margin, we need to calculate the net income as per below:

Net income = (Operating profit - interest expense) * (1 - tax rate)

Putting the values in the above formula,

Net income = ($450 - $15) * ( 1 - 21%)

Net income = $435 * 79%

Net income = $343.65

Now,

Profit margin = Net income / Sales * 100

Profit margin = $343.65 / $550 * 100

Profit margin = 62.48%

Cash flows from operations = Net income + Depreciation + Increase in payables - Increase in receivables

Cash flows from operations = $343.65 + $30 + $5 - $3

Cash flows from operations = $375.65