You are the CFO of ABC Corp. You are looking to hire a financial analyst, and...

You are the CFO of ABC Corp. You are looking to hire a financial analyst, and you’ve given an assignment to two short-listed candidates. You’ve given the following information to the job applicants:

•	The company reported net sales of $50,000,000. Assume that there were no noncash sales.
•	Operating costs (excluding depreciation and amortization) were 65% of the company’s total revenues.
•	Depreciation and amortization charges were 5% of total sales.
•	Interest charges were 15% of earnings before interest and taxes (EBIT) with a tax rate of 40%.

You’ve asked the candidates to give you a number that best represents the cash flow situation of the company.

FINN: submits a report stating that the firm has $10,150,000 in cash.

ARTY: submits a report stating that the firm has $7,650,000 in cash.

Based on the information given to them, which applicant has provided a better estimate of the company’s current cash flows? Check all that apply.

Arty

Finn

Your follow-up question to both Finn and Arty asks them to think about the difference between their cash flow estimates. The most likely reason for the discrepancy is that failed to:

Subtract the company’s depreciation and amortization expenses from ABC’s EBIT.

Add back the company’s non-cash expenses to ABC’s net income.

Expert Solution

Answer a)
	To compute cash we have to first compute Income statement

	Income statement
	Sales		50,000,000
Less	Opearting cost 65% of sales		32500000
Less	Depreciation and amortization	5% of sales	2500000
	EBIT		15,000,000

Less	Interest	15% of EBIT	2250000
	Earning before tax		12,750,000
Less	Tax @ 40%		5100000
	Earning after tax		7,650,000


	Cash flow computation
	Earning after tax		7,650,000
Add	Depreciation and amortization	5% of sales	2500000
	Cash flow position		10,150,000


Therefore FINN submission is correct about the cash flow


Answer b)	The most likely reason for the discrepancy is that Arty failed to: Subtract the company’s depreciation and amortization expenses from ABC’s EBIT. Add back the company’s non-cash expenses to ABC’s net income.

jeff jeffy answered 3 years ago

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