Question

In: Finance

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.

Solutions

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.

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