In: Finance
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.
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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