Question

Consider the balance sheets and selected data from the income statement of Keith Corporation that follow LOADING.... Keith Corporation Balance Sheets December 31 Assets 2019 2018 Cash $ 1,470 $ 970 Marketable securities 1, 750 1 comma 150 Accounts receivable 1 comma 970 1 comma 770 Inventories 2 comma 880 2 comma 820 Total current assets $ 8 comma 070 $ 6 comma 710 Gross fixed assets $ 29 comma 460 $ 28 comma 100 Less: Accumulated depreciation 14 comma 650 13 comma 050 Net fixed assets $ 14 comma 810 $ 15 comma 050 Total assets $ 22 comma 880 $ 21 comma 760 Liabilities and Stockholders' Equity Accounts payable $ 1 comma 630 $ 1 comma 520 Notes payable 2 comma 820 2 comma 220 Accruals 210 320 Total current liabilities $ 4 comma 660 $ 4 comma 060 Long-term debt $ 4 comma 800 $ 4 comma 920 Total liabilities $ 9 comma 460 $ 8 comma 980 Common stock $ 10 comma 000 $ 10 comma 000 Retained earnings 3 comma 420 2 comma 780 Total stockholders' equity $ 13 comma 420 $ 12 comma 780 Total liabilities and stockholders' equity $ 22 comma 880 $ 21 comma 760 Income Statement Data (2019 ) Depreciation expense $ 1 comma 600 Earnings before interest and taxes (EBIT) 2 comma 710 Interest expense 369 Net profits after taxes 1 comma 849 Tax rate 21 % a. Calculate the firm's net operating profit after taxes (NOPAT) for the year ended December 31, 2019. b. Calculate the firm's operating cash flow (OCF) for the year ended December 31, 2019. c. Calculate the firm's free cash flow (FCF) for the year ended December 31, 2019. d. Interpret, compare and contrast your cash flow estimate in parts (b) and (c). Interpret, compare and contrast your cash flow estimate in parts (b) and (c). (Select all that apply.)

A. Depreciation is approximately the same size as net operating profit after tax, so the operating cash flow is about twice the NOPAT. B. Keith Corporation has negative cash flows from operating activities. C. Keith Corporation has positive cash flows from operating activities. D. The FCF value is very meaningful because it shows that the cash flows from operations are adequate to cover both operating expense plus investment in fixed and current assets. E. The OCF value is very meaningful because it shows that the cash flows from operations are adequate to cover both operating expense plus investment in fixed and current assets.

Answer 1

A. To calculate the firm's net operating profit after tax we must add back all non-operating expenses to the Profit after tax.

here we have only one such item, i.e. , interest expense.

Therefore, NOPAT = profit after tax + interest expense = 1849 + 369 = $ 2218

B. in order to calculate the firm's operating cash flow(OCF) we must add back all expenses that are non cash in nature to the NOPAT. (here only depriciation) as well as adjust for changes in working capital

first we calcuate changes in working capital

change in A/C receivables = 1170 - 1970 = -800

change in inventories = 2820 - 2880 = -60

change in current liabilites = -4060 - (-4660) = 600

Therefore, Operating cash flow = NOPAT + Depriciation + changes in working capital= 2218 +1600 + (-800 -60 +600)= $ 3558

C. To calculate Free Cash Flow(FCF) we must also include non-operating cash expenses as well as changes in fixed assets in the equation

subtracting interest expense from operating cash flow(OCF) and adding changes in gross fixed assets and gross fixed liabilities

FCF = OCF - interest expense = changes in fixed assets - changes in fixed liabilites = 3558 - 369 +(-1360) -(-120) = $ 1949

D. The difference between answers for b and c stem from the presence of interest expenditure as well as changes in fixed assets/liabilites which is non operational in nature. therefore, while it will not be considered for only operating cash flow and thus has to be added back to the profit it has to be considered and therefore must not be added back to the profit figure.

As far as the multiple choice is concerned from what we can observe.

option C and E are correct.

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