Question

A comparative balance sheet and an income statement for Rowan Company are given below:

Rowan Company Comparative Balance Sheet (dollars in millions)
	Ending Balance			Beginning Balance
Assets
Current assets:
Cash and cash equivalents	$	70		$	91
Accounts receivable		536			572
Inventory		620			580
Total current assets		1,226			1,243
Property, plant, and equipment		1,719			1,656
Less accumulated depreciation		640			480
Net property, plant, and equipment		1,079			1,176
Total assets	$	2,305		$	2,419
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	205		$	180
Accrued liabilities		94			105
Income taxes payable		72			88
Total current liabilities		371			373
Bonds payable		180			310
Total liabilities		551			683
Stockholders' equity:
Common stock		800			800
Retained earnings		954			936
Total stockholders' equity		1,754			1,736
Total liabilities and stockholders' equity	$	2,305		$	2,419

Rowan Company Income Statement For the Year Ended December 31 (dollars in millions)
Sales	$	4,350
Cost of goods sold		3,470
Gross margin		880
Selling and administrative expenses		820
Net operating income		60
Nonoperating items: Gain on sale of equipment		4
Income before taxes		64
Income taxes		22
Net income	$	42

Rowan also provided the following information:

The company sold equipment that had an original cost of $16 million and accumulated depreciation of $9 million. The cash proceeds from the sale were $11 million. The gain on the sale was $4 million.

The company did not issue any new bonds during the year.

The company paid a cash dividend during the year.

The company did not complete any common stock transactions during the year.

Required:

1. Using the indirect method, prepare a statement of cash flows for the year.

2. Calculate the free cash flow for the year.

3. To help Rowan assess its liquidity at the end of the year, calculate the following:

a. Current ratio

b. Acid-test (quick) ratio

4. To help Rowan assess its asset management, calculate the following:

a. Average collection period (assuming all sales are on account)

b. Average sale period

5. To help Rowan assess its debt management, calculate the following:

a. Debt-to-equity ratio at the end of the year

b. Equity multiplier

6. To help Rowan assess its profitability, calculate the following:

a. Net profit margin percentage

b. Return on equity

7. To help Rowan assess its market performance, calculate the following (assume the par value of the company’s common stock is $10 per share):

a. Earnings per share

b. Dividend payout ratio

Answer 1

Statement of cash flow
Cash flows from operating activities
Net Income		42
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation expenses 640-(480-9)	169
Gain on sale of equipment	-4
Decrease in Accounts receivable	36
Increase in Inventory	-40
Increase in Accounts Payable	25
Decraese in Accrued Liabilities	-11
Decraese in Income tax payable	-16
Net cash from operating activities		201
Cash flows from investing activities
Purchase of Property Plant & equipment 1719-(1656-16)	-79
Sale of equipment	11	-68
Net cash used investing activities		(68.00)
Cash flows from financing activities
Repayment of Bonds Payable	(130.00)
Payment of Dividend 954-(936+42)	-24
		(154.00)
Net cash used financing activitie		(154.00)
Net Increase in cash and cash equivalents		(21.00)
Cash and cash equivalents at beginning of period		91.00
Ending Balance		70.00
ans 2
Free cash flow
Net cash from operating activities-Capital exp
201-79	122
ans 3
Current ratio
Current assets/current liabilities	3.30
1226/371
Quick ratio	1.63
(70+536)/371
ans 4
Average collection period	46.5
((536+572)/2)/4350*365
average sale period	63.1
((620+580)/2)/3470*365