The Alabaster Corp. reported Net sales of 6.7 million, operating costs of 4.3 mi
ID: 2731379 • Letter: T
Question
The Alabaster Corp. reported Net sales of 6.7 million, operating costs of 4.3 million, and depreciation of $480,000 in 2009. Their interest charges were $325,000. They had cash, accounts receivable and inventories of $1.8 million, $5.6 million and $4.2 million, respectively, at the end of 2009. At the end of 2008, those three accounts were $1.9 million, $4.5 million, and $3.4 million respectively. Accounts payable and accruals were $3.0 million and $1.4 million, respectively, at the end of 2009, while at the end of 2008 they were $2.9 million and $1.3 million, respectively. Net plant and equipment was $12.8 million at the end of 2009 and $12.2 million at the end of 2008.
Calculate Alabaster’s Net Income, Free Cash Flow and Return on Invested Capital for 2009. Assume a flat tax rate of 40%. How is the Free Cash Flow interpreted? In other words, what does it measure? (12 pts.)
Explanation / Answer
Alabaster's Net Income for 2009:
Net Income = Total Revenue - Total Expenses
=(Net sales) - (Operating Exp+Depreciation+Interest charges)
=6700000-(4300000+480000+325000)
=$1595000
Free Cash Flow:
Working capital = Current assets - current liabilities
2009
Working Capital =(1.8+5.6+4.2)-(3+1.4) = $7.2Million = $7200000
2008
Working Capital = (1.9+4.5+3.4)-(2.9+1.3) = $5.6Million = $5600000
Changes in working capital = 7200000-5600000 = $1600000
Capital Expenditure =12.8-(12.2+0.48) =$120000
Free Cash flow = Cash flow from Operations - Capital Expenditures
= (Net Income+ Depreciation-changes in working Capital)-Capital Expenditure
=(1595000+480000-1600000)-120000
=$355000
Return on Invested capital:
=Net Income After Taxes/Invested Capital
=1595000(1-0.4)/12800000
=7.477%
Interpretation of Free Cash Flow:
Free cash flows states the amount that a company can pay to investors.
It is one of the indicator for growth of the business.
This represents the financial flexibility of the company i.e to take advantage in investing activities.
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