List Four Types Of Financial Statements That The Company Use
List four types of financial statements that the company’s annual report typically include
The four primary types of financial statements typically included in a company's annual report are the Income Statement, Balance Sheet, Cash Flow Statement, and Statement of Shareholders’ Equity. Each provides distinct insights into the financial health and performance of the company.
1. Income Statement: Shows the company's revenues, expenses, and profits over a specific period. Items include sales revenue, cost of goods sold, and net income.
2. Balance Sheet: Presents the company's assets, liabilities, and shareholders' equity at a specific point in time. Items include current assets, long-term liabilities, and total shareholders' equity.
3. Cash Flow Statement: Details the inflows and outflows of cash during a period, categorized into operating, investing, and financing activities. Items include cash flows from operations, purchase of equipment, and issuance of shares.
4. Statement of Shareholders’ Equity: Reflects changes in equity items such as common stock, retained earnings, and other comprehensive income over the reporting period.
Determine Computron’s net income for the year
Given Data:
- Operating Income (EBIT): $4 million
- Depreciation Expense: $1 million
- Interest Expense: $1 million
- Tax Rate: 25%
Calculation:
1. Earnings Before Tax (EBT): EBIT - Interest Expense = $4 million - $1 million = $3 million
2. Taxes: EBT Tax Rate = $3 million 25% = $0.75 million
3. Net Income: EBT - Taxes = $3 million - $0.75 million = $2.25 million
Therefore, Computron’s net income for the year is $2.25 million.
What was Computron’s net cash flow?
Net cash flow from operating activities can be approximated as net income plus non-cash expenses like depreciation. Since depreciation is a non-cash expense:
Net cash flow = Net Income + Depreciation = $2.25 million + $1 million = $3.25 million
This figure assumes no other adjustments; in practice, changes in working capital and investing activities would also be considered. Nonetheless, based on provided data, Computron’s net cash flow is approximately $3.25 million.
What was Computron’s net operating profit after taxes (NOPAT)?
NOPAT measures the company's after-tax operating income, ignoring interest expenses to reflect operating efficiency.
Given EBIT of $4 million and a tax rate of 25%, NOPAT is calculated as:
NOPAT = EBIT (1 - Tax Rate) = $4 million (1 - 0.25) = $4 million * 0.75 = $3 million
Thus, Computron’s NOPAT is $3 million.
Calculate net operating working capital and total net operating capital for the year
Net Operating Working Capital (NOWC):
= Operating Current Assets - Operating Current Liabilities
= $14 million - $4 million = $10 million
Total Net Operating Capital:
= Net Operating Working Capital + Net Plant & Equipment
= $10 million + $15 million = $25 million
Therefore, for the year, Computron’s net operating working capital is $10 million, and total net operating capital is $25 million.
Calculate Computron’s free cash flow for the year if net operating capital in the previous year was $24 million
Free Cash Flow (FCF) is calculated as:
FCF = NOPAT - Change in Net Operating Capital
Change in Net Operating Capital = Current Year NOC - Previous Year NOC = $25 million - $24 million = $1 million
Thus, FCF = $3 million - $1 million = $2 million
Computron’s free cash flow for the year is approximately $2 million.
Explain to the chairman of the board five uses of free cash flow that can help maximize the value of the firm
1. Debt Repayment: Utilizing free cash flow to reduce debt improves the company's financial leverage, decreases interest expenses, and enhances creditworthiness, leading to lower borrowing costs and increased stability.
2. Dividend Payments: Distributing free cash flow as dividends rewards shareholders, signals financial strength, and can attract more investors, thus increasing market valuation.
3. Share Repurchases: Buying back company stock can increase earnings per share (EPS) and stock price, thereby enhancing shareholder value.
4. Reinvestment in Growth Opportunities: Investing in research and development, new products, or market expansion can generate higher future cash flows and sustain competitive advantage.
5. Acquisitions: Using free cash flow to acquire other firms can lead to synergies, expanded market share, and increased revenues, supporting long-term growth and value maximization.
Explain Economic Value Added (EVA) and compute Computron’s EVA if total net operating capital is $25 million
Economic Value Added (EVA) is a measure of a company's financial performance based on residual wealth, calculated as:
EVA = NOPAT - (Capital * Cost of Capital)
Given:
- NOPAT = $3 million (from previous calculation)
- Total Net Operating Capital = $25 million
- Cost of Capital = 10%
Calculating EVA:
EVA = $3 million - ($25 million * 10%) = $3 million - $2.5 million = $0.5 million
Therefore, Computron’s EVA is $0.5 million, indicating value created above the required return.
Compute and explain market value added (MVA) for Computron
Market Value Added (MVA) measures the difference between the market value of a company and its invested capital:
MVA = Market Value of Equity - Total Capital Invested
Given:
- Total Shares Outstanding = 2 million
- Current Stock Price = $35
- Total Equity (Book Value) = $68.2 million
Market Value of Equity = Shares Outstanding Stock Price = 2 million $35 = $70 million
MVA = Market Value of Equity - Book Value of Equity = $70 million - $68.2 million = $1.8 million
This positive MVA suggests the company’s market value exceeds its accounting book value, indicating value creation for shareholders.
Calculate the company’s return on invested capital (ROIC). Do you think Computron’s growth added value?
ROIC = NOPAT / Total Net Operating Capital
ROIC = $3 million / $25 million = 0.12 or 12%
Since the ROIC exceeds the after-tax cost of capital (10%), the company is generating returns above its cost, indicating that its growth is adding value.
Consistent ROIC above the cost of capital typically signifies effective management and value creation, corroborated by positive MVA and EVA metrics.
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