FNCE2003 Lecture Notes - Lecture 2: Accrual, Retained Earnings, Accounting Equation
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Use the income statement and balance sheet provided to make recommendation for the amount of dividend (if any). How are retained earnings impacted and what does this mean for the organization?
Compute the Internal Growth Rate and Sustainable Growth Rate using current (2015) financial information and then a second scenario; if we issue a dividend payment of $3 million.
Explain your thought process and rationale for a recommended dividend strategy.
Concept Check: Dividends are distributions of profits to your investors who placed their capital at risk for you. Theoretically every company should eventually provide a dividend distribution to their investors.
CME Iron | Balance Sheet | ||
Assets | |||
Current assets: | 2014 | 2015 | change |
Cash | 500,000 | 600,000 | 100,000 |
Investments | 1,000,000 | 1,025,000 | 25,000 |
Inventories | 110,000,000 | 117,000,000 | 7,000,000 |
Accounts receivable | 11,750,000 | 12,500,000 | 750,000 |
Pre-paid expenses | 2,500,000 | 2,600,000 | 100,000 |
Other | 0 | 0 | - |
Total current assets | 125,750,000 | 133,725,000 | 7,975,000 |
Fixed assets: | 2014 | 2015 | change |
Property and equipment | 165,000,000 | 175,000,000 | 10,000,000 |
Leasehold improvements | 0 | 0 | - |
Equity and other investments | 55,000,000 | 65,000,000 | 10,000,000 |
Less accumulated depreciation | 15,000,000 | 15,500,000 | 500,000 |
Total fixed assets | 235,000,000 | 255,500,000 | 20,500,000 |
Other assets: | 2014 | 2015 | change |
Goodwill | 75,000,000 | 70,000,000 | (5,000,000) |
Total other assets | 75,000,000 | 70,000,000 | (5,000,000) |
Total assets | 435,750,000 | 459,225,000 | 23,475,000 |
Liabilities and owner's equity | |||
Current liabilities: | 2014 | 2015 | change |
Accounts payable | 40,500,000 | 42,400,000 | 1,900,000 |
Accrued wages | 85,000,000 | 90,500,000 | 5,500,000 |
Accrued compensation | 10,000,000 | 10,855,000 | 855,000 |
Income taxes payable | 4,024,000 | 4,697,000 | 673,000 |
current portion of LT debt | 5,500,000 | 10,350,000 | 4,850,000 |
Other | 0 | 0 | - |
Total current liabilities | 145,024,000 | 158,802,000 | 13,778,000 |
Long-term liabilities: | 2014 | 2015 | change |
Long term debt | 125,000,000 | 130,000,000 | 5,000,000 |
Total long-term liabilities | 125,000,000 | 130,000,000 | 5,000,000 |
Owner's equity: | 2014 | 2015 | change |
Common stock | 122,000,000 | 122,000,000 | - |
Preferred stock | 16,725,000 | 16,725,000 | - |
Accumulated retained earnings | 27,001,000 | 31,698,000 | 4,697,000 |
Total owner's equity | 165,726,000 | 170,423,000 | 4,697,000 |
Total liabilities and owner's equity | 435,750,000 | 459,225,000 | 23,475,000 |
Income Statement
ACME Iron
December 2015
Financial Statements in '000s of U.S. Dollars
REVENUE | |
Gross Sales | 250,000 |
Less: Sales Returns & Allowances | 2,500 |
Net Sales | 247,500 |
COST OF GOODS SOLD | |
Beginning Inventory | 7,500 |
Add: Purchases | 4,500 |
Freight-in | - |
Direct Labor | 75,000 |
Indirect Expenses | 15,000 |
Inventory Available | 102,000 |
Less: Ending Inventory | |
Cost of Goods Sold | 102,000 |
Gross Profit (Loss) | 145,500 |
EXPENSES | |
Advertising | 7,500 |
Amortization | - |
Bad Debts | 5,000 |
Depreciation | 500 |
Dues and Subscriptions | - |
Employee Benefit Programs | 18,750 |
Insurance | 2,500 |
Interest | 10,350 |
Legal & Professional Fees | 100 |
Licenses & Fees | - |
Miscellaneous | 10 |
Office Expenses | 100 |
Payroll Taxes | 5,625 |
Postage | 3 |
Rent | - |
Repairs & Maintenance | 5,000 |
Supplies | 2,000 |
Telephone | 120 |
Travel | 1,750 |
Utilities | 50,000 |
Vehicle Expenses | 450 |
Wages | 25,000 |
Total Expenses | 134,758 |
Net Operating Income | 10,742 |
OTHER INCOME | |
Gain (Loss) on Sale of Assets | - |
Interest Income | 1,000 |
Total Other Income | 1,000 |
TAXES | 4,697 |
Net Income (Loss) | 7,045 |
Springfield Bank is evaluating Creekâ Enterprises, which hasrequested a $ 3,720,000 loan, to assess theâ firm's financialleverage and financial risk. On the basis of the debt ratios forâCreek, along with the industry averages andâ Creek's recentfinancialâ statements, evaluate and recommend appropriate action onthe loan request.
Industry averages | |||
Debt ratio | 0.47 |
Times interest earned ratio | 7.29 |
âFixed-payment coverageratio 2.03 |
Creek Enterprises Incomeâ Statement:
Creek Enterprises Income Statement for the Year Ended December31, 2019
Sales revenue $30,045,000
Less: Cost of goods sold 20,995,000
Gross profits $9,050,000
Less: Operating expenses
Selling expense $2,968,000
General and administrative expenses 1,832,000
Lease expense 237,000
Depreciation expense 999,000
Total operating expense 6,036,000
Operating profits $3,014,000
Less: Interest expense 1,002,000
Net profits before taxes $2,012,000
Less: Taxes (rate=21%) 422,520
Net profits after taxes $1,589,480
Less: Preferred stock dividends 103,700
Earnings available for common stockholders $1,485,780
Creek Enterprises Balanceâ Sheet:
Creek Enterprises Balance Sheet December 31, 2019
Assets Liabilities and Stockholders' Equity
Current assets Current liabilities
Cash $952,000 Accountspayable $7,969,000
Marketable securities 3,018,000 Notes payable 7,991,000
Accounts receivable 11,962,000 Accruals 539,000
Inventories 7,543,000 Total current liabilities $16,499,000
Total current assets $23,475,000 Long-term debt (includes
financialleases)** $19,493,500
Gross fixed assets (at cost)* Stockholders' equity
Land and buildings $10,997,000 Preferred stock (24,400
shares, $4.25 dividend) $2,462,000
Machinery and equipment 20,516,000 Common stock (1.07 million
Furniture and fixtures 8,043,000 shares at $5.25 par) 5,617,500
Gross fixed assets $39,556,000 Paid-in capital in excess of
par value 3,968,000
Less: Accumulated depreciation 13,005,000 Retained earnings 1,986,000
Net fixed assets $26,551,000 Total stockholders' equity $14,033,500
Total liabilitiesand
Total assets 50,026,000 stockholders' equity $50,026,000
*The firm has a 4-year financial lease requiring annualbeginning-of-year payments of $237,000. Three years of the leasehave yet to run.
**Required annual principal payments are $807,000.
What are the Market Value Leverage Ratios (Value of Debt to Value of Equity, Value of Debt to Value of Assets)) for the following 2015 and 2016 financial data? (PLEASE SHOW WORK SO I CAN UNDERSTAND HOW THIS WAS DONE. Thank you)
AMAZON.COM INC (AMZN) CashFlowFlag INCOME STATEMENT | ||
Fiscal year ends in December. USD in millions except per share data. | 2015-12 | 2016-12 |
Revenue | 107006 | 135987 |
Cost of revenue | 71651 | 88265 |
Gross profit | 35355 | 47722 |
Operating expenses | ||
Sales, General and administrative | 20411 | 27284 |
Other operating expenses | 12711 | 16252 |
Total operating expenses | 33122 | 43536 |
Operating income | 2233 | 4186 |
Interest Expense | 459 | 484 |
Other income (expense) | -206 | 190 |
Income before income taxes | 1568 | 3892 |
Provision for income taxes | 950 | 1425 |
Other income | -22 | -96 |
Net income from continuing operations | 596 | 2371 |
Net income | 596 | 2371 |
Net income available to common shareholders | 596 | 2371 |
Earnings per share | ||
Basic | 1.28 | 5.01 |
Diluted | 1.25 | 4.9 |
Weighted average shares outstanding | ||
Basic | 467 | 474 |
Diluted | 477 | 484 |
EBITDA | 8308 | 12492 |
AMAZON.COM INC (AMZN) CashFlowFlag BALANCE SHEET | ||
Fiscal year ends in December. USD in millions except per share data. | 2015-12 | 2016-12 |
Assets | ||
Current assets | ||
Cash | ||
Cash and cash equivalents | 15890 | 19334 |
Short-term investments | 3918 | 6647 |
Total cash | 19808 | 25981 |
Receivables | 6423 | 8339 |
Inventories | 10243 | 11461 |
Deferred income taxes | ||
Total current assets | 36474 | 45781 |
Non-current assets | ||
Property, plant and equipment | ||
Land | 9770 | 13998 |
Fixtures and equipment | 18417 | 25989 |
Other properties | 1866 | 2454 |
Property and equipment, at cost | 30053 | 42441 |
Accumulated Depreciation | -8215 | -13327 |
Property, plant and equipment, net | 21838 | 29114 |
Goodwill | 3759 | 3784 |
Intangible assets | ||
Deferred income taxes | 1084 | |
Other long-term assets | 2289 | 4723 |
Total non-current assets | 28970 | 37621 |
Total assets | 65444 | 83402 |
Liabilities and stockholders' equity | ||
Liabilities | ||
Current liabilities | ||
Accounts payable | 20397 | 25309 |
Accrued liabilities | 10384 | 13739 |
Deferred revenues | 3118 | 4768 |
Total current liabilities | 33899 | 43816 |
Non-current liabilities | ||
Long-term debt | 8235 | 7694 |
Capital leases | 5948 | 7519 |
Deferred taxes liabilities | 392 | |
Other long-term liabilities | 3978 | 4696 |
Total non-current liabilities | 18161 | 20301 |
Total liabilities | 52060 | 64117 |
Stockholders' equity | ||
Common stock | 5 | 5 |
Additional paid-in capital | 13394 | 17186 |
Retained earnings | 2545 | 4916 |
Treasury stock | -1837 | -1837 |
Accumulated other comprehensive income | -723 | -985 |
Total stockholders' equity | 13384 | 19285 |
Total liabilities and stockholders' equity | 65444 | 83402 |
AMAZON.COM INC (AMZN) Statement of CASH FLOW | ||
Fiscal year ends in December. USD in millions except per share data. | 2015-12 | 2016-12 |
Cash Flows From Operating Activities | ||
Net income | 596 | 2371 |
Depreciation & amortization | 6281 | 8116 |
Investments losses (gains) | 5 | |
Deferred income taxes | 81 | -246 |
Stock based compensation | 2119 | 2975 |
Accounts receivable | -1755 | -3367 |
Inventory | -2187 | -1426 |
Accounts payable | 4294 | 5030 |
Accrued liabilities | 913 | 1724 |
Other working capital | 1292 | 1955 |
Other non-cash items | 281 | -689 |
Net cash provided by operating activities | 11920 | 16443 |
Cash Flows From Investing Activities | ||
Investments in property, plant, and equipment | -4589 | -6737 |
Acquisitions, net | -795 | -116 |
Purchases of investments | -4091 | -7756 |
Sales/Maturities of investments | 3025 | 4733 |
Net cash used for investing activities | -6450 | -9876 |
Cash Flows From Financing Activities | ||
Long-term debt issued | 353 | 621 |
Long-term debt repayment | -4235 | -4361 |
Excess tax benefit from stock based compensation | 119 | 829 |
Repurchases of treasury stock | ||
Net cash provided by (used for) financing activities | -3763 | -2911 |
Effect of exchange rate changes | -374 | -212 |
Net change in cash | 1333 | 3444 |
Cash at beginning of period | 14557 | 15890 |
Cash at end of period | 15890 | 19334 |
Free Cash Flow | ||
Operating cash flow | 11920 | 16443 |
Capital expenditure | -4589 | -6737 |
Free cash flow | 7331 | 9706 |
Supplemental schedule of cash flow data | ||
Cash paid for income taxes | 273 | 412 |
Cash paid for interest | 478 | 496 |