BBS 301 Lecture Notes - Lecture 3: Deferred Income, Retained Earnings, Financial Statement

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NAME ___________________________________ Student Number__________________________
Instructions: Open book and open notes. Please work independently. Hand-in no additional sheets of
paper; use the back of this quiz sheet if you need more space. If you would like your marked quiz
returned, use pen rather than pencil for your answer.
The following information is available on the financial accounts of ABC Corporation.
Trade Capital
Short-term Debt
Net Fixed Assets
NOTES: "Equity" represents the sum of all of the accounting equity accounts (that is, share-capital
plus retained earnings). You can presume that depreciation for tax purposes and for financial statement
purposes is the same, and therefore, there is no deferred income tax or future income tax liability in
this problem.
Any incremental short-term borrowing undertaken by ABC during 1998 was at the end of the year.
Therefore, ABC’s interest expense for 1998 is the interest rate on short-term debt times short-term debt
at the beginning of 1998 (end of 1997). Alternatively, if instead, ABC paid down any short-term debt
during 1998, this was also done at the end of 1998. ABC has financed its business activity with short-
term debt and with common equity. In 1998, ABC’s rate of return on equity (ROE) was 20%. ROE is
calculated with equity at the end of 1998. ABC paid dividends of $26 during 1998. ABC had no share
issues or share repurchases during 1998. Also in 1998, ABC’s EBITDA margin was 25%. Their trade
capital to sales ratio was 30%, both trade capital and sales are measured at the end of 1998. ABC’s tax
rate is 40%.
Required: Using both the operating and the financial definitions, find ABC’s free cash flow for 1998.
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