Assignment 1: Chapter 2 Mini Case: “Financial Statement and Cash Flow Analysis” In the mini case in our textbook we were given an account balance sheet for Jaeden Industries as of December 31, 2010 along with their income statement and balance sheet from the previous year. It also stated that the firm’s dividend payout ratio is 25% and the tax rate is 34%. The firm’s stock price on December 31, 2009, was $ 42.89 and on December 31, 2010, it was $ 56.82. In part A of our assignment it asks us to use the financial statements in the text to determine Jaeden’s free cash flow, liquidity, debt and profitability ratios, and market ratios for year 2010. Part A Jaeden’s Free Cash Flow The measure of free cash flow (FCF) is the amount of cash flow available to investors; the providers of debt and equity capital. It represents the net amount of cash flow remaining after the firm has met all operating needs and has made all required payments on both long- term (fixed) and short- term (current) investments (Graham, Megginson, Smart pg. 34). However, in order to determine the free cash flow you have to obtain the operating cash flow (OCF), which are cash inflows and outflows directly related to the production and sale of products or services. OCF = [Earnings before interest and taxes (EBIT) × (1 - T)] + Depreciation (T=.34%) OCF = (42000000-26460000-1621000-800000) x (1 – T) + Depreciation OCF = 13119000 x (1 - .34) + 800000 OCF = 9458540 Now that we have the OCF we can solve for the FCF FCF = OCF – Capital Expenditures + Depreciation – Networking Capital FCF = 9458540 – 2932000 – (4530181-190000-150000) FCF = 9458540 – 2932000 – 4190181 FCF = 2336359 Jaeden’s free cash flow is 2336359 Jaeden’s Liquidity Our textbook states that liquidity ratios measure a firm’s ability to satisfy its short-term obligations as they come due. Current ratio and quick ratio are two measures of liquidity. Current Ratio is defined as current assets divided by current liabilities and it is used to measure a firm’s ability to meet short-term obligations. Current assets include cash, marketable securities, accounts receivable, and inventory. Current liabilities include accounts payable, notes payable, and accruals. Quick ratio is somewhat similar except it excludes a certain asset that is, inventory. Inventory turnover provides a measure of how quickly a firm sells its goods (Graham, Megginson, Smart pg. 43). Inventory turnover can be converted into average age turnover simply by dividing the turnover figure by the amount of days in a year. Current Ratio = Current Assets / Current Liabilities Current Ratio = (3689000 + 5423000 + 1836000 + 4118000) / (3136000 + 706000 + 500000) Current Ratio = 15066000 / 4342000 Current Ratio = 3.469829572 Quick Ratio = Current Assets – Inventory / Current Liabilities Quick Ratio = (3689000 + 5423000 + 1836000) – 4118000 / (3136000 + 706000 + 500000) Quick Ratio = (10948000 – 4118000) / (3136000 + 706000 + 5000 ...