Corp Fin Week 3 12. Starting with Net Income, show the calculation of Cash Flow
ID: 2617543 • Letter: C
Question
Corp Fin Week 3
12. Starting with Net Income, show the calculation of Cash Flow from Operations for Gannon for 2017?
13. What was Gannon’s Equity Multiplier for 2017?
14. What was Gannon’s Return on Equity in 2017 (For balance sheet accounts, use the average of the beginning and end-of-year balances)?
15. If Gannon had 100,000 common shares outstanding during 2017 and its stock is currently worth $45.58 per share, what is the firm’s Price : Earnings (PE) ratio?
16. If Gannon projects 2018 sales to increase by 15% over 2017, its after-tax profit margin to remain the same, and anticipates a 36% dividend payout ratio, what are its projected retained earnings by the end of 2018?
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For questions #7-18, refer to the following financial information for Gannon Insurance. YOU MUST SHOW ALL CALCULATIONS TO EARN CREDIT 2016 2017 BALANCE SHEETS: Assets: Cash Accounts Receivable Inventory Fixed Assets, net Total Assets 120,000 520,000 305,000 410,000 1,355,000 160,000 620,000 290,000 510,000 1,580,000 Liabilities and Equity: Accounts Payable Long-term Debt Common Stock Retained Earnin Total Liabilities and Equity 350,000 500,000 50,000 455,000 1,355,000 375,000 625,000 75,000 505,000 1,580,000 INCOME STATEMENT: 3,500,000 2,275,000 515,000 120,000 590,000 40,000 550,000 167,000 383,000 Revenue Cost of Goods Sold General and Administrative ation se Earnings Before Interest and Taxes Interest Pretax Net Income Income Taxes Net Income seExplanation / Answer
12 Net Income 383000 Add: Depreciation 120000 Less: Increase in Accounts Receivable -100000 Add: Decrease in Inventory 15000 Add: Increase in Accounts Payable 25000 Cash Flow from Operations for Gannon for 2017 443000 13 Total Assets 1580000 Stock Holders'Equity= Common Stock + Retained Earnings = 75000+505000 = 580000 Equity Multiplier = Total Assets / Stock holders' Equity = 1580000/580000 Equity Multiplier for 2017 = 2.72 14 Net Income 383000 Stock Holders'Equity for 2017 580000 Stock Holders'Equity for 2016= 50000+455000 = 505000 Average Shareholders' Equity= (580000+505000)/2 = 542500 Return on Equity= Net Income/Return on Equity = 383000/542500 = 0.7060 or 70.60% 15 No of common stock shares 100000 Current price of stock 45.58 Earnings Per share= Net Income / no of shares = 383000/100000 = 3.83 Price Earnings Ratio= Current price of share/EPS = 45.58/3.83 = 11.90 16 Sales in 2017 3500000 Net Income 383000 % of Net Income to Sales= 383000/3500000*100 = 10.94% Sales for 2018 @ 15% increase over 2017= 3500000*115% = 4025000 Net income @ 10.94%= 4025000*10.94% = 440450 Dividend Payout Ratio= Total Dividend paid/Net income Hence, Total Dividend Paid = Net Income * Dividend Payout Ratio = 440450*36% = 158562 Retained Earnings by end of 2018= Net Income - Dividend Paid = 440450-158562 = 281888 Another way to solve this, Retained Earnings by end of 2018= Netincome *(1-Dividend Payout Ratio) = 440450*(1-0.36) = 281888