Question

How much cash does the firm actually have? You are the CFO of ABC Corp. You are looking to hire a financial analyst, and you've given an assignment to two short-listed candidates. You've given the following information to the job applicants: The company reported net sales of $5, 625 million. Assume that there were no noncash sales. Operating costs (excluding depreciation and amortization) were 65% of the company's total revenues. Depreciation and amortization charges were 5% of total sales. Interest charges were 15% of earnings before interest and taxes (EBIT) with a tax rate of 40%. You've asked the candidates to give you a number that best represents the cash flow situation of the company. Jake submits a report stating that the firm has $861 million in cash. Kurt submits a report stating that the firm has $1, 142 million in cash available Based on the information given to them, which applicant has provided a better estimate of the company's current cash flows? Kurt Jake

Answer 1

Kurt

Step-by-step explanation:

The computation of the cash available is shown below;

But before that first we have to determine the net income which is shown below:

Net sale $5,625

Less:

Operating cost -$3,656.25 ($5,625 × 65%)

Depreciation -$281.25 ($5,625 × 5%)

EBIT $1,687.5

Less

interest -$253.125 ($1,687.50 × 15%)

Profit before tax $1434.375

Less:

Tax -$573.75 ($1,434.375 × 40%)

Net income $860.625

Add: depreciation $281.25

Cash $1,141.875

Hence, the Kurt provide a better estimation for the current cash flows