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Keith Corporation Financial Analysis

The document provides financial data for Keith Corporation, including income statement and balance sheet figures for 2011. Key calculations include operating cash flow (OCF), net operating profit after tax (NOPAT), and free cash flow (FCF), indicating positive cash flows from operations. It highlights the impact of depreciation as a tax shield and the sufficiency of cash flows for covering operating expenses and investments.

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8 views3 pages

Keith Corporation Financial Analysis

The document provides financial data for Keith Corporation, including income statement and balance sheet figures for 2011. Key calculations include operating cash flow (OCF), net operating profit after tax (NOPAT), and free cash flow (FCF), indicating positive cash flows from operations. It highlights the impact of depreciation as a tax shield and the sufficiency of cash flows for covering operating expenses and investments.

Uploaded by

blaclac95
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd

Accruals R 15,000

Question 1 Current assets 120,000


Interest expense 15,000
Sales revenue 400,000
Inventory 70,000
Total costs before depreciation, interest, and taxes 290,000
Tax rate on ordinary income 40%

MACRS 5 year recovery year % by recovery year


1 20%
2 32%
3 19%
4 12%
5 12%
6 5%
Cost 180000
Depreciation 34200

Accounting operating cash flows take net profits after tax and add in depreciation
and other noncash charges. The net profits after tax figure is obtained after interest
expense is deducted from operating income. Since interest expense is not an
operating account, the financial calculation of operating cash flows excludes the
impact of interest by taking EBIT and backing out taxes. This finance definition is
a more accurate estimate of cash flows associated with the operations of the firm.

a) Sales 400,000
Tot costs before dep 290,000
less: Depreciation 34200
EBIT 75,800
Interest expense 15,000
EBT 60,800
Taxes 24,320
NP 36,480

OCF 79,680

b) Depreciation & other non-cash items serve as tax shield against income, hence
increasing cash flows. Therefore higher depreciation amount, the higher the
tax shield.

Question 2
Keith Corporation Balance Sheets
December, 31
Assets 2011
Cash R 1,500 R
Marketable securities 1,800
Accounts receivable Inventories 2,000
Inventory 2,900
Total current assets R 8,200 R
Gross fixed assets R 29,500 R
Less: Accumulated depreciation 14,700
Net fixed assets R 14,800 R
Total assets R 23,000 R

Liabilities and Stockholders' Equity


Accounts payable R 1,600 R
Notes payable 2,800
Accruals 200
Total current liabilities R 4,600 R
Long-term debt 5,000
Total liabilities R 9,600 R
Common stock R 10,000 R
Retained earnings 3,400
Total stockholders' equity R 13,400 R
Total liabilities and stockholders' equity R 23,000 R

Keith Corporation Income Statement data (2011)


Depreciation expense R
Earnings before interest and taxes (EBIT)
Interest expense
Net profit after taxes
Tax rate

NOPAT = EBIT*(1-t)
OCF = NOPAT+depreciation NFAI = net fixed asset investment
FCF = OCF - NFAI - NCAI NCAI = net current asset investment
NFAI = Δ net fixed assets + depreciation
NCAI = Δ current assets - Δ (accounts payable + accrual)

a) NOPAT R 1,620

b) OCF R 3,220

c) NFAI 1,300
Δ current assets 1,400
Δ accounts payable 100
Δ accruals -100
NCAI 1,400
FCF R 520

d) The firm has positive cash flows from operating activities


Depreciation above same size as NOPAT therefore OCF is about twice NOPAT
FCF meaningful because shows that cash flows from operations sufficient to
both operating expenses plus net fixed investments and investments in
current assets.
December, 31
2010
1,000
1,200
1,800
2,800
6,800
28,100
13,100
15,100
21,800

1,500
2,200
300
4,000
5,000
9,000
10,000
2,800
12,800
21,800

1,600
2,700
367
1,400
40%

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