Question

Sheridan Corporation was formed five years ago through an initial public offering (IPO) of common shares. Daniel Brown, who owns 15% of the common shares, was one of the organizers of Sheridan and is its current president. The company has been successful, but it is currently experiencing a shortage of funds. On June 10, 2020, Daniel Brown approached the Hibernia Bank, asking for a 24-month extension on two $34,800 notes, which are due on June 30, 2020, and September 30, 2020. Another note for $7,300 is due on March 31, 2021, but he expects no difficulty in paying this note on its due date. Brown explained that Sheridan’s cash flow problems are due primarily to the company’s desire to finance a $305,500 plant expansion spent evenly over the next two fiscal years through internally generated funds. The plant expansion will be used in operations following the completion of the construction in 2023. The commercial loan officer of Hibernia Bank requested financial reports for the past two fiscal years. These reports are reproduced below.

SHERIDAN CORPORATION Statement of Financial Position March 31
Assets		2020			2019
Cash		$19,130			$13,200
Notes receivable		148,570			142,400
Accounts receivable (net)		132,890			116,800
Inventories (at cost)		107,720			51,400
Plant and equipment (net of depreciation)		1,466,300			1,504,000
Total assets		$1,874,610			$1,827,800
Equity and Liabilities
Share capital—common (131,000 shares issued)		$1,310,000			$1,310,000
Retained earnings (note 1)		391,390			279,000
Accrued liabilities		9,310			5,970
Notes payable (current)		76,900			62,380
Accounts payable		87,010			170,450
Total equity and liabilities		$1,874,610			$1,827,800

Note 1: Cash dividends were paid at the rate of $1 per share in fiscal year 2019 and $2 per share in fiscal year 2020.

SHERIDAN CORPORATION Income Statement For the Fiscal Years Ended March 31
		2020			2019
Sales		$3,015,200			$2,709,000
Cost of goods sold (note 2)		1,537,100			1,432,000
Gross margin		$1,478,100			$1,277,000
Operating expenses		897,500			785,500
Income before income tax		$580,600			$491,500
Income tax (30%)		174,180			147,450
Net income		$406,420			$344,050

Note 2: Depreciation charges on the plant and equipment of $107,000 and $109,675 for fiscal years ended March 31, 2019 and 2020, respectively, are included in cost of goods sold.

Additional information:

		2020		2019
1. Cash flows from operating activities		$459,000		$350,000
2. Capital expenditures for the year		128,000		110,000

Compute the following items for Sheridan Corporation.

Free cash flow to operating cash flows for fiscal years 2019 and 2020. (Round answers to 1 decimal places, e.g. 15.2%.)

		2019		2020
Free cash flow to operating cash flows		%		%

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Incorrect answer iconYour answer is incorrect.

Calculate the book value per share for fiscal years 2019 and 2020. (Round answers to 2 decimal places, e.g. 15.25.)

		2019		2020
Book value per share		$		$

Answer 1

1) Free cash flow to operating cash flow % = Free cash Flows / Cash Flow from operations

Free Cash Flow = Cash Flow from Operating activities - Capital Expenditure

Therefore,

Free cash flow for 2019 = $350,000 - $110,000.

= $ 240,000

Free cash flow for 2020 = $459,000 - $128,000.

= $ 331,000

Therefore, 2019 2020

Free cash flow to operating cash flow % 68.6% 72.1%

($240,000/$350,000) ; ($331,000/$459,000)

2) Book Value per Share = (Company's Assets - Liabilities) / No. of common shares

Book Value for 2019 = Total Assets - Outstanding Liabilities

= ($1,827,800 - $5,970 - $62,380 - $170,450)

= $ 1,589,000

Book Value per Share for 2019 = $1,589,000 / $131,000

= $12.13

Book Value for 2020 = Total Assets - Outstanding Liabilities

= ($1,874,610 - $9,310 - $76,900 - $87,010)

= $1,701,390

Book Value per Share for 2020 = $1,701,390 / $131,000

= $12.99