Question

Given the following financial statements for Voice-Soft, a voice recognition company, answer the questions on the next page.

Income Statement for years
	2010	2009
Sales	$5,500	$5,000
Operating Costs excluding Depreciation and Amortization	4,675	4,250
EBITDA	825	750
Depreciation and Amortization	190	180
EBIT	$635	$570
Interest Expense	62	50
EBT	$573	$520
Taxes (40%)	229	208
NI	$344	$312

Balance Sheet for years ending December 31
	2010	2009
Assets:
Cash	$275	$250
Short Term Investments	55	50
Accounts Receivable	1,375	1,250
Inventories	825	750
Total Current Assets	$2,530	$2,300
Net Plant and Equipment	1,925	1,750
Total Assets	$4,455	$4,050
Liabilities:
Notes Payable	$192	$100
Accounts Payable	580	500
Miscellaneous Payables	245	250
Total Current Liabilities	$1,017	$850
Long-Term Debt	550	500
Total Liabilities	$1,567	$1,350
Common Stock	2154	2,200
Retained Earnings	734	500
Less Treasury Stock	46	0
Total Shareholder Equity	$2,888	$2,700
Liabilities and Shareholder Equity	$4,455	$4,050

Cash Flow Statement for year ending December 31, 2010
Operating Activities
Net Income	$344
Depreciation and Amortization	190
Increase in Accounts Receivables	(125)
Increase in Inventories	(75)
Increase in Accounts Payables	80
Decrease in Miscellaneous Payables	(5)
Net Cash Provided by Operations	409
Investing Activities
Purchase of equipment	(365)
Increase in Short Term Investments	(5)
Net Cash Used for Investment Activities	(370)
Financing Activities
Dividends paid	(110)
Increase in Notes Payable	92
Increase in Long Term Debt	50
Purchase stock for Treasury	(46)
Net Cash used for Financing Activities	(14)
Beginning Cash Balance January 1, 2010	250
Ending Cash Balance December 31, 2010	275
Net Cash Flow	$25

Develop Free Cash Flow for 2010 from the income statement, balance sheet and cash flow statement above.

+D&A) –(investment in fixed assets + change in net operating working capital)

Develop and analyze the results of an extended DuPont equation based on 2009 and 2010.

Answer 1

CALCULATION OF FREE CASH FLOW

Free cash Flow=

EBIT (1-tax rate) + (depreciation and amortization) - (change in net working capital) - (capital expenditure).

EBIT *(1-Tax rate)	$381	(635*(1-0.4)
Depreciation and Amortization	190
Increase in Accounts Receivables	-125
Increase in Inventories	-75
Increase in Accounts Payables	80
Decrease in Miscellaneous Payables	-5
Capital Expenditure	($365)
Free Cash Flow	$81	(381+190-125-75+80-5)

Extended Dupoint Equation:

ROE = (Net Income/EBT) * (EBT/EBIT) * (EBIT/Sales) * (Sales/AverageTotal Assets) * (AverageTotal Assets/Average Shareholders’ Equity)=(Tax Burden Ratio)*(Interest Burden Ratio)*(Operating Profit margin)*(Asset Turnover ratio)*(Financial Leverage Ratio)

Net Income/Earnings Before Taxes = Tax Burden Ratio

Earnings Before Taxes/Earnings Before Interest and Taxes = Interest Burden Ratio

Earnings Before Interest and Taxes/Sales = Operating Profit Margin

Asset Turnover Ratio or Asset Use Efficiency = Sales/AverageTotal Assets

Financial Leverage Ratio= AverageTotal Assets/Average Shareholders Equity

			Beginning of year	End of year	Average
A	Net Income	$344
B	EBIT	$635
C	EBT	$573
D	Sales	$5,500
E	AverageTotal Assets	4252.5	$4,050	$4,455	(4050+4455)/2
F	AverageShareholders' equity	2794	$2,700	$2,888	(2700+2888)/2
G=A/C	Tax burden ratio	0.600349
H=C/B	Interest Burden Ratio	0.902362
I=B/D	Operating Profit margin	0.115455
J=D/E	Asset Turnover Ratio	1.29
K=E/F	Financial Leverage Ratio	1.522011
ROE=G*H*I*J*K	RETURN ON EQUITY (ROE)	0.1231
	RETURN ON EQUITY (ROE)	12.31%