Tom is a newly hired financial manager for MM Steel Corporation. His boss Kin, the CFO...

 

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Tom is a newly hired financial manager for MM Steel Corporation. His boss Kin, the CFO of the company, wants him to review the company's last two years' financial records and assess the business's performance using its free cash flow measure. Tom is required to not only calculate the company's free cash flow value at the end of 2019, he also needs to present the result and explain it on the company's upcoming shareholder's meeting. You are asked to help Tom to complete this task. Below are MM Steel Corporation last two years' financial statements. Balance Sheet Dec 31, 2019 Dec 31, 2018 Current Assets Cash And Cash Equivalents 9,088,000 10,341,000 Short Term Investments 6,170,000 3,217,000 Account Receivables 6,904,000 6,000,000 Inventory 42,912,000 37,751,000 Total Current Assets 65,074,000 57,309,000 Fixed Assets Long Term Investments 17,365,000 21,927,000 Property Plant and Equipment 10,224,000 9,660,000 27,589,000 31,587,000 Total Fixed Assets 92,663,000 88,896,000 Total Assets Liabilities Current Liabilities 49,900,000 43,500,000 Accounts Payable 1,563,000 1,336,000 Notes Payable 23,000 146,000 Accruals Total Current Liabilities 51,486,000 44,982,000 Long Term Debt 32,302,000 38,047,000 Total Liabilities 83,788,000 83,029,000 Stockholders' Equity Common Stock 5,061,000 5,061,000 Retained Eamings 3,814,000 806,000 Total Stockholder Equity 8,875,000 5,867,000 Income Statement Dec 31, 2019 Dec 31, 2018 Total Revenue 86,623,000 81,698,000 Cost of Goods Sold 73,268,000 68,665,000 Other Expenses Excluding Depreciation 4,893,000 4,870,000 Depreciation 3,844,000 1,811,000 Earnings Before Interest And Taxes (EBIT) 4,618,000 6,352,000 Interest Expense 386,000 442,000 Income Before Tax 4,232,000 5,910,000 Taxes (Tax rate is 35%) 1,481,200 2,068,500 Net Income 2,750,800 3,841,500 1. Calculate the company's free cash flow by doing the following 3-step calculation. Again, you MUST show your work to earn credit. (To be more specific, for each calculation, you should firstly show the formula, input values, 1 or more calculation steps (when needed) and result.) (1) Capital expenditure САРЕХя (2) Change in net operating working capital NOWC2019= NOWC2018 ANOWC2019= NOWC2019 - NOWC019 (3) Free cash flow FCF 2019 1) Help Tom to explain to the shareholders of the company the meaning of "free cash flow", its usage and how to use its value to assess a company's performance. 2) Tell shareholders what the company's free cash flow level at the end of year 2019 is, according to your calculation in previous part. 3) Tell shareholders what can be learned from this number. Based on this number, did company have any cash generated in year 2019 to be used for interest and dividend payments? 4) The company needs to pay $386,000 of interest payment, can it use its newly generated free cash flow in 2019 to pay for that? Explain why do you think so? Tom is a newly hired financial manager for MM Steel Corporation. His boss Kin, the CFO of the company, wants him to review the company's last two years' financial records and assess the business's performance using its free cash flow measure. Tom is required to not only calculate the company's free cash flow value at the end of 2019, he also needs to present the result and explain it on the company's upcoming shareholder's meeting. You are asked to help Tom to complete this task. Below are MM Steel Corporation last two years' financial statements. Balance Sheet Dec 31, 2019 Dec 31, 2018 Current Assets Cash And Cash Equivalents 9,088,000 10,341,000 Short Term Investments 6,170,000 3,217,000 Account Receivables 6,904,000 6,000,000 Inventory 42,912,000 37,751,000 Total Current Assets 65,074,000 57,309,000 Fixed Assets Long Term Investments 17,365,000 21,927,000 Property Plant and Equipment 10,224,000 9,660,000 27,589,000 31,587,000 Total Fixed Assets 92,663,000 88,896,000 Total Assets Liabilities Current Liabilities 49,900,000 43,500,000 Accounts Payable 1,563,000 1,336,000 Notes Payable 23,000 146,000 Accruals Total Current Liabilities 51,486,000 44,982,000 Long Term Debt 32,302,000 38,047,000 Total Liabilities 83,788,000 83,029,000 Stockholders' Equity Common Stock 5,061,000 5,061,000 Retained Eamings 3,814,000 806,000 Total Stockholder Equity 8,875,000 5,867,000 Income Statement Dec 31, 2019 Dec 31, 2018 Total Revenue 86,623,000 81,698,000 Cost of Goods Sold 73,268,000 68,665,000 Other Expenses Excluding Depreciation 4,893,000 4,870,000 Depreciation 3,844,000 1,811,000 Earnings Before Interest And Taxes (EBIT) 4,618,000 6,352,000 Interest Expense 386,000 442,000 Income Before Tax 4,232,000 5,910,000 Taxes (Tax rate is 35%) 1,481,200 2,068,500 Net Income 2,750,800 3,841,500 1. Calculate the company's free cash flow by doing the following 3-step calculation. Again, you MUST show your work to earn credit. (To be more specific, for each calculation, you should firstly show the formula, input values, 1 or more calculation steps (when needed) and result.) (1) Capital expenditure САРЕХя (2) Change in net operating working capital NOWC2019= NOWC2018 ANOWC2019= NOWC2019 - NOWC019 (3) Free cash flow FCF 2019 1) Help Tom to explain to the shareholders of the company the meaning of "free cash flow", its usage and how to use its value to assess a company's performance. 2) Tell shareholders what the company's free cash flow level at the end of year 2019 is, according to your calculation in previous part. 3) Tell shareholders what can be learned from this number. Based on this number, did company have any cash generated in year 2019 to be used for interest and dividend payments? 4) The company needs to pay $386,000 of interest payment, can it use its newly generated free cash flow in 2019 to pay for that? Explain why do you think so?