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Question 1: Nova Electrics cash flow and free cash flow projection

Nova Electrics anticipates cash flow from operating activities of $9 million in 20X1. It will need to spend $4.0 million on capital investments to remain competitive within the industry. Common stock dividends are projected at $.75 million and preferred stock dividends at $.45 million.

a. What is the firm’s projected free cash flow for the year 20X1? (Enter your answer in millions of dollars rounded to 2 decimal places.)

b. What does the concept of free cash flow represent?

Free cash flow represents the funds that are available for investing activities, such as purchasing plant and equipment assets.
Free cash flow represents the funds that are available for special financing activities, such as a leveraged buyout.
Free cash flow equals cash flow from operating activities.

Amigo Software Inc. has total assets of $823,000, current liabilities of $248,000, and long-term liabilities of $147,000. There is $71,000 in preferred stock outstanding. Thirty thousand shares of common stock have been issued.

a. Compute book value (net worth) per share. (Round your answer to 2 decimal places.)

b. If there is $49,000 in earnings available to common stockholders and the firm’s stock has a P/E of 23 times earnings per share, what is the current price of the stock? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

c. What is the ratio of market value per share to book value per share? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:


Current Assets			Liabilities
Cash	$	25,000	Accounts payable	$	27,000
Accounts receivable		30,000	Notes payable		35,000
Inventory		40,000	Bonds payable		65,000
Prepaid expenses		13,500
Fixed Assets			Stockholders’ Equity
Gross plant and equipment	$	265,000	Preferred stock	$	35,000
Less: Accumulated depreciation		53,000	Common stock		70,000
			Paid in Capital		40,000
Net plant and equipment	$	212,000	Retained earnings		48,500
Total assets	$	320,500	Total liabilities and stockholders’ equity	$	320,500

For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:
Sales for 20X2 were $295,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was $29,500. Depreciation expense was 8 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 10 percent, while the interest rate on the bonds payable was 12 percent. This interest expense is based on December 31, 20X1 balances. The tax rate averaged 20 percent.

$3,500 in preferred stock dividends were paid, and $4,950 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding.

During 20X2, the cash balance and prepaid expenses balances were unchanged. Accounts receivable and inventory increased by 10 percent. A new machine was purchased on December 31, 20X2, at a cost of $50,000.

Accounts payable increased by 35 percent. Notes payable increased by $7,500 and bonds payable decreased by $17,500, both at the end of the year. The preferred stock, common stock, and capital paid in excess of par accounts did not change.

a. Prepare an income statement for 20X2. (Round EPS answer to 2 decimal places.)

b. Prepare a statement of retained earnings for 20X2.

c. Prepare a balance sheet as of December 31, 20X2. (Amounts to be deducted should be indicated with parentheses or a minus sign.)