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Financial statements for Hilton Company are presented below: Hilton Company Statement of Financial Position December 31, 2019 Assets Equity & Liabilities Buildings and equipment $150,000 Share capital-ordinary $65,000 Accumulated depreciation— Retained earnings 60,000 buildings and equipment (50,000) Patents 20,000 Accounts receivable 35,000 Bonds payable 50,000 Cash 40,000 Accounts payable 20,000 €195,000 €195,000 Hilton Company Statement of Cash Flows For the Year Ended December 31, 2019 Cash flows from operating activities Net income $45,000 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accounts receivable $(16,000) Increase in accounts payable 8,000 Depreciation expense 15,000 Gain on sale of equipment (6,000) Amortization of patents 2,000 3,000 Net cash provided by operating activities 48,000 Cash flows from investing activities Sale of equipment 12,000 Purchase of land (25,000) Purchase of buildings and equipment (48,000) Net cash used by investing activities (61,000) Cash flows from financing activities Payment of cash dividend (15,000) Sale of bonds 40,000 Net cash provided by financing activities 25,000 Net increase in cash 12,000 Cash, January 1, 2019 28,000 Cash, December 31, 2019 €40,000 At the beginning of 2019, Accounts Payable amounted to €12,000 and Bonds Payable was €10,000
Financial statements for Hilton Company are presented below:
Hilton Company
Statement of Financial Position
December 31, 2019
Assets Equity & Liabilities
Buildings and equipment $150,000 Share capital-ordinary $65,000
Accumulated depreciation— Retained earnings 60,000
buildings and equipment (50,000)
Patents 20,000
Accounts receivable 35,000 Bonds payable 50,000
Cash 40,000 Accounts payable 20,000
€195,000 €195,000
Hilton Company
Statement of Cash Flows
For the Year Ended December 31, 2019
Cash flows from operating activities
Net income $45,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accounts receivable $(16,000)
Increase in accounts payable 8,000
Depreciation expense 15,000
Gain on sale of equipment (6,000)
Amortization of patents 2,000 3,000
Net cash provided by operating activities 48,000
Cash flows from investing activities
Sale of equipment 12,000
Purchase of land (25,000)
Purchase of buildings and equipment (48,000)
Net cash used by investing activities (61,000)
Cash flows from financing activities
Payment of cash dividend (15,000)
Sale of bonds 40,000
Net cash provided by financing activities 25,000
Net increase in cash 12,000
Cash, January 1, 2019 28,000
Cash, December 31, 2019 €40,000
At the beginning of 2019, Accounts Payable amounted to €12,000 and Bonds Payable was €10,000.
Requirement
Calculate the following for Hilton Company:
a. Current cash debt coverage (3 marks)
b. Cash debt coverage (3 marks)
c. Free cash flow (4 marks)
Expert Solution
(a) Computation of Current Cash Debt Coverage Ratio:
Current Cash Debt Coverage Ratio = Net cash provided by the operating activities / Average current liabilities
= 48,000 / [ (20,000 + 12,000) / 2 ]
= 48,000 / 16,000
= 3 : 1
(b) Computation of Cash Debt Coverage Ratio:
Cash Debt Coverage Ratio = Net cash provided by the operating activities / Average total liabilities
= 48,000 / [ { (20,000+50,000) + (12,000 + 10,000) } / 2 ]
= 48,000/[{(70,000+22,000)}/2]
= 48,000/46,000
= 1.04 : 1
(c) Computation of Free Cash Flow:
Free Cash Flow = Net Cash from Operating Activities - Capital Expenditure - Dividends
= 48,000 - (25,000 + 48,000) - 15,000
= 48,000 - 73,000 - 15,000
= - 40,000
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