Stock price per share: 20.5 Expected Sales: 920mn Opr expenses: 405mn Depr & Amortzn: 44mn ROE: 12% Shares outstanding: 31mn Common shareholder’s equity: 380mn Calculate price/cash flow ratio. Doubt: Why do we take cash flow as earnings+ depr here. Why not sales-opr expenses? If one wants to say sales might include credit sales, then I would argue that even earnings that we calculate will have that credit sales part in it.
I’m new here but I’ll try to help you answer this. Sales - Oper. Expenses - D & A would be operating profit (different than oper. cash flow ). In the Price / Cash Flow Ratio it’s Stock Price (per share) / CFO (per share). Earnings (net income) can be calculated as follows
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Earnings = ROE x Shareholder Equity = 12% x 380 mm = 45.6 mm earnings
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CFO = Net income + Depreciation & Amortization = 45.6 + 44 mm = 89.6 mm CFO
Price / Cash Flow = 20.5 / (89.6 mm / 31 mm ) = 7.09 Price / Cash Flow Ratio.
What does the answer say?
This is a weird one: interest expenses, for example, is a nonoperating expense, but it’s an operating cash flow (under US GAAP), so sales less operating expenses won’t do.
I’d follow their approach: a poor man’s indirect CFO.
Got it! Make indirect your weapon for the exam.
I can’t recall the answer off th cuff, but your approach is correct!