“Road-Master Inc.” sells two grades of asphalt. In 2016 sales for the two grades were $1,375,000 for Grade 1, and $625,500 for Grade 2. Cost of goods sold for the two grades were 72% and 55% of sales, respectively. Selling and G & A expenses continued to increase at a rate of 18% a year. Fixed expenses increased to $68,000, and $128,000 in depreciation allowance was taken.
“Road-Master Inc.” also had $170,000 in short-term debt at 6% interest, and had increased its long-term debt by $150,000 to partially pay for new equipment of $275,500. The remainder of the equipment was paid in cash.
All long-term debt carried an interest rate of 8.5%. The corporation’s marginal tax rate was 34% in 2016. Accounts receivable were at 40% of sales, and inventory at year end was 30% of sales. Accounts payable were held at 25% of the cost of goods sold. Other current liabilities were $19,790. Common stock remained constant.
1. The firm retained only 30% of its earnings, paying the remaining net income out as dividends. ( Round retained earnings up to the next dollar.)
2. Compute “Road-Master Inc.”’s free cash flow for 2016, and its Return On Invested Capital (ROIC) for the years 2015, and 2016.
3. Given that “Road-Master Inc.” ’s Weighted Average Cost of Capital (WACC) was 8.75% in 2015 and 2016, compute its Economic Value Added (EVA) for the years, 2015 and 2016.
4. The industry benchmark ratios are also provided. Compute “Road-Master Inc.” ’s corresponding ratios for 2015 and 2016, and give a concise written evaluation of “Road-Master Inc.” ’s overall financial position.