RadioShack Corporation is a consumer electronics retailer. Recently, the company
ID: 2572834 • Letter: R
Question
RadioShack Corporation is a consumer electronics retailer. Recently, the company declared bankruptcy to provide financial protection while attempting to reorganize its operations. Annual report information for the three most recent years prior to the bankruptcy are as follows (in millions):
1
Year 3
Year 2
Year 1
2
Cash flows from operating activities
$36.00
$(43.00)
$218.00
3
Cash used to purchase property, plant, and equipment
(42.00)
(68.00)
(82.00)
4
Sales
3,434.00
3,831.00
4,032.00
a. Determine the free cash flow. For those boxes in which you must enter subtractive or negative numbers use a minus sign.
b. Determine the ratio of free cash flow to sales. Round percentages to one decimal place. For those boxes in which you must enter subtractive or negative numbers use a minus sign.
c. Which of the following factors about the free cash flow indicate financial stress?
Check all that apply.
The free cash flow and the ratio of free cash flow to sales were positive in the most recent years before bankruptcy.
The amount of accounts receivable collected increased across the three years.
The free cash flow and the ratio of free cash flow to sales were negative in the most recent years before bankruptcy.
The amount of cash used to purchase fixed assets reduced across the three years.
1
Year 3
Year 2
Year 1
2
Cash flows from operating activities
$36.00
$(43.00)
$218.00
3
Cash used to purchase property, plant, and equipment
(42.00)
(68.00)
(82.00)
4
Sales
3,434.00
3,831.00
4,032.00
Explanation / Answer
From the given question, the free cash flows can be calculated as = Cash flow from operating activities + cash used to purchase PPE
Year 1: 36-42 = -6 million
Year 2: -43-68 = - 111 million
Year 3: 218-82 = 136 million
B) Free cash flow to sales
Year 1: -6*100/3434 = -0.17%
Year 2: -111*100/3831 = -2.90%
Year 3: 136*100/4032 = 3.37%
C) The last two points apply to the financial stress of the company. Since most of the years, the ratio of free cash flows to sales was negative and more cash was used to purchase fixed assets.
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