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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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FREE CASH FLOW Financial information for Powell Panther Corporation is shown here.

Powell Panther Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)

  2016 2015
Sales $1,200,0 $1,000,0
Operating costs excluding depreciation and amortization 1,020.0 850.0
EBTTDA $ 180.0 $ 150.0
Depreciation & amortization 30.0 25.0
Earnings before interest and taxes (EBIT) $ 150.0 $ 125.0
Interest 21.7 20.2
Earnings before taxes (EBT) $ 128.3 $ 104.8
Taxes (40%) 51.3 41.9
Net income $ 77.0 $ 62.9

Powell Panther Corporation: Balance Sheets as of December 31 (Millions of Dollars)

  2016 2015
Assets    
Cash and equivalents $ 12.0 $ 10.0
Accounts receivable 180.0 150.0
Inventories 180.0 200.0
Total current assets $372.0 $360.0
Net plant and equipment 300.0 250.0
Total assets $672.0 $610.0
Liabilities and Equity    
Accounts payable $108.0 $ 90.0
Accruals 72.0 60.0
Notes payable 67.0 51.5
Total current liabilities $247.0 $201.5
Long-term bonds 150.0 150.0
Total liabilities $397.0 $351.5
Common stock (50 million shares) 50.0 50.0
Retained earnings 225.0 208.5
Common equity $275.0 $258.5
Total liabilities and equity $672.0 $610.0
  1. a. What was net operating working capital for 2015 and 2016?
  2. b. What was the 2016 free cash flow?
  3. c. How would you explain the large increase in 2016 dividends?

a.

Summary Introduction

To compute: The net operating working capital for 2015 and 2016.

Balance sheet:

Balance sheet is a part of the financial statements that lists the company’s assets, liabilities and shareholders’ fund. It is prepared at last of the accounting period and informs about company’s financial position on that day.

Income Statement:

A part of the financial statements that lists the income and expenses of business for an accounting year is called income statement. It is prepared at the end of accounting period to know the profitability of the` business.

Explanation

Given (for 2016),

Accounts payable are $108.

Accruals are $72.

Current assets are $372.

Formula to compute net operating working capital,

Net Operating Working Capital=[Current AssetsAccounts PayableAccruals]

Substitute $108 for accounts payable, $72 for accruals and $372 for current assets.

Net Operating Working Capital=$372$108$72=$192

Given (for 2015),

Accounts payable are $90

b.

Summary Introduction

To compute: The free cash flow in 2016 for Company P.

Free Cash Flow:

The cash generated over and above required by business operations and capital expenditure is called free cash flow. Statement of cash flow reports the cash flow generated or consumed by the business.

c.

Summary Introduction

To explain: The large increase in dividends in 2016.

Balance sheet:

Balance sheet is a part of the financial statements that lists the company’s assets, liabilities and shareholders’ fund. It is prepared at last of the accounting period and informs about company’s financial position on that day.

Income Statement:

A part of the financial statements that lists the income and expenses of business for an accounting year is called income statement. It is prepared at the end of accounting period to know the profitability of the` business.

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