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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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Section
BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

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)

images

Powell Panther Corporation: Balance Sheets as of December 31

(Millions of Dollars)

images

  1. a. What was net operating working capital for 2014 and 2015?
  2. b. What was the 2015 free cash flow?
  3. c. How would you explain the large increase in 2015 dividends?

a.

Summary Introduction

To compute: The net operating working capital for 2014 and 2015.

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

Income Statement: A part of 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

Solution:

Given (for 2015),

Accounts payable are $108 million.

Accruals are $72 million.

Current assets are $372 million.

Formula to compute net operating working capital,

Net Operating Working Capital=[Current AssetsAccounts PayableAccruals]

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

Net Operating Working Capital2015=$372 million$108 million$72 million=$192 million

Given (for 2014),

Accounts payable are $90 million

b.

Summary Introduction

To compute: The free cash flow in 2014 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 2015.

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