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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

FREE CASH FLOW Financial information for Powell Panther Corporation is shown here.

Powell Panther Corporation income statement for year ending December 31 (Million of Dollars)

  2018 2017
Sales $ 1,200.0 $ 1000.0
Operating costs excluding depreciation and amortization $ 1,020.0 850.0
EBITDA $ 180.0 $150.0
Depreciation and amortization 30.0 25.0
Earnings before interests and taxes (EBIT) $ 150.0 $ 125.0
interest 21.7 20.2
Earnings before taxes (EBT) $ 128.3 $ 104.3
Taxes (40%) 51.3 41.9
Net income $ 77.0 $ 62.9
Common dividends $ 60.5 $ 46.4

Powell Panther Corporation Balance sheets as of December 31 (Million of Dollars)

  2018 2017
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
Liability and Equity    
Accounts payable $ 108.0 $ 90.0
Accrusis 72.0 60.0
Notes payable 67.0 51.5
Term current liabilities $ 247.0 $201.5
Long term bonds 150.0 1SO.D
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 2017 and 2018? Assume the firm has no excess cash.
  2. b. What was the 2018 free cash flow?
  3. c. How would you explain the large increase in 2018 dividends?

a.

Summary Introduction

To compute: The net operating working capital for 2017 and 2018.

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 information (for 2017)

Amounts in million

Note payable is $51.5

Current assets are $360.

Current liabilities is $201.5

Formula to compute operating current assets is as follows:

Operating current assets=Total current assetsExcess cash

Compute operating current assets is as follows:

Operating current assets=Total current assetsExcess cash=$360$0=$360

Hence, the operating current asset is $360.

Formula to compute operating current liabilities is as follows:

Operating current liabilities=Total current libilitiesNotes payable

Compute operating current liabilities is as follows:

operating current liabilities=Total current libilitiesNotes payable=$201.5$51.5=$150

Hence, the operating current liabilities is $150.

Formula to compute net operating working capital is as follows:

Net operating working capital(2017)=Operating current assetsOperting current liabilities

Compute net operating working capital is as follows:

Net operating working capital(2017)=Operating current assetsOperting current liabilities=$360$150=$210

Hence, the net operating working capital for 2017 is 210.

Given information (for 2018)

Amounts in million

Cash and equivalents is $12

b.

Summary Introduction

To compute: The free cash flow in 2018 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 2018.

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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