Question

The comparative balance sheet for company “Delta” in € for years 2017 and 2018 is
given below:

Comparative Balance Sheet of “Delta”
Assets	2018	2017	Liabilities & Stockholders' Equity	2018	2017
Fixed assets: Property, plant & equipment Less accumulated depreciation Net property, plant and equipment Long-term investments Total fixed assets Current assets: Cash and cash equivalents Marketable securities Accounts receivables Inventory Total current assets Total current assets	1,900,000 (600,000) 1,300,000 85,000 1,385,000 100,000 175,000 235,000 290,000 800,000 2,185,000	1,600,000 (450,000) 1,150,000 105,000 1,255,000 65,000 175,000 240,000 230,000 710,000 1,965,000	Stockholders' equity: Common stock Retained earnings Total stockholders' equity Long-term liabilities: Long-term debt Total long-term liabilities Current liabilities: Accounts payable Notes payable Accrued Expenses Taxes Payable Wages Payable Other current liabilities Total current liabilities Total liabilities Total liabilities & stockholders' equity	350,000 700,000 1,050,000 950,000 950,000 90,000 30,000 20,000 20,000 10,000 15,000 185,000 1,135,000 2,185,000	400,000 550,000 950,000 750,000 750,000 120,000 80,000 40,000 10,000 5,000 10,000 265,000 1,015,000 1,965,000

The income statement of company “Delta” for 2018 is also given below:

Income Statement of “Delta” for 2018
Sales Cost of goods sold Gross margin Selling and administrative expenses Wages Depreciation expense Net operating income Interest expense Income before taxes Income taxes Net income	6,500,000 (4,500,000) 2,000,000 (550,000) (50,000) (150,000) 1,250,000 (150,000) 1,100,000 (500,000) 600,000

Required:
1. Prepare the cash flow statement using the indirect method. For your answer you
need to consider that company “Delta” has repurchased shares and it has
decreased respectively its share capital. (20%).
2. Which is the dividend payout ratio for “Delta” for year 2018? If the company
increases the dividend payout ratio by 10%, what would the effect be to the
retained earnings? (5%)
3. Is the increase of the dividend payout ratio a good signal and what is the impact
on the free cash flows? What do you think that an analyst should consider when

the dividend payout ratio increases? (max: 200 words) (5%)
4. What inferences can you draw from the analysis of “Delta” cash flows? Explain
briefly (max: 300 words) (10%)

Answer 1

1) Cash flow Statement for 2018 :
Cash flow from Operating Activities:	Amount $
NI	600000
Add:
depreciation	150000
decrease in AR	5000
increase in TP	10000
increase in WP	5000
increase in OCL	5000
Less:
increase in Inven.	-60000
decrease in AP	-30000
decrease in NP	-50000
decrease in AE	-20000
Cash inflow from operating activities	615000	A
Cash flow from Investing Activities:
Less: Purchase of FA	-300000
Add: sale of LT Invest.	20000
Cash outflow from the investing activities	-280000	B
Cash flow from Financing Activities:
Less: buyback of equity	-50000
Add: issue of LTD	200000
Less: Dividend paid out	-450000	(550000+600000-700000)
Cash outflow from Financing Activities	-300000	C
Net Cash inflow of all activities	35000	(A+B+C)
Add: Opening Cash and Cash equi.	65000
Closing Cash and cash equi.	100000
2) dividend payout ratio for 2018 = dividend/NI = 450000/600000 = 75%
If company increase its dividend payout ratio by 10%, the retained
earnings will get reduced by 600000*10% = $60000 and 2018's RE closing
balance would be 700000 - 60000 = $640000
3) Yes, if the company has a good growth rate and sales are growing
and profitability rate is increasing, then the dividend payout ratio is a
good signal. The free cash flows reduces with the amount of dividend
paid out.
When the company is increasing the dividend payout ratio, it means that
company is under the progressive mode and sales is increasing and profits
are growing. The analyst would always consider the growth and development
path of the company.
4) Through the Delta's cash flow, the analyst would draw out that the company
dividend payout ratio is very leberal. The company is paying out what it is
earning. It seems as if company do not have any project to invest in, so it is
distributing all its earnings among shareholders. The company's current liabilities
has been rising. The company has been utilising the long term investment.
The company is reducing its equity investment and ploughing the debt leverage
in the Capital Structure through taking new debts.