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Powell Panther Corporation: Income Statements for Year Ending December 31 (Millions of Dollars) 2019 2018 Sales...

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

2019 2018
Sales $ 1,820.0 $ 1,400.0
Operating costs excluding depreciation and amortization 1,547.0 1,190.0
EBITDA $ 273.0 $ 210.0
Depreciation and amortization 46.0 36.0
Earnings before interest and taxes (EBIT) $ 227.0 $ 174.0
  Interest 40.0 30.8
Earnings before taxes (EBT) $ 187.0 $ 143.2
  Taxes (25%) 74.8 57.3
Net income $ 112.2 $ 85.9
Common dividends $ 101.0 $ 68.7

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

2019 2018
Assets
Cash and equivalents $ 17.0 $ 14.0
Accounts receivable 273.0 210.0
Inventories 322.0 280.0
  Total current assets $ 612.0 $ 504.0
Net plant and equipment 455.0 364.0
Total assets $ 1,067.0 $ 868.0
Liabilities and Equity
Accounts payable $ 123.0 $ 98.0
Accruals 67.0 56.0
Notes payable 36.4 28.0
  Total current liabilities $ 226.4 $ 182.0
Long-term bonds 364.0 280.0
  Total liabilities $ 590.4 $ 462.0
Common stock 439.6 380.2
Retained earnings 37.0 25.8
  Common equity $ 476.6 $ 406.0
Total liabilities and equity $ 1,067.0 $ 868.0

Write out your answers completely. For example, 25 million should be entered as 25,000,000. Round your answers to the nearest dollar, if necessary. Negative values, if any, should be indicated by a minus sign.

  1. What was net operating working capital for 2018 and 2019? Assume the firm has no excess cash.

    2018:  $  

    2019:  $  

  2. What was the 2019 free cash flow?

    $  

  3. How would you explain the large increase in 2019 dividends?

    1. The large increase in net income from 2018 to 2019 explains the large increase in 2019 dividends.
    2. The large increase in EBIT from 2018 to 2019 explains the large increase in 2019 dividends.
    3. The large increase in free cash flow from 2018 to 2019 explains the large increase in 2019 dividends.
    4. The large increase in sales from 2018 to 2019 explains the large increase in 2019 dividends.
    5. The large increase in retained earnings from 2018 to 2019 explains the large increase in 2019 dividends.

Solutions

Expert Solution

a. net operating working capital = current operating assets - current operating liabilities

Current operating assets = Cash + accounts receivable + inventories

Current operating liabilities = accounts payable + accrual + notes payable

net operating working capital for 2018 = ($14 + $210 + $280) - ($98 + $56 + $28) = $504 - $182 = $322 million or $322,000,000

net operating working capital for 2019 = ($17 + $273 + $322) - ($123 +$67 + $36.4) = $612 - $226.4 = $385.6 million or $385,600,000

b. free cash flow = net income + non-cash expenses - increase in working capital - capital expenditures

We have Depreciation and amortization as non-cash expenses in this question.

increase in working capital = (accounts receivable 2019 - accounts receivable 2018) + (inventory 2019 - inventory 2018) - (accounts payable 2019 - accounts payable 2018)

increase in working capital = ($273 - $210) + ($322 - $280) - ($123 - $98) = $63 + $42 - $25 = $80

Capital expenditures = (net plant and equipment 2019 - net plant and equipment 2018 + Depreciation and amortization 2019) = ($455 - $364 + $46) = $137

Free cash flow for 2019 = $112.2 + $46 - $80 - $137 = -$58.8 million or -$58,800,000

c. Answer is I.The large increase in net income from 2018 to 2019 explains the large increase in 2019 dividends.

increase in net income in 2019 = ($112.2/$85.9) - 1 = 1.3062 - 1 = 0.3062 or 30.62%

increase in Sales in 2019 = ($1,820/$1,400) - 1 = 1.3 - 1 = 0.30 or 30%

increase in EBIT in 2019 = ($227/$174) - 1 = 1.3046 - 1 = 0.3046 or 30.46%

we don't have 2017 balance sheet and income statement for calculation of 2018 free cash flow. so we can't calculate increase in free cash flow in 2019 from 2018.

increase in retained earnings can't explain increase in dividends because retained earnings is the income left after distributing dividends.


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