Question

In: Accounting

Following the acquisition of Kraft during Year 8, the Philip Morris Companies released its Year 8...

Following the acquisition of Kraft during Year 8, the Philip Morris Companies released its Year 8 statement of cash flows (indirect method).

PHILIP MORRIS COMPANIES, INC.

Statement of Cash Flows

For the Year Ended December 31, Year 8 ($ millions)

Cash flows from operating activities

Net income............................................................. $ 2,337

Add (deduct) adjustments to cash basis

Depreciation expense........................................ 654

Amortization of goodwill.................................... 125

Decrease in accounts receivable....................... 601

Decrease in inventories..................................... 2

Decrease in deferred taxes................................ (325)

Increase in accounts payable............................ 408

Increase in accrued liabilities............................ 1,041

Increase in income taxes payable...................... 362

Net cash flow from operating activities................. $ 5,205

Cash flows from investing activities

Increase in property, plant & equipment

(before depreciation)........................................... (980)

Increase in goodwill (before amortization)............. (783)

Decrease in investments....................................... 405

Acquisition of subsidiary—Kraft *......................... (11,383)

Net cash used by investing activities.................... (12,741)

Cash flows from financing activities

Decrease in short‑term debt................................. (881)

Increase in long‑term debt.................................... 9,929

Decrease in equity (repurchase) **........................ (540)

Dividends declared............................................... (941)

Increase in dividends payable............................... 47

Net cash provided by financing activities.............. 7,614

Net increase in cash............................................. $ 78

Instructions

Compute Philip Morris’s free cash flow for Year 8. Discuss how free cash flow impacts the company’s future earnings and financial condition.

Expert Solution

Free cash flow to the firm (FCFF) is the cash available to all investors, both equity owners and debt holders. FCFF can be calculated by starting with either net income or operating cash flow. FCFF is calculated from net income as:

FCFF = Net Profit + Non Cash Charges – Fixed Capital Investment – Working Capital Investment

Therefore, in the given question the Free Cash Flow to Company is calculated as -

FCFF = 2,337 + (654+125) + [(980)+(783)+405+(11,383)] + [601+2+(325)+408+1,041+362]

= $(7,536)

The Philip Morris Company has negative free cash flow of $ (7,536) whch will affect the company in the following ways:

Their requirement for increased financing will result in increased financing cost reducing future income.
According to the discounted cash flow valuation model, the intrinsic value of a company is the present value of all future free cash flows, plus the cash proceeds from its eventual sale. Such presumption reflect that the present financial position is very poor.
Because free cash flow is more difficult to manipulate than net income, the problems with this presumption are itemized at cash flow and return of capital.

ekkarill92 answered 2 years ago

Philip Morris expects the sales for his clothing company to be $540,000 next year. Philip notes...

Philip Morris expects the sales for his clothing company to be $540,000 next year. Philip notes that net assets (Assets − Liabilities) will remain unchanged. His clothing firm will enjoy a 11 percent return on total sales. He will start the year with $140,000 in the bank. What will Philip's ending cash balance be?

The following events occur for Morris Engineering during 2018 and 2019, its first two years of...

The following events occur for Morris Engineering during 2018 and 2019, its first two years of operations. February 2, 2018 Provide services to customers on account for $33,800. July 23, 2018 Receive $23,500 from customers on account. December 31, 2018 Estimate that 30% of uncollected accounts will not be received. April 12, 2019 Provide services to customers on account for $46,800. June 28, 2019 Receive $6,000 from customers for services provided in 2018. September 13, 2019 Write off the...

The following information pertains to the acquisition of an asset by Torres Company during the year;...

The following information pertains to the acquisition of an asset by Torres Company during the year; FURNITURE Invoice price P 30,000 Date bought February 1 Trade discount 10% Terms 20% down, balance 2/10, n/30 Freight paid P500 Allowance granted 3,000 Date allowance granted February 3 Partial payment made P6,000 Date of partial payment February 5 Date of full payment of account February 10 Required: 1.1 From the given information, journalize a. the acquisition b. the incurrence of expense c. the granting of allowance...

8. Exe plc is considering an acquisition of Wye plc. Both companies are entirely equity financed....

8. Exe plc is considering an acquisition of Wye plc. Both companies are entirely equity financed. Relevant information is as follows: Exe Number of shares 16,250,000 Share price £18.00 Wye 11,252,000 £3.11 The risk-free interest rate is 4% and the corporation tax rate is 19%. The synergies from the acquisition are expected to have a total present value of £32.1 million. The shareholders of Wye will expect a premium of 25% to agree to the acquisition. (a) What will be...

Which of the following is true about interferon? It is released by uninfected cells during a...

Which of the following is true about interferon? It is released by uninfected cells during a viral infection It is produced by virally infected cells during a viral infection, whereupon it inhibits further viral replication within the cells where it is made. It is produced by virally infected cells to activate helper T-cells. It is released by virally infected cells to induce an antiviral state in uninfected cells. It is released by cells in lymph nodes to attract T cells...

Morris Corporation has the following information on its balance sheets: Cash = $40, accounts receivable =...

Morris Corporation has the following information on its balance sheets: Cash = $40, accounts receivable = $30, inventories = $100, net fixed assets = $500, accounts payable = $20, accruals = $10, short-term debt (matures in less than a year) = $25, long-term debt = $200, and total common equity = $415. Its income statement reports: Sales = $820, costs of goods sold (excluding depreciation) = $450, depreciation = $50, interest expense = $20, and tax rate = 40%. Calculate...

Packard Company engaged in the following transactions during Year 1, its first year of operations:

Packard Company engaged in the following transactions during Year 1, its first year of operations: (Assume all transactions are cash transactions.)1) Acquired $950 cash from the issue of common stock.2) Borrowed $420 from a bank.3) Earned $650 of revenues.4) Paid expenses of $250.5) Paid a $50 dividend.During Year 2, Packard engaged in the following transactions: (Assume all transactions are cash transactions.)1) Issued an additional $325 of common stock.2) Repaid $220 of its debt to the bank.3) Earned revenues of $750.4)...

Lexington Company engaged in the following transactions during Year 1, its first year in operation:

Lexington Company engaged in the following transactions during Year 1, its first year in operation: (Assume all transactions are cash transactions)Acquired $6,000 cash from issuing common stock.Borrowed $4,400 from a bank.Earned $6,200 of revenues.Incurred $4,800 in expenses.Paid dividends of $800.Lexington Company engaged in the following transactions during Year 2: (Assume all transactions are cash transactions)Acquired an additional $1,000 cash from the issue of common stock.Repaid $2,600 of its debt to the bank.Earned revenues, $9,000.Incurred expenses of $5,500.Paid dividends of $1,280....

1. Morris Company had the following information for the year ending December 31: Additional Resources Units...

1. Morris Company had the following information for the year ending December 31: Additional Resources Units Unit Cost Beginning inventory 200 $40 Purchase: April 6 460 42 Sale: May 4 260 Purchase: July 19 500 44 Sale: September 9 470 Purchase: October 10 120 45 Morris uses the perpetual inventory system and the FIFO method. Required: Using FIFO 2. On December 31, 2017, Tiffany Company issued $1,420,000 of 9% bonds. The market interest rate at the time of issuance was...

1. A company had the following purchases during its first year of operations:

1. A company had the following purchases during its first year of operations:PurchasesJanuary:11 units at $121February:21 units at $131May:16 units at $141September:13 units at $151November:11 units at $161On December 31, there were 31 units remaining in ending inventory. These 31 units consisted of 3 from January, 5 from February, 7 from May, 5 from September, and 11 from November. Using the specific identification method, what is the cost of the ending inventory?2. During the first week of January, an employee...