Question

FREE CASH FLOW

Financial information for Powell Panther Corporation is shown below:

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

	2016	2015
Sales	$3,250.0	$2,600.0
Operating costs excluding depreciation and amortization	2,438.0	2,210.0
EBITDA	$812.0	$390.0
Depreciation and amortization	94.0	75.0
Earnings before interest and taxes (EBIT)	$718.0	$315.0
Interest	72.0	57.0
Earnings before taxes (EBT)	$646.0	$258.0
Taxes (40%)	258.4	103.2
Net income	$387.6	$154.8
Common dividends	$349.0	$124.0

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

	2016	2015
Assets
Cash and equivalents	$31.0	$26.0
Accounts receivable	299.0	260.0
Inventories	748.0	650.0
Total current assets	$1,078.0	$936.0
Net plant and equipment	943.0	754.0
Total assets	$2,021.0	$1,690.0
Liabilities and Equity
Accounts payable	$257.0	$234.0
Accruals	150.0	130.0
Notes payable	65.0	52.0
Total current liabilities	$472.0	$416.0
Long-term bonds	650.0	520.0
Total liabilities	$1,122.0	$936.0
Common stock	814.4	708.0
Retained earnings	84.6	46.0
Common equity	$899.0	$754.0
Total liabilities and equity	$2,021.0	$1,690.0

Write out your answers completely. For example, 25 million should be entered as 25,000,000.

1. What was net operating working capital for 2015 and 2016?
   
   2015:  $  
   
   2016:  $  
   
2. What was the 2016 free cash flow?
   
   $  
   
3. How would you explain the large increase in 2016 dividends?
   
   1. The large increase in net income from 2015 to 2016 explains the large increase in 2016 dividends.
   2. The large increase in EBIT from 2015 to 2016 explains the large increase in 2016 dividends.
   3. The large increase in free cash flow from 2015 to 2016 explains the large increase in 2016 dividends.
   4. The large increase in sales from 2015 to 2016 explains the large increase in 2016 dividends.
   5. The large increase in retained earnings from 2015 to 2016 explains the large increase in 2016 dividends.
   
   -Select-IIIIIIIVV

Answer 1

a).Net Operating Working Capital = Current Assets - Accounts Payable - Accurals (Notes Payable are not part of Operating working capital)

Net Operating Working Capital of 2015 = $936 millions - $234 millions - $130 millions

= $572 millions

Net Operating Working Capital of of 2016 = $1078 millions - $257 millions - $150 millions

= $671 millions

b). Free cash Flow = EBIT*(1-Tax rate) + Depreciation - Change in Net Operating Working Capital - Net Capital Spending

where, Change in Net Operating Working Capital = Net Operating Working Capital of 2016 - Net Operating Working Capital of 2015

= $671 millions - $572 millions

= $99 millions

- Net Capital Spending of 2016 = Net Plant & Equipment of 2016 + depreciation of 2016 - Net Plant & Equipment of 2015

= $943 millions - $94 millions + $754 millions

= $283 millions

Free cash Flow = $718 million*(1-40%) + $94 million - $99 million - $283 million

Free cash Flow = $142.80 million

c). Ans- Option II.

As EBIT of 2016 increases drastically from 2015 which increased the Net income. Thus with increase in Net income Dividend increased.

Note- Sales Increased from 2015 to 2016 but at the same time Operating cost and depreciation decreased as proportion to increase in sales.

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