Question

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Balance Sheets (in millions of dollars) 2020 2019 Assets Cash and cash equivalents $600 $495 Accounts...

Balance Sheets (in millions of dollars)	2020	2019
*Assets*
Cash and cash equivalents	$600	$495
Accounts receivable	$626	$525
Inventories	$285	$240
Total current assets	$1,511	$1,260
Net fixed assets	$1,590	$1,470
Total assets	$3,101	$2,730
*Liabilities and equity*
Accounts payable	$248	$195
Accruals	$195	$180
Notes payable	$189	$195
Total current liabilities	$632	$570
Long-term debt	$356	$300
Total liabilities	$987	$870
Common stock	$570	$570
Retained Earnings	$1,544	$1,290
Total common equity	$2,114	$1,860
Total liabilities and equity	$3,101	$2,730

Use the amounts you calculated for the 2020 income statement as needed.

Income Statements (in millions of dollars)	2020	2019
Sales		$2,376
Costs+Exp excl. D&A		$1,782
EBITDA		$594
Depr. & amort.		$90
EBIT		$504
Interest expense		$60
EBT		$444
Taxes		$120
Net Income		$324

1.What is the Cash from Operating Activities in 2020 ($millions)?

2.What is the Cash from Investing Activities in 2020 ($millions)?

3.What are the Dividends in 2020 ($millions)?

4.What is the Net Change in Cash in 2020 ($millions)?

5.Calculate the Free Cash Flow. What is the Change in Net Operating Working Capital in 2020 ($millions)?

6.What is the Free Cash Flow in 2020 ($millions)?

Solutions

Expert Solution

Tutorial Note :

1. There is a mistake in the Problem. For the year 2020 the summation of the figures provided in Total Liabilities is wrong. As per the given data the total liabilities should have been $988 millions (i.e., $632+$356). However, the total provided in the problem is $987 millions. Therefore, we are going to solve the question assuming the figure of Long term debt as $355 instead of $356.

2. We are going to make the Cash Flow Statement irst and then we will find out the required answers to questions asked in the problem.

Cash Flow Statement for the year 2020

A : Cash from Operating Activities in 2020 ($millions) :

Net Income after tax 324
Less: Tax paid    120
EBT      444
Add: Interest Paid       60
EBIT 504
Add: Depreciation & Amortisation     90
Operating Cash Flow before changes in working Capital    594

Add: Increase in Total Current Liabilities
- Accounts Payable [248-195]     53
- Accruals [195-180]     15
Add: Decrease in Current Assets   Nil

Less: Increase in Current Assets (excluding Cash & Cash Equivalent)
- Accounts Receivables [626-525] (101)
   - Inventories [285-240]   (45)
Less: Decrease in Current Liabilities
- Notes Payable [189-195]      (6)
Change in Net Operating Working Capital (Part-5) (84)
510
Less: Income Tax (120)
Cash Generated from Operating Activities    (A) (Part-1)    390

B : Cash from Investing Activities in 2020 ($millions)

Purchase of Fixed Assets [1590-1270] (120)
Cash outflow due to Investing Activities (B) (Part-2) (120)

C : Cash from Financing Activities in 2020 ($millions)

Receipt of Long term Debt [355-300]   55
Dividend paid (Balancing Figure)    (Part-3)    (220)
Cash flow from Financing Activities (Refer Working Note-1) (C)   (165)

Net Change in Cash in 2020 (Part-4) 105

Working Note-1 : Computation of Cash Flow from Financing Activities

From Part-4 of our answer we can see that the Net change in Cash flow during 2020 shall be $105 millions

Again, From the above statement we have found following data-
Cash flow from Operating Acitivities $390 millions
Cash flow from Investing Activities ($120) millions

Therefore, the Cash generated from Financing Activities shall be result in such an amount that would make the Net Change in Cash Flow as $105 millions.

Hence, Cash Flow from Financing Activities would be ($165) millions [$105 - $390-($120) ]

Therefore,

Part-1 : Cash from Operating Activities in 2020 = $390 millions

Part-2 : Cash from Investing Activities in 2020 = ($120) millions

Part-3 : Dividends paid during the year 2020 = $165 millions

Part-4 : Net Change in Cash
= Closing Cash Balance - Opening Cash Balance = $600 - $495 = $105

Part-5 : Change in Net Operating Working Capital in 2020 = ($84) millions

Part-6 : Free Cash Flow in 2020

To find out Free cash flow we have to add non cash expenses with Net Income
Hence, Free Cash Flow = Net Income + Depreciation & Amortisation = $324 + $90 = $414 millions

jeff jeffy answered 1 year ago

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