Question

Financial information for Powell Panther Corporation is shown below:

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

	2019		2018
Sales	$	3,240.0	$	2,700.0
Operating costs excluding depreciation and amortization		2,430.0		2,295.0
EBITDA	$	810.0	$	405.0
Depreciation and amortization		71.0		62.0
Earnings before interest and taxes (EBIT)	$	739.0	$	343.0
Interest		71.3		59.4
Earnings before taxes (EBT)	$	667.7	$	283.6
Taxes (25%)		267.1		113.4
Net income	$	400.6	$	170.2
Common dividends	$	360.5	$	136.2

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

	2019		2018
Assets
Cash and equivalents	$	40.0	$	35.0
Accounts receivable		311.0		270.0
Inventories		776.0		621.0
Total current assets	$	1,127.0	$	926.0
Net plant and equipment		714.0		621.0
Total assets	$	1,841.0	$	1,547.0
Liabilities and Equity
Accounts payable	$	248.0	$	216.0
Accruals		203.0		162.0
Notes payable		64.8		54.0
Total current liabilities	$	515.8	$	432.0
Long-term bonds		648.0		540.0
Total liabilities	$	1,163.8	$	972.0
Common stock		586.1		524.0
Retained earnings		91.1		51.0
Common equity	$	677.2	$	575.0
Total liabilities and equity	$	1,841.0	$	1,547.0

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 free cash flow from 2018 to 2019 explains the large increase in 2019 dividends.
   3. The large increase in EBIT 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.

   -Select-IIIIIIIVV

Answer 1

Ans) (a)

Calculation of the Net Operating Working Capital for year 2018 & 2019

Net Operating Working Capital = Current Assets - (Current Liabilities - Notes Payable)

NOWC(for year 2019) = $1127,000,000 - ( $515,800,000 - $64,800,000)

= $1127,000,000 - $451,000,000

= $676,000,000

NOWC(for year 2018) = $926,000,000 - ( $432,000,000 - $54,000,000)

= $926,000,000 - $378,000,000

= $548,000,000

Ans) (b)

Calculation of Free Cash flow for year 2019

Free Cash flow(2019) = [EBIT(1-t) + Depreciation] - [Capital Expenditure + Change in Net Operating Working Capital]

= [$739,000,0000(1-0.25)+ $71,000,000] - [ $164,000,000 + $128,000,000]

= [$554,250,000 + $71,000,000] - [$292,000,000]

= $625,250,000 - $292,000,000

= $333,250,000

Capital Expenditure =[Book Value of Plant & Equipment at the end of Year 2019 - Book Value of Plant & Equipment at the end of Year 2018]+ Current year Depreciation

= [$714,000,000 - $621,000,000] + $71,000,000

= $93,000,000 + $71,000,000

= $164,000,000

Change in Net Operating Working Capital = (Net Working Capital for the year 2019 - Net Working Capital for the year 2018)

= $676,000,000 - $548,000,000

= $128,000,000

Ans) (c)

The large increase in Free Cash Flows from 2018 to 2019 explains the large increase in 2019 dividends. Since higher Free Cash Flows represent the company has been performing well and it can afford to pay higher dividends as compared to company that has lower Free Cash Flows.