Question

Financial information for Powell Panther Corporation is shown below:

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

	2018		2017
Sales	$	3,080.0	$	2,800.0
Operating costs excluding depreciation and amortization		2,310.0		2,380.0
EBITDA	$	770.0	$	420.0
Depreciation and amortization		73.0		56.0
Earnings before interest and taxes (EBIT)	$	697.0	$	364.0
Interest		68.0		62.0
Earnings before taxes (EBT)	$	629.0	$	302.0
Taxes (40%)		251.6		120.8
Net income	$	377.4	$	181.2
Common dividends	$	340.0	$	145.0

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

	2018		2017
Assets
Cash and equivalents	$	55.0	$	42.0
Accounts receivable		322.0		280.0
Inventories		837.0		644.0
Total current assets	$	1,214.0	$	966.0
Net plant and equipment		728.0		560.0
Total assets	$	1,942.0	$	1,526.0
Liabilities and Equity
Accounts payable	$	185.0	$	168.0
Accruals		101.0		84.0
Notes payable		62.0		56.0
Total current liabilities	$	348.0	$	308.0
Long-term bonds		616.0		560.0
Total liabilities	$	964.0	$	868.0
Common stock		886.6		604.0
Retained earnings		91.4		54.0
Common equity	$	978.0	$	658.0
Total liabilities and equity	$	1,942.0	$	1,526.0

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 2017 and 2018? Assume the firm has no excess cash.

   2017:  $  

   2018:  $  

2. What was the 2018 free cash flow?

   $  

3. How would you explain the large increase in 2018 dividends?
   
   1. The large increase in net income from 2017 to 2018 explains the large increase in 2018 dividends.
   2. The large increase in EBIT from 2017 to 2018 explains the large increase in 2018 dividends.
   3. The large increase in sales from 2017 to 2018 explains the large increase in 2018 dividends.
   4. The large increase in free cash flow from 2017 to 2018 explains the large increase in 2018 dividends.
   5. The large increase in retained earnings from 2017 to 2018 explains the large increase in 2018 dividends.

Answer 1

Answer : (a.) Calculation of Net Increase in Working Capital for 2017 :

Net Increase in Working Capital = Current assets - (Current Liabilities - Notes Payable)

= 966,000,000 - (308,000,000 - 56,000,000)

= 714,000,000

Calculation of Net Increase in Working Capital for 2018 :

Net Increase in Working Capital = Current assets - (Current Liabilities - Notes Payable)

= 1,214,000,000 - (348,000,000 - 62,000,000)

= 928,000,000

(b.) Free Cash Flow = EBIT * (1 - Tax Rate) + Depreciation - Capital Expenditure - Increase in Working Capital

= [697,000,000 * (1 - 0.40)] + 73,000,000 - 241,000,000 - 214,000,000

= 36,200,000

Capital expenditure =Net Fixed Assets in 2018 + Depreciation - Net Fixed Assets in 2017

= 728,000,000 + 73,000,000 - 560,000,000

= 241,000,000

Increase in Net Working Capital = 928,000,000 - 714,000,000 = 214,000,000

(c.) Correct option is The large increase in net income from 2017 to 2018 explains the large increase in 2018 dividends.