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	$	3,190.0	$	2,900.0
Operating costs excluding depreciation and amortization		2,712.0		2,465.0
EBITDA	$	478.0	$	435.0
Depreciation and amortization		73.0		64.0
Earnings before interest and taxes (EBIT)	$	405.0	$	371.0
Interest		70.2		63.8
Earnings before taxes (EBT)	$	334.8	$	307.2
Taxes (25%)		133.9		122.9
Net income	$	200.9	$	184.3
Common dividends	$	180.8	$	147.4

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

	2019		2018
Assets
Cash and equivalents	$	32.0	$	29.0
Accounts receivable		487.0		406.0
Inventories		557.0		464.0
Total current assets	$	1,076.0	$	899.0
Net plant and equipment		734.0		638.0
Total assets	$	1,810.0	$	1,537.0
Liabilities and Equity
Accounts payable	$	334.0	$	290.0
Accruals		100.0		87.0
Notes payable		63.8		58.0
Total current liabilities	$	497.8	$	435.0
Long-term bonds		638.0		580.0
Total liabilities	$	1,135.8	$	1,015.0
Common stock		598.7		466.6
Retained earnings		75.5		55.4
Common equity	$	674.2	$	522.0
Total liabilities and equity	$	1,810.0	$	1,537.0

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:  $ 522000000

   2019:  $ 642000000

2. What was the 2019 free cash flow?

   $ ???

Answer 1

Answer to Part a.

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

Net Operating Working Capital, 2018 = $899,000,000 – ($435,000,000 - $58,000,000)
Net Operating Working Capital, 2018 = $899,000,000 - $377,000,000
Net Operating Working Capital, 2018 = $522,000,000

Net Operating Working Capital, 2019 = $1,076,000,000 – ($497,800,000 - $63,800,000)
Net Operating Working Capital, 2019 = $1,076,000,000 - $434,000,000
Net Operating Working Capital, 2019 = $642,000,000

Answer to Part b.

Capital Expenditure = Ending Net FA – Beginning Net FA + Depreciation
Capital Expenditure = $734,000,000 - $638,000,000 + $73,000,000
Capital Expenditure = $169,000,000

Change in Net Working Capital = $642,000,000 - $522,000,000
Change in Net Working Capital = $120,000,000

Free Cash Flow = EBIT * (1 – Tax) + Depreciation - Capital Expenditure - Change in Net Working Capital
Free Cash Flow = $405,000,000 * (1 – 0.25) + $73,000,000 - $169,000,000 - $120,000,000
Free Cash Flow = $303,750,000 + $73,000,000 - $169,000,000 - $120,000,000
Free Cash Flow = $87,750,000