Question

Assess the dividend policy of Streamin, Inc., a music company that was started as a business on January 1, 2014. You have been provided with the information from its operating history:

	2014	2015	2016
Revenues	$1,000	$1,110	$1,220
Net Income	$100	$109	$118
Depreciation	$40	$45	$50
Capital Exp.	$50	$61	$72
Non-cash Working capital (End of year)	$10	$30	$50
Total Debt (End of year)	$10	$15	$75
Dividend payout ratio	0%	37%	49%

a. Assuming that the company started operations on January 1, 2014, with no cash and no debt, how much cash did the company have at the end of each year from 2014 to 2016.

b. Now assume that the company plans to double its non-cash working capital as a percent of revenues and believes that doing so will allow it to grow revenues 20% a year for the next three years, while maintaining the net margin and payout ratio it had in the most recent year. If capital expenditures and depreciation are expected to grow 10% a year and the company intends to repay its existing debt in three equal annual installments, estimate the cash balance three years from now. (You can assume that you are at the start of 2014)

Answer 1