Question

In: Finance

Consider the following information: Cash and cash equivalents at 31 December 2010 = $1.50 million Cash...

Consider the following information:

  • Cash and cash equivalents at 31 December 2010 = $1.50 million
  • Cash and cash equivalents at 31 December 2011 = $1.85 million
  • Interest expense = $0.48 million
  • Net borrowings = $0.25 million
  • Cash dividends = $1.25 million

Given a tax rate of 40%, the firm's FCFF at the end of 2011 is closest to:

Select one:

a. $1,830,000

b. $1,638,000

c. $388,000

Question 13

Question text

Assuming a tax rate of 40%, a $100 increase in which of the following would not impact FCFF and decrease FCFE by $60?

Select one:

a. Notes payable

b. Interest expense

c. Accounts payable

Question 14

Question text

How do net income and EBITDA, respectively, rate as proxies for cash flows in the FCFE and FCFF formulas?

Select one:

a. Good

b. No use

c. Poor

Solutions

Expert Solution

12). Answer: B

FCFF = Increases in cash balances + After-tax interest expense + Repayment of principal - New borrowings + Cash dividends + Share repurchases - New equity issues

FCFF = ($1.85m – $1.50m) + [$0.48m × (1 - 0.4)] - $0.25m + $1.25m = $1.638 million

13). Correct Option : B

A $100 increase in notes payable will have no impact on FCFF but increase FCFE by $100.

A $100 increase in interest expense will have no impact on FCFF but decrease FCFE by $60.

A $100 increase in accounts payable will increase FCFF and FCFE by $100

14). Poor: Option "C"

Net income is a poor proxy for FCFE. We can see that by simply examining the formula for FCFE in terms of NI.

FCFE = NI + NCC – FCInv – WCInv + net borrowing

Net income includes non-cash charges like depreciation that have to be added back to arrive at FCFE. In addition, it ignores cash flows that don’t appear on the income statement, such as investments in working capital and fixed assets as well as net borrowings.

EBITDA is a poor proxy for FCFF. We can also see this from the formula relating FCFF to EBITDA

FCFF = [EBITDA × (1 – tax rate)] + (Dep × tax rate) – FCInv – WCInv

EBITDA doesn’t reflect the cash taxes paid by the firm, and it ignores the cash flow effects of the investments in working capital and fixed capital.

jeff jeffy answered 10 months ago
Next > < Previous

Related Solutions

Cash and cash equivalents balance, December 31, 2014 $ 38,000 Cash and cash equivalents balance, December...
Cash and cash equivalents balance, December 31, 2014 $ 38,000 Cash and cash equivalents balance, December 31, 2015 106,856 Cash received as interest 3,800 Cash paid for salaries 110,200 Bonds payable retired by issuing common stock (no gain or loss on retirement) 170,000 Cash paid to retire long-term notes payable 190,000 Cash received from sale of equipment 93,100 Cash received in exchange for six-month note payable 38,000 Land purchased by issuing long-term note payable 98,600 Cash paid for store equipment...
Cash and cash equivalents, Dec. 31 prior year-end $ 45,000 Cash and cash equivalents, Dec. 31...
Cash and cash equivalents, Dec. 31 prior year-end $ 45,000 Cash and cash equivalents, Dec. 31 current year-end 126,540 Cash received as interest 4,500 Cash paid for salaries 130,500 Bonds payable retired by issuing common stock (no gain or loss on retirement) 140,000 Cash paid to retire long-term notes payable 225,000 Cash received from sale of equipment 110,250 Cash received in exchange for six-month note payable 45,000 Land purchased by issuing long-term note payable 81,200 Cash paid for store equipment...
The following information is taken from ABC Corporation's financial statements: December 31 2011 2010 Cash $90,000...
The following information is taken from ABC Corporation's financial statements: December 31 2011 2010 Cash $90,000 $ 27,000 Accounts receivable, net 87,500 76,900 Inventory 155,000 175,000 Prepaid expenses 7,500 6,800 Land 90,000 60,000 Buildings 287,000 244,000 Accumulated depreciation (32,000) (13,000) Patents 20,000 35,000 $705,000 $611,700 Accounts payable $ 90,000 $ 84,000 Accrued liabilities 54,000 63,000 Bonds payable 125,000 60,000 Common stock 100,000 100,000 Retained earnings 351,000 312,700 Treasury stock, at cost (15,000) (8,000) $705,000 $611,700 For 2011 Year Net income...
Devin E Corporation Balance Sheet As of December 31, 2015 2014 Assets: Cash & Cash Equivalents...
Devin E Corporation Balance Sheet As of December 31, 2015 2014 Assets: Cash & Cash Equivalents $41,900 $25,000 Accounts Receivable 24,000 6,250 Inventory 30,000 36,000      Current Assets 95,900 67,250 Land 25,000 10,000 Equipment 42,000 38,500 Less: Accumulated Depreciation (14,000) (7,000) 53,000 41,500 Total Assets 148,900 108,750 Liabilities: Accounts Payable 17,500 22,500 Accrued Salaries Payable 5,500 8,000 Rent Expense Payable 2,200 1,000 Income Tax Payable 6,900 4,000 Current Liabilities 32,100 35,500 Long-term notes payable 50,000 30,000 Total Liabilities 82,100 65,500...
ABC CORP BALANCE SHEET December 31, 2010                         Cash           &nbs
ABC CORP BALANCE SHEET December 31, 2010                         Cash                                                            $   100                         Marketable Securities                                          0                         Accounts Receivables                                     2,000                         Inventory                                                          140                         Fixed Assets ( net )                                          2,000                         Total Assets                                                                                                                                                =====                         Accounts Payable                                             $ 2,380                         Notes Payable                                                             0                         Retained earnings                                                 ?                         Common Stock                                                      1,400                         Total of Both Liabilities & Equity                      ===== For the year ended 12/31/10 ABC CORP generated Sales of $12,000...
PHAROAH COMPANY Balance Sheets December 31 (in thousands) 2022 2021 Current assets    Cash and cash equivalents...
PHAROAH COMPANY Balance Sheets December 31 (in thousands) 2022 2021 Current assets    Cash and cash equivalents $330 $360    Accounts receivable (net) 570 500    Inventory 640 570    Prepaid expenses 130 160      Total current assets 1,670 1,590 Property, plant, and equipment (net) 410 380 Investments 110 110 Intangibles and other assets 530 510      Total assets $2,720 $2,590 Current liabilities $920 $890 Long-term liabilities 660 560 Stockholders’ equity—common 1,140 1,140      Total liabilities and stockholders’ equity $2,720 $2,590 PHAROAH COMPANY Income Statements For the...
Consider the following stock price and shares outstanding information. DECEMBER 31, Year 1 DECEMBER 31, Year...
Consider the following stock price and shares outstanding information. DECEMBER 31, Year 1 DECEMBER 31, Year 2 Price Shares Outstanding Price Shares Outstanding Stock K $22 108,000,000 $33 108,000,000 Stock M 86 2,200,000 46 4,400,000a Stock R 37 21,000,000 42 21,000,000 aStock split two-for-one during the year. Compute the beginning and ending values for a price-weighted index and a market-value-weighted index. Assume a base value of 100 and Year 1 as the base period. Do not round intermediate calculations. Round...
Consider the following stock price and shares outstanding information. DECEMBER 31, Year 1 DECEMBER 31, Year...
Consider the following stock price and shares outstanding information. DECEMBER 31, Year 1 DECEMBER 31, Year 2 Price Shares Outstanding Price Shares Outstanding Stock K $22 100,000,000 $30 100,000,000 Stock M 84 2,400,000 46 4,800,000a Stock R 39 24,000,000 42 24,000,000 aStock split two-for-one during the year. Compute the beginning and ending values for a price-weighted index and a market-value-weighted index. Assume a base value of 100 and Year 1 as the base period. Do not round intermediate calculations. Round...
Consider the following stock price and shares outstanding information. DECEMBER 31, Year 1 DECEMBER 31, Year...
Consider the following stock price and shares outstanding information. DECEMBER 31, Year 1 DECEMBER 31, Year 2 Price Shares Outstanding Price Shares Outstanding Stock K $22 108,000,000 $33 108,000,000 Stock M 74 2,100,000 43 4,200,000a Stock R 40 20,000,000 43 20,000,000 aStock split two-for-one during the year. Compute the beginning and ending values for a price-weighted index and a market-value-weighted index. Assume a base value of 100 and Year 1 as the base period. Do not round intermediate calculations. Round...
Presented below is information related to equipment owned by ALALI Company at December 31, 2010.                        ...
Presented below is information related to equipment owned by ALALI Company at December 31, 2010.                         Cost                                                        SAR 7,000,000                         Accumulated depreciation to date                  1,500,000                         Value-in-use                                                  5,000,000                         Fair value less cost of disposal                       4,400,000 Assume that ALALI will continue to use this asset in the future. As of December 31, 2010, the equipment has a remaining useful of 4 years. Instructions Prepare the journal entry (if any) to record the impairment of the asset at December...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT