Question

1. Use the financial information below to construct a 2010 income statement and balance sheets for both 2009 and 2010. The firm’s average tax rate is 40% and its plowback ratio is 60%. Find the firms’ cash flows (OCF, NCS, change in NWC, FCF, CFC, CFS).

	2009	2010
Sales ($ millions)	1000	1112
Cost of Goods Sold ($ millions)	500	556
Other Expenses ($ millions)	100	111
Depreciation ($ millions)	100	100
Interest Expense ($ millions)	50	55
Total Current Assets ($ millions)	600	700
Accumulated Depreciation	200	300
Net Fixed Assets ($ millions)	1800	2000
Total Current Liabilities ($ millions)	450	550
Long-term Liabilities ($ millions)	900	975
Accumulated Retained Earnings	500	This can be determined from the information given.

Answer 1

Income statement
Particulars	2010 ($ millions)	2009 ($ millions)
Sales	1,112	1,000
Less-
Cost of goods sold	556	500
Other expenses	111	100
Depreciation	100	100
Interest expense	55	50
Profit before taxes	290	250
Less-Tax at 40%	116	100
Profit after taxes	174	150

Balance sheet
Particulars	2010 ($ millions)	2009 ($ millions)
Current assets	700	600
Gross Fixed assets	2,300	2,000
Less-Accumulated depreciation	-300	-200
Total Assets	2,700	2,400
Current Liabilities	550	450
Long term liabilities	975	900
Accumulated retained earnings	674	500
Provision for Tax	116	100
Total Liabilities	2,315	1,950

Note - It is assumed that the retained earnings for 2009 is the closing retained earnings computed after taking that year's profit into account.Retained earnings of 2010 is calculated as Closing Retained earnings of 2009 + 2010's profit plowback (ie 500 + $ 174 = 674)

Gross fixed assets is computed as the sum of Net fixed asset and accumulated depreciation.

Since all the account balances are not provided it is not possible to tally the balance sheet.

Cash flows for 2010
Particulars	Amount($ millions)	Amount($ millions)
Operating activities
Profit before taxes	290
Less-Depreciation	-100	190
Change in working capital
Increase in current assets	-100
Increase in current liabilities	100	0
Financing Activites
Issue of Debt instruments (Movement in long term liabilities)		75
Investing Activites
Purchase of fixed assets (2300-2000)		-300