1.
a.
b.
c.
d.
2.
Show which type of financial management decisions are related to the following examples (Capital structure,
Capital budgeting, Working capital management
Deciding on whether to expand a manufacturing plant
Capital budgeting
deciding whether to issue new equity
Capital structure
modifying the firm’s credit collection policy with its customers
Working capital management
deciding whether to use the proceeds to retire outstanding debt Capital structure
Sheffield Co. shows the following information on its 2010 income statement: sales = $153,000; costs =
$81,900; other expenses = $5,200; depreciation expense = $10,900; interest expense = $8,400; taxes = $16,330;
dividends = $7,200. In addition, you're told that the firm issued $2,600 in new equity during 2010, and
redeemed $3,900 in outstanding long-term debt.
a. What is the 2010 operating cash flow?
b. What is the 2010 cash flow to creditors?
c. What is the 2010 cash flow to stockholders?
d. If net fixed assets increased by $19,475 during the year, what was the addition to NWC?
Formula:
OCF = EBIT + Depreciation – Taxes
Cash flow to creditors = Interest paid – Net new borrowing
Cash flow to stockholders = Dividends paid – Net new equity
Cash flow from assets = Cash flow to creditors + Cash flow to stockholders
Net capital spending = Depreciation + Increase in fixed assets
Cash flow from assets = OCF – Change in NWC – Net capital spending
ANSWER:
a.
To calculate the OCF, we first need to construct an income statement. The income statement
starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable
income, and then subtract taxes to arrive at net income. Doing so, we get:
Income Statement
Sales
$153,000
Costs
81,900
Other Expenses
5,200
Depreciation
10,900
EBIT
$55,000
Interest 8,400
Taxable income $46,600
Taxes 16,330
Net income
$30,270
Dividends
$7,200
Addition to retained earnings
23,070
Dividends paid plus addition to retained earnings must equal net income, so:
Net income = Dividends + Addition to retained earnings
Addition to retained earnings = $30,270 – 7,200
Addition to retained earnings = $23,070
So, the operating cash flow is:
OCF = EBIT + Depreciation – Taxes
OCF = $55,000 + 10,900 – 16,330
OCF = $49,570
b.
The cash flow to creditors is the interest paid, minus any new borrowing. Since the
company redeemed long-term debt, the net new borrowing is negative. So, the cash flow to creditors
is:
Cash flow to creditors = Interest paid – Net new borrowing
Cash flow to creditors = $8,400 – (–$3,900)
Cash flow to creditors = $12,300
c.
The cash flow to stockholders is the dividends paid minus any new equity. So, the cash flow
to stockholders is:
Cash flow to stockholders = Dividends paid – Net new equity
Cash flow to stockholders = $7,200 – 2,600
Cash flow to stockholders = $4,600
d.
In this case, to find the addition to NWC, we need to find the cash flow from assets.
We can then use the cash flow from assets equation to find the change in NWC. We know that cash
flow from assets is equal to cash flow to creditors plus cash flow to stockholders. So, cash flow from
assets is:
Cash flow from assets = Cash flow to creditors + Cash flow to stockholders
Cash flow from assets = $12,300 + 4,600
Cash flow from assets = $16,900
Net capital spending is equal to depreciation plus the increase in fixed assets, so:
Net capital spending = Depreciation + Increase in fixed assets
Net capital spending = $10,900 + 19,475
Net capital spending = $30,375
Now we can use the cash flow from assets equation to find the change in NWC. Doing so, we
find:
Cash flow from assets = OCF – Change in NWC – Net capital spending
$16,900 = $49,570 – Change in NWC – $30,375
Change in NWC = $2,295
3.
The ABC Company has net profits of $10 million, sales of $150 million, and 2.5 million shares of common
stock outstanding. The company has total assets of $75 million and total stockholders’ equity of $45 million. It
pays $ 1 per share in common dividends, and the stock trades at $20 per share. Given this information,
determine the following:
a.
b.
c.
d.
e.
ABC Company’s EPS.
ABC Company’s book value per share and price-to-book-value ratio.
The firm’s P/E ratio.
The company’s net profit margin.
The stock’s dividend payout ratio and its dividend yield.
Formula:
(i)
(ii)
(iii)
Net profits after taxes  Preferred dividends
Number of common shares outstanding
Stockholders' equity
Book value per share
Number of common shares outstanding
Market price of stock
EPS
(iv)
(v)
(vi)
Dividend yield
Net profit after taxes
Total revenues
Dividends per share
EPS
Dividends per share
Market price of common stock
ANSWER:
(i)
Net profits after taxes  Preferred dividends
Number of common shares outstanding
For ABC:
(ii)
$10,000,000  $0
 $4 per share
2,500,000
Stockholders' equity
Book value per share
Number of common shares outstanding
For ABC:
Price-to-book value
$45,000,000
 $18 per share
2,500,000
Market price of common stock
Book value per share
For ABC:
Price-to-book value
(iii)
$20
 1.11
$18
Market price of stock
EPS
For ABC:
(iv)
$20
= 5 times
$4
Net profit after taxes
Total revenues
For ABC:
$10,000,000
 6.7%
$150,000,000
Dividends per share
EPS
(v)
For ABC:
Dividend payout
Dividend yield
$1
 25%
$4
Dividends per share
Market price of common stock
For ABC:
Dividend yield
$1
 5%
$20
(vi)
4.
PEG ratio
Stock's P/E ratio
 5/7.5  .667
35 years growth rate in earnings
Future Value and Multiple Cash Flows. Ali Sdn Bhd, has identified an investment project with the following
cash flows. If the discount rate is 10 percent, what is the future value of these cash flows in Year 3? What is the
present value of these cash flows?
Year
1
2
3
Cashflow
($)
800
1000
1200
PV = 800/(1+0.1) + 1000/(1+0.1) 2+1200/(1+0.1)3=2455.297
FV= 800*(1+0.1)2+1000*(1+0.1)1+1200=3268
5.
Calculating Rates of Return. During 2013, I sold my car for a price of $18000. Unfortunately I he had
purchased it in 2003 at a price of $65000. What was his annual rate of return on this car?
Formula:
FV = PV(1 + r)t
Solving for r, we get:
r = (FV / PV)1 / t – 1
ANSWER:
r = ($18000 / $65000)1/10 – 1
r = –0.1205