Rey Joyce B.

Abuel July 10, 2018

AEC 13-ACB

3-15 FREE CASH FLOW

Powell Panther Corporation: Income Statement for Year Ending December 31

(Millions of Dollars)

2012 2011

Sales $1,200.0 $1,000.0

Operating costs excluding depreciation and amortization 1,020.0 850.0

EBITDA $180.0 $150.0

Depreciation and amortization 30.0 25.0

Earnings before interest and taxes $150.0 $125.0

Interest 21.7 20.2

Earnings before taxes $128.3 $104.8

Taxes (40%) 51.3 41.9

Net income
$77.0 $62.9

Common dividends
$60.5 $46.4

Powell Panther Corporation: Balance Sheets as of December 31

(Millions of Dollars)

2012 2011

Assets

Cash and equivalents $12.0 $10.0

Accounts receivable 180.0 150.0

Inventories 180.0 200.0

 Total current assets $372.0 $360.0

Net plant and equipment 300.0 250.0

Total assets
$672.0 $610.0

Liabilities and Equity

Accounts payable $108.0 $90.0

Notes payable 67.0 51.5

Accruals 72.0 60.0

Total current liabilities $247.0 $201.5

Long-term bonds 150.0 150.0

Total debt $397.0 $351.5

Common stock 50.0 50.0

Retained earnings 225.0 208.5

Common equity
$275.0 $258.5

Total liabilities and equity

$672.0 $610.0

a. What was net operating working capital for 2011 and 2012?

2011
Net operating working capital = Current assets – (Current liabilities – Notes payable)
Net operating working capital = $360,000,000 – ($201,500,000 – $51,500,000)
Net operating working capital = $360,000,000 – $150,000,000
Net operating working capital = $210,000,000

2012
Net operating working capital = Current assets – (Current liabilities – Notes payable)
Net operating working capital = $372,000,000 – ($247,000,000 – $67,000,000)
Net operating working capital = $372,000,000 – $180,000,000
Net operating working capital = $192,000,000
b. What was the 2012 free cash flow?

2012 FCF =[ EBIT ( 1−T ) + Deprec . ] −[ Cap . expend .+∆ NOWC ]

2012 FCF =[ $ 150,000,000 ( 0.6 )+ $ 30,000,000 ]−[ $ 80,000,000−$ 18,000,000 ]
2012 FCF =[ $ 90,000,000+$ 30,000,000 ] −[ $ 80,000,000−$ 18,000,000 ]
2012 FCF =$ 120,000,000−$ 62,000,00 0
2012 FCF =$ 58 ,000,00 0

c. How would you explain the large increase in 2012 dividends?

The large increase in dividends for 2012 can most likely be attributed to a large
increase in free cash flow from 2011 to 2012, since FCF represents the amount
of cash available to be paid to stockholders after the company has made all
investments in fixed assets, new products, and working capital necessary to
sustain the business.