PROBLEM 12-11

a. Free cash flows for all debt and equity stakeholders:

2009 2008 2007
Cash Flow from Operating Activities (Net
cash provided by operating activities) 159,676 262,968 139,609
+/- Net Interest after Tax 4,813 7,388 5,572
Cash paid during the year for interest 8,021 12,314 9,286
Tax rate 40% 40% 40%
(Dick’s Sporting Goods requir
all of its cash and cash equival
for operating liquidity and rep
no interest income on the inco
+/- Changes in Cash Requirements for Liquidit (24,530) 85,635 (99,378) statement)
Free Cash Flow from Operations to All Debt
and Equity Stakeholders 139,959 355,991 45,803
Cash Flow for Investing Activities (144,194) (435,296) (130,486)
Free Cash Flows to All Debt and Equity
Stakeholders $ (4,235) $ (79,305) $ (84,683)

b. Free cash flows for common equity shareholders:

2009 2008 2007
Cash Flow from Operating Activities (Net
cash provided by operating activities) 159,676 262,968 139,609
+/- Changes in Cash Requirements for Liquidit (24,530) 85,635 (99,378)
Free Cash Flow from Operations for Common
Equity Shareholders 135,146 348,603 40,231
Cash Flow for Investing Activities (144,194) (435,296) (130,486)
(Decrease) Increase long-term borrowing -
Construction Allowance Receipts 11,874 13,282 17,902
(Decrease) Increase in Short-Term Borrowing (9,927) 4,785 8,829
(Decrease) Increase in Long-Term Debt and
Capital Leases (6,793) (1,058) (184)
Free Cash Flows to Common Equity
Shareholders $ (13,894) $ (69,684) $ (63,708)

c. Dick’s Sporting Goods sources of free cash flows from common equity shareholders:
2009 2008 2007
Proceeds from Sale of Common Stock 13,894 69,684 63,708
Free Cash Flows from Common Equity
Shareholders $ 13,894 $ 69,684 $ 63,708

d. The free cash flows to all debt and equity capital stakeholders for Dick’s Sporting
Goods vary dramatically over 2007 to 2009. In 2007, the firm grew by investing in
new store assets but financed most of that growth with cash from operations,
construction allowances, short-term debt, and equity issues. In 2008, the firm used a
d. The free cash flows to all debt and equity capital stakeholders for Dick’s Sporting
Goods vary dramatically over 2007 to 2009. In 2007, the firm grew by investing in
new store assets but financed most of that growth with cash from operations,
construction allowances, short-term debt, and equity issues. In 2008, the firm used a
large amount of cash from operations, cash on hand, and issued equity to acquire Golf
Galaxy and Chick’s Sporting Goods and to finance growth in new stores. In the fiscal
year ending in 2009, Dick’s used primarily cash from operations to finance growth in
stores. In each of these three years, the free cash flows to all debt and equity capital
stakeholders differ from the free cash flows to common equity shareholders because
Dick’s Sporting Goods is relying more heavily on equity than debt for external
capital. Note: Most of Dick’s equity issues are to employees through stock purchase
plans and stock option exercises.

e. In each of these three years, Dick’s Sporting Goods produces negative free cash
flows for common shareholders, but this does not imply that Dick’s Sporting Goods is
destroying the value of common equity. To the contrary, Dick’s Sporting Goods is
raising additional equity capital through stock offerings and is investing in
acquisitions and opening new stores, which should create shareholder value in the
long run.
(Dick’s Sporting Goods requires
all of its cash and cash equivalents
for operating liquidity and reports
no interest income on the income
statement)
 PROBLEM 12-15
a.
Year Best Most Likely Worst
PV of PV of PV of
Cash flow Cash flow Cash flow
Cash flow Cash flow Cash flow
8 73,967 65,140 47,034 41,421 3,027 2,666
9 52,143 40,441 (3,120) (2,420) (84,800) (65,769)
10 213,895 146,096 135,939 92,850 48,353 33,026
11 315,633 189,860 178,510 107,378 36,605 22,019
12 432,232 228,971 220,010 116,549 10,232 5,420
13 518,678 241,978 242,011 112,905 10,232 4,774
14 622,414 255,723 266,212 109,375 10,232 4,204
15 746,897 270,249 292,833 105,955 10,232 3,702
16 896,276 285,600 322,117 102,643 10,232 3,260
17 1,075,532 301,823 354,328 99,434 10,232 2,871
After 17 33,326,329 9,352,250 4,351,400 1,221,118 75,513 21,191
Total $ 11,378,130 $ 2,107,208 $ 37,365

b. The most likely scenario provides a value for MSC that is more than three times larger than if the firm does
not add gas stoves. The wood-stove market appears to be in decline, whereas the gas stove market is growing. If
the probability of the most likely scenario is approximately 30% or more, the expected value of adding gas
stoves exceeds the value of not adding gas stoves, regardless of the probability of the best- and worst-case
scenarios
 No Gas
PV of
Cash flow
Cash flow
162,455 143,069
132,708 102,925
106,021 72,415
81,840 49,229
60,007 31,788
60,007 27,995
60,007 24,654
60,007 21,712
60,007 19,121
60,007 16,840
442,856 124,277
$ 634,026

er than if the firm does

ove market is growing. If
value of adding gas
est- and worst-case