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Cash from investments
(Increase) decrease in property & plant -31,536 -47,960
Acquisition (disposition) of subsidiaries or other business –702 –19
Increase (decrease) in marketable securities -18,825 380,737
Net cash provided by (used in) investing -51,063 332,758
Cash from financing
Issuances (purchases) of equity shares –370 -434,570
Issuances (repayment) of debt – –
Increase (decrease) in bank, or other borrowings -25,000 25,000
Dividends, other distributions -29,377 -37,202
Net cash provided by (used in) financing -54,747 -446,772
Net change cash & cash equivalents 674 –134
Cash and cash equivalents at start of year 3,255 3,389
Cash and cash equivalents at year-end 3,929 3,255
Interest Revenue 50 35
Interest Paid 394 1400
Using the above information calculate the amount of free cash flows for common equity shareholders
for Garland Products for year 2012 and 2011.
ANS:
Cash flow from Operations 106,484.00 113,880.00
3. Shady Sunglasses operates retail sunglass kiosks in shopping malls. Below is information related to the
company:
(dollar amounts in thousands) 2012 2013 2014 2015 2016 2017
Net Cash Flow from Operations 564 628 854 1059 1345 1655
Interest Expense after tax 122 134 148 145 155 148
Decrease (Increase) in Cash Required for Operations –75 –54 –48 –32 –61 –48
Net Cash Flow from Investing –287 –300 –310 –285 –294 –277
Net Cash from Debt Financing 210 204 140 85 –40 –46
Present Value Factors (Re = 8.5%) 0.922 0.849 0.783 0.722 0.665
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Common Shares Outstanding
in thousands 1,512
Using the above information and assuming that steady-state growth in year 2017 and beyond will be
4% calculate Shady Sunglasses’ current value per share.
ANS:
4. Shady Sunglasses operates retail sunglass kiosks in shopping malls. Below is information related to the
company:
(dollar amounts in thousands) 2012 2013 2014 2015 2016 2017
Net Cash Flow from Operations 564 628 854 1059 1345 1655
Interest Expense after tax 122 134 148 145 155 148
Decrease (Increase) in Cash Required for Operations –75 –54 –48 –32 –61 –48
Net Cash Flow from Investing –287 –300 –310 –285 –294 –277
Net Cash from Debt Financing 210 204 140 85 –40 –46
Present Value Factors (WACC = 8.5%) 0.922 0.849 0.783 0.722 0.665
12-15
Using a five-year forecast horizon compute the sum of the present value of free cash flows accruing to
all debt and common equity holders for years 2012 to 2016.
ANS:
(dollar amounts in thousands) 2012 2013 2014 2015 2016 2017
5. The quarterly cash flows from operations for two computer companies are as follows:
(in Millions) 2012 2012 2012 2012 2013
Q 1 Q2 Q3 Q4 Q 1
Firm A $406.1 $204.2 $729.1 $440.2 $587.8
Firm B $136.7 $243.1 $708.2 ($87.90) ($161.4)
Required:
1) Explain why Firm B has more credit risk than Firm A.
2) Suppose that Firm B’s cash flow was $200 million higher each quarter. Explain why Firm B might
still be viewed as having higher credit risk than Firm A.
ANS:
2. Here are the revised operating cash flow amounts for each firm:
2012 2012 2012 2012 2013
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
6. Net income for the year for Tanglewood Inc. was $750,000, but the statement of cash flows reports
that cash provided by operating activities was $860,000. Tanglewood also reported capital
expenditures of $75,000 and paid dividends in the amount of $30,000. Compute Tanglewood’s free
cash flow.
7. Morgan Company reported the following items in 2013:
Net income $50,000
Dividends paid 6,000
Increase in accounts receivable 12,000
Increase in accounts payable 8,000
Purchase of equipment (capital expenditure) 9,000
Depreciation expense 3,500
Issue of notes payable 15,000
Required:
Calculate the following:
(1) net cash provided by operating activities,
(2) the net change in cash during 2013, and
(3) free cash flow.
ANS:
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© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Financing Activities
Issue notes payable 15,000
Dividends (6,000)
Net cash flow from financing activities 9,000
(2) Net change in cash ($49,500 – $9,000+ $9,000) $49,500
8. Clarmont Corporation engaged in the following cash transactions during 2012:
Sale of land and building 209,000
Purchase of treasury stock 35,000
Purchase of land 38,000
Payment of cash dividend 105,000
Purchase of equipment 54,000
Issuance of common stock 150,000
Retirement of bonds 97,500
Required:
What is Clarmont’s free cash flow, assuming that it reported net cash provided by operating activities
of $650,000?
ANS:
9. Below is a condensed version of the comparative balance sheets for Stiller Corporation for 2011 and
2012:
2012 2011
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Cash $157,000 $78,000
Accounts Receivable 180,000 185,000
Investments 52,000 74,000
Equipment 298,000 240,000
Less Accumulated depreciation
(106,000)
(89,000)
Current liabilities 134,000 151,000
Common Stock 160,000 160,000
Retained Earnings 287,000 177,000
Additional information:
Investments were sold at a loss (not extraordinary) of $7,000; no equipment was sold; cash dividends
paid were $50,000; and net income was $160,000.
Required:
(a) Prepare a statement of cash flows for 2012 for Stiller Corporation.
(b) Calculate the company’s free cash flow.
ANS:
(b)
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
10. A comparative balance sheet for Otto Inc. is presented below:
2012 2011
Assets
Cash $ 63,000 $ 22,000
Accounts receivable 82,000 66,000
Inventories 180,000 189,000
Land 71,000 110,000
Equipment 270,000 200,000
Accumulated depreciation – Equipment (69,000) (42,000)
Total $ 597,000 $ 545,000
Liabilities & Stockholders’ Equity
Accounts payable $34,000 $47,000
Bonds payable 150,000 200,000
Common stock ($1 par) 214,000 164,000
Retained earnings 199,000 134,000
Total $ 597,000 $ 545,000
1. Net income for 2012 was $105,000.
2. Cash dividends of $40,000 were declared and paid.
3. Bonds payable amounting to $50,000 were retired through issuance of common stock.
Required:
(a) Prepare a statement of cash flows for 2012 for Otto, Inc.
(b) Compute Otto’s current cash debt coverage ratio and cash debt coverage ratio.
(c) Determine Otto Inc.’s free cash flow and comment on its liquidity and financial flexibility.
ANS:
(a)
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(c)
11. Amherst, Inc. had the following balance sheet at December 31, 2012:
Amherst Inc.
Balance Sheet
December 31, 2012
Cash $ 20,000 Accounts payable $ 30,000
Accounts receivable 21,200 Bonds payable 41,000
Investments 32,000 Common stock 100,000
Plant assets (net) 81,000 Retained earnings 23,200
Land 40,000
$194,200 $194,200
During 2013 the following occurred.
1. Amherst liquidated its available for sale investment portfolio at a loss of $5,000.
2. A tract of land was purchased for $38,000.
3. An additional $30,000 in common stock was issued at par.
4. Dividends totaling $10,000 were declared and paid to stockholders.
5. Net income for 2013 was $35,000, including $12,000 in depreciation expense.
6. Land was purchased through the issuance of $30,000 of additional bonds.
7. At December 31, 2013, Cash was $70,200, Accounts Receivable was $42,000 and Accounts
Payable was $40,000.
Required:
(a) What were Amherst’s cash flows from operating activities for the year ended December 31, 2013?
(b) Compute Amherst’s free cash flow and current cash debt coverage for 2013.
(c) How does information in the balance sheet and statement of cash flows help the user or analyst of
the financial statements?
ANS:
(a)
(b) An analysis of Amherst’s free cash flow indicates it is negative as shown below:
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(c) This type of information is useful for assessing the amount, timing, and uncertainty of future
cash flows. For example, by showing the specific inflows and outflows from operating
12. Financial statements for Hawk Company are presented below:
Hawk Company
Balance Sheet
December 31, 2012
Assets Liabilities & Stockholders’ Equity
Cash $ 40,000 Accounts payable 20,000
Accounts receivable 35,000 Bonds payable 50,000
Buildings and equipment 150,000
Accumulated depreciation—
buildings and equipment (50,000) Common stock 65,000
Patents 20,000 Retained earnings 60,000
$195,000 $195,000
Hawk Company
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income $50,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accounts receivable $(16,000)
Increase in accounts payable 8,000
Depreciation—buildings and equipment 15,000
Gain on sale of equipment (6,000)
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Amortization of patents 2,000 3,000
Net cash provided by operating activities 53,000
Cash flows from investing activities
Sale of equipment 12,000
Purchase of land (25,000)
Purchase of buildings and equipment (48,000)
Net cash used by investing activities (61,000)
Cash flows from financing activities
Payment of cash dividend (15,000)
Sale of bonds 40,000
Net cash provided by financing activities 25,000
Net increase in cash 17,000
Cash, January 1, 2010 23,000
Cash, December 31, 2010 $40,000
At the beginning of 2010, Accounts Payable amounted to $12,000 and Bonds Payable was $10,000.
Required:
Calculate the company’s free cash flow.
ANS:
Free cash flow = Net cash provided by operating activities –
13. Suppose a firm faces the following costs of capital:
Proportion in Capital Structure
Pretax Cost
Tax
Effect
After-tax Cost
Weighted Average Cost of Capital
Pretax After Tax
Debt .33 .40 12% .35 4.2% 4.8 2.00%
Equity .67 .65 20% — 20% 13.00% 13.00%
1.00 17.20% 15%
Assume that this firm expects to generate $95 million of pretax-free cash flows.
Required:
(1) What would be the after-tax free cash flows one year from today?
(2) Assuming a one-year horizon, what is the appropriate valuation to be used by the analyst?
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These values are not equivalent because cash inflows from assets are taxed at 35 percent and