12-13
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
2017
Net Cash Flow from Operations
564
628
854
1059
1655
Interest Expense after tax
122
134
148
145
148
Decrease (Increase) in Cash
Required for Operations
-75
-54
-48
-32
-48
Net Cash Flow from Investing
-287
-300
-310
-285
-277
Net Cash from Debt Financing
210
204
140
85
-46
Present Value Factors (Re = 8.5%)
0.922
0.849
0.783
0.722
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.
(dollar amounts in thousands)
Net Cash Flow from Operations
Interest Expense after tax
Net Cash from Debt Financing
Present Value Factors for 8.5%
Continuing Value:
Free Cash Flow (year 2017)
1,284
X 1 / (1.085)^5
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
2017
Net Cash Flow from Operations
564
628
854
1059
1655
Interest Expense after tax
122
134
148
145
148
Decrease (Increase) in Cash
Required for Operations
-75
-54
-48
-32
-48
Net Cash Flow from Investing
-287
-300
-310
-285
-277
Net Cash from Debt Financing
210
204
140
85
-46
Present Value Factors (WACC =
8.5%)
0.922
0.849
0.783
0.722
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.
(dollar amounts in thousands)
2012
2013
2014
2015
2016
2017
Net Cash Flow from Operations
564
628
854
1059
1655
Interest Expense after tax
122
134
148
155
148
Net Cash Flow from Investing
-287
-300
-310
-294
Present Value Factors for 8.5%
0.849
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.
Firm A
Firm B (revised
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.
12-16
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.
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?
9. Below is a condensed version of the comparative balance sheets for Stiller Corporation for 2011 and
2012:
2012
2011
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.
12-18
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
Additional information:
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.
12-20
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?
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)
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.
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?
Pretax:
$95 million x 1/1.7200 =
$55.23 million
After-tax:
$61.75 million x 1/1.15 =
$53.696 million