TEST NUMBER 2
Question 1 (10 points)
Below is an excerpt from the cash flow statement of a firm for fiscal year 2003:
Cash flows from operating activities:
Net income
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization
Amortization of software
Tax benefits of employee
stock plans
Special charges
(Gains)/losses on investments
Change in operating assets and liabilities:
Receivables
Inventories
Pension assets
Other assets
Accounts payable
Pension liabilities
Other liabilities
Net cash provided by
operating activities
Cash flows from investing activities:
Payments for plant and other
property
Proceeds from disposition of plant
and other property
Investment in software
Purchases of marketable securities
and other investments
Proceeds from disposition of
marketable securities and
other investments
Net cash used in investing
activities
Fiscal Year Ended
December 31, 2003
$1,500
250
400
450
200
20
600
250
(475)
70
(50)
85
__200
_3,500
(2,000)
800
(500)
(1,500)
1,200
_____
(2,000)
__
Additional information:
Cash interest receipts
Cash interest payments
From the reformulated equity statement:
Shareholders’ equity December 31, 2002
110
(200)
5,500
Shareholders’ equity December 31, 2003
Net payout to shareholders
The firm’s tax rate is 35%.
4,760
2,500
Required:
e. Calculate free cash flow for 2003.
f. Calculate net payments to debt holders and issuers for 2003.
g. Calculate comprehensive income for 2003.
Question 2 (30 points).
Part A
The following is a condensed version of the statement of shareholders’ equity for Dell
Computer Corporation for fiscal year ending January 31, 2003 (in millions of dollars):
Balance at February 1, 2002
Net income
Unrealized gain on debt investments
Unrealized loss on derivative instruments
Foreign currency translation gain
Comprehensive income
Shares issued on exercise of options,
including tax benefits of $260
Repurchase of 50 millions shares
Balance of January 31, 2003
4,694
2,122
26
(101)
____4
2,051
418
(2,290)
_______
___4,873
Other information:
3. Dell’s tax rate is 35%
4. The repurchase occurred when the stock traded at $28 per share.
Required:
Prepare a reformulated statement of shareholders’ equity for 2003 for Dell Computer
Corporation. The reformulated statement should identify comprehensive income.
(Page for answer)
Part B See Box 11.5 on page 356 of text.
The following is extracted from Dell’s balance sheet at January 31, 2003 (in millions of dollars):
Net financial assets
Common equity (2,579 million shares outstanding)
9,167
4,873
Analysts are forecasting consensus earnings per share of $1.01 for the year ending January 31,
2004.
h. Calculate net operating assets at January 31, 2003.
i. Net financial assets are expected to earn an after-tax return of 4% in 2004. What is the
forecast of operating income implicit in the analysts’ eps forecast?
j. Forecast the residual operating income for 2004 that is implicit in the analysts’ forecast.
Use a required annual return for operations of 9%.
k. Dell’s shares are currently trading at $34 each. With the above information, value the
shares under the following set of scenarios using residual income methods:
(iv) Sales will grow at 5% per year after 2004.
(v) Operating assets and operating liabilities with both grow at 5% per year after 2003.
(vi) Operating profit margins (after tax) will be the same as these forecasted for 2004.
l. Under the same scenarios, forecast free cash flow for 2004.
m. Under the same scenarios, forecast abnormal growth in operating income for 2005.
n. Show that, with a long term growth rate of 5%, the following formula will give the same
value as that in part (d) of the question:
AssetsFinancial Net
g
gG
xOIVE
09.109.0
12
10 +
−
−
=
where G2 is the (one plus) cum-dividend growth rate in operating income two years ahead
and g is (one plus) the long-term growth rate.