The following Income Statement and Balance Sheet is for Graduation Company: $K 2
ID: 2797495 • Letter: T
Question
The following Income Statement and Balance Sheet is for Graduation Company: $K 2017 2016 Sales 80 20 Operating Costs 40 8 Depreciation 4 2 EBIT 36 10 Less Interest 0.5 0.5 Earnings before Taxes 35.5 9.5 Taxes @ 40% 14.2 3.8 Net Income 21.3 5.7 Balance Sheet Assets 2017 2016 Liabilities 2017 2016 Cash 20 8 Accounts Payable 15 6 ST Investments 10 4 Accruals 9 3 Accounts Receivable 12 3 Notes Payable 5 2 Inventory 8 2 Total Current Liabilities 29 11 Total Current Assets 50 17 LT Debt 10 5 Net Plant & Equipment 11 8 Total Liabilities 39 16 Total Assets 61 25 Common Equity 10 6 Retained Earnings 12 3 Total Equity 22 9 Total Liabilities & Equity 61 25 Question : Assume that dividends were projected to be $9.3M in 2017. Would there be any issues from a free cash flow perspective? The following Income Statement and Balance Sheet is for Graduation Company: $K 2017 2016 Sales 80 20 Operating Costs 40 8 Depreciation 4 2 EBIT 36 10 Less Interest 0.5 0.5 Earnings before Taxes 35.5 9.5 Taxes @ 40% 14.2 3.8 Net Income 21.3 5.7 Balance Sheet Assets 2017 2016 Liabilities 2017 2016 Cash 20 8 Accounts Payable 15 6 ST Investments 10 4 Accruals 9 3 Accounts Receivable 12 3 Notes Payable 5 2 Inventory 8 2 Total Current Liabilities 29 11 Total Current Assets 50 17 LT Debt 10 5 Net Plant & Equipment 11 8 Total Liabilities 39 16 Total Assets 61 25 Common Equity 10 6 Retained Earnings 12 3 Total Equity 22 9 Total Liabilities & Equity 61 25 Question : Assume that dividends were projected to be $9.3M in 2017. Would there be any issues from a free cash flow perspective?Explanation / Answer
Calculation of free cash flow to equity share holders:
Free CashFlow to Equity holders = Net Income + Depreciation - Capital Expenditur - Change in Working Capital + Borrowing
Net Income: 21.3
Depreciation: 4
Capital Expenditure = 11-8 =3
Increase in Working Capital = (50-29)-(17-11) = 15
Increase in Borrowings = 10-5 = 5
Therefore, FCFE = 21.3 + 4- 3 - 15 + 5 = $ 12.3M.
Company can pay dividends of $ 9.3 M since Free Cash Flow available to Equity Shareholders is $12.3M