Question

For the firm described below, what is the firm’s 2010 total cash flow and the firm’s 2010 cash flow to shareholders?

Consider the following information regarding ABC Corporation.

Sales ($ millions)

2009: 1000

2010:1112

Cost of Goods Sold ($ millions)

2009: 500

2010: 556

Other Expenses ($ millions)

2009: 100

2010: 111

Depreciation ($ millions)

2009: 100

2010: 100

Interest Expense ($ millions)

2009: 50

2010: 55

Total Current Assets ($ millions)

2009: 600

2010: 700

Net Fixed Assets ($ millions)

2009: 1800

2010: 2000

Total Current Liabilities ($ millions)

2009: 450

2010: 550

Long-term Liabilities ($ millions)

2009: 900

2010: 975

• The firm’s plowback ratio is 60%

• The firm’s tax rate is 40%

• The company has 30 million shares outstanding. The current stock price is $35.

• The company has two bond issues outstanding. The first issue is 100,000 bonds that have YTM of 5%, coupon rate of 7%, face value of $1000, and mature in 7 years. The second issue is 500,000 bonds with YTM of 8%, face value of $1500, and mature in 13 years. These bonds are currently selling for $1200.

• The expected return on the market is 11%. The risk-free rate is 4%.

• ABC’s beta is 2.15

Answer 1

Calculation of Firm's Cash flovw Amount ($ in million) 290 100 -100 100 -116 -200 75 69.6 79.4 Particulars Calculation Nature Profit before Tax Depreciation Expense Increase in Total Current Assets Increase in Total Current Liabilities Inflow Tax Expense Increase in Fixed Assets Increase in Long term liabilities Dividend Paid Cash Inflow for Year 2010 Inflow Non Cash Item Outflow 1112-556-111-100-55 Given (700-600) 550-450 Given Outflow Outflow Inflow Outflow Inflow 2000-1800 975-900 290-116) *40% Cash flow to shareholders will be the amount of dividend paid during the year which is Profit after tax multiplied by (100-Plowbach Ratio)% Amount ($ in million 290 116 174 104.4 69.60 Particulars Profir before Tax [see answer (1)] Tax Expense Profit after tax Retained Earning (174*60%) Dividend Distributed to Shareholders Hence, Cash flow to Shareholders will be $69.60 million during the year 2010