Problem 3-10. Free cash flow Financial information for Powell Panther Corporatio
ID: 2671793 • Letter: P
Question
Problem 3-10. Free cash flowFinancial information for Powell Panther Corporation is shown below:
Powell Panther Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)
? 2008 2007
Sales $3,640.0 $2,800.0
Operating costs excluding depreciation and amortization 2,821.0 2,380.0
EBITDA $819.0 $420.0
Depreciation and amortization 94.0 78.0
Earnings before interest and taxes $725.0 $342.0
Less: Interest 80.0 62.0
Earnings before taxes $645.0 $280.0
Taxes (40%) 258.0 112.0
Net income $387.0
$168.0
Common dividends $348.0
$134.0
Powell Panther Corporation: Balance Sheets as of December 31 (Millions of Dollars)
? 2008 2007
Assets
Cash and equivalents $45.0 $36.0
Accounts receivable 370.0 336.0
Inventories 764.0 588.0
Total current assets $1,179.0 $960.0
Net plant and equipment 941.0 784.0
Total assets $2,120.0
$1,744.0
Liabilities and Equity
Accounts payable $290.0 $252.0
Notes payable 73.0 56.0
Accruals 146.0 112.0
Total current liabilities $509.0 $420.0
Long-term bonds 728.0 560.0
Total debt $1,237.0 $980.0
Common stock 793.0 713.0
Retained earnings 90.0 51.0
Common equity $883.0
$764.0
Total liabilities and equity $2,120.0
$1,744.0
a. What was net working capital for 2007 and 2008? (Enter your answers as whole numbers. For example, an answer of $1 million should be entered as 1,000,000.)
2007:
2008:
b. What was the 2008 free cash flow? (Enter your answers as whole numbers. For example, an answer of $1 million should be entered as 1,000,000.)
c. How would you explain the large increase in 2008 dividends?
-Select-The large increase in net income from 2007 to 2008 explains the large increase in 2008 dividends.The large increase in EBIT from 2007 to 2008 explains the large increase in 2008 dividends.The large increase in sales from 2007 to 2008 explains the large increase in 2008 dividends.The large increase in retained earnings from 2007 to 2008 explains the large increase in 2008 dividends.The large increase in free cash flow from 2007 to 2008 explains the large increase in 2008 dividends.Item 4
Explanation / Answer
a. Net Working Capital for 2007 = Current Assets - Current Liabilities Net Working Capital for 2007 = $360 - $201.5 = $158.5 million Net Working Capital for 2008 = Current Assets - Current Liabilities Net Working Capital for 2008 = $372 - $247 = $125 million b. Free Cash Flow = EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital Free Cash Flow = $150(1-0.4) + $30 - $33.5 = $86.5 million c. The 2008 Free Cash Flow was available for distribution to the investors, including shareholders and debt-holders. It looks like Powell Panther decided to use the free cash to pay dividends to shareholders rather than repay debt-holders, repurchase stock, or buy marketable securities.
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