The firm started Year 2 with a cash balance of $97 million, and raised 27% of it
ID: 2772445 • Letter: T
Question
The firm started Year 2 with a cash balance of $97 million, and raised 27% of its external financing needs from debt. The non-cash working capital in Year 1 was $266 million. Each year the company pays out 20% of its net income as dividends. Assuming that the firm did not buy back any stock over the period, estimate how much cash the firm would have at the end of Year 2. Assume that cash balances earn no interest and that the firm will continue to raise 27% of its external financing needs from debt
the answer is 138 but how?
Year 2 Net Income $141 Capital Expenditures $194 Depreciation $135 Non-Cash Working Capital $306Explanation / Answer
Here we need to calculate Free Cash Flows
Net Income + Depreciation - increase in non cash working capital - Capital Expenditure
= 141 + 135 - 40 - 194
Free Cash flows = 42
Cash Balance at the beginning of the Year = 97
Cash Balance at the End of the Year = 97 + 42 = 139
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