uestion 3 (10 points QualTel, Inc. currently has 200 million common stock shares

Question

uestion 3 (10 points QualTel, Inc. currently has 200 million common stock shares outstanding and paid $0.40 per share last year (Year 0) in cash dividends. Over the next 6+ years, the firm expects the following earnings, depreciation, and capital investments. Calculate the expected surpluses/share (surpluses are also called discretionary cash flows) over the next 6 years by completing the table below. 4 Year Earnings (SM) (NI Depreciation (D) Investment (I) AWC 200325300275225 15 100 335 45 60 30 100 10 35 25 10 70 160 0 Debt Surplus (SM) Surplus/Share

Explanation / Answer

Discretionary cash flow (Surpluses) is any money left over once all possible capital projects with positive net present values have been financed, and all mandatory payments have been paid including Working Capital Requirement and Debt repayments.

In the above example, we assumplle that all the investments are non-discretionary (meaning, it is compulsory to make those investments to retain the Net Income)

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Year 1 2 3 4 5 6+ Earnings ($M) (NI) 200 325 300 275 225 335 (+) Depreciation 10 35 30 25 15 45 (-) Investment 10 70 100 160 100 60 (-) WC 0 0 0 0 0 0 (+) Debt 0 0 0 0 0 0 Suplus ($M) 200 290 230 140 140 320 No of Shares outstanding (M) 200 200 200 200 200 200 Suplus / Share 1.00 1.45 1.15 0.70 0.70 1.60

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