2) You have been asked to estimate the free cash flow for last year for Holton H
ID: 2427460 • Letter: 2
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2) You have been asked to estimate the free cash flow for last year for Holton Holdings and have collected the following information. • The firm reported earnings before interest, taxes, depreciation and amortization of $ 350 million on its revenues of $ 1600 million. • Depreciation and amortization charges amounted to $ 100 million and capital expenditures were $ 200 million. • Holton spent $ 100 million last year on research and development in its software division, following R&D expenditures of $ 60 million (3 years ago), $ 75 million (2 years ago) and $ 90 million (1 year ago) in the prior three years. You believe that research expenditures have an amortizable life of 3 years. • The working capital items for the last year and the previous year are reported below. Last Year Year before last Cash 100 million 80 million Accounts Receivable 80 million 90 million Inventory 150 million 100 million Accounts Payable 130 million 110 million Short term Debt 150 million 130 million • The tax rate for the firm is 40%. a. Estimate the value of the research asset of the firm. b. Estimate the operating income adjusted for R&D expenditures. c. Estimate the free cash flows to the firm last year. 2) You have been asked to estimate the free cash flow for last year for Holton Holdings and have collected the following information. • The firm reported earnings before interest, taxes, depreciation and amortization of $ 350 million on its revenues of $ 1600 million. • Depreciation and amortization charges amounted to $ 100 million and capital expenditures were $ 200 million. • Holton spent $ 100 million last year on research and development in its software division, following R&D expenditures of $ 60 million (3 years ago), $ 75 million (2 years ago) and $ 90 million (1 year ago) in the prior three years. You believe that research expenditures have an amortizable life of 3 years. • The working capital items for the last year and the previous year are reported below. Last Year Year before last Cash 100 million 80 million Accounts Receivable 80 million 90 million Inventory 150 million 100 million Accounts Payable 130 million 110 million Short term Debt 150 million 130 million • The tax rate for the firm is 40%. a. Estimate the value of the research asset of the firm. b. Estimate the operating income adjusted for R&D expenditures. c. Estimate the free cash flows to the firm last year.Explanation / Answer
Holton Holdings Statement of Free Cashflow Free Cashflow in Million EBITD $ 350 Less: Tax $ 100 Earnings after Tax $ 250 Changes in working Capital Decrease in accounts receivable $ 10 Increase in Inventory $ -50 Increase in accounts payable $ 20 Increase in short term debt $ 20 $ - cashflow from operations $ 250 Less:Capital Expenditures $ 200 Free cashflows $ 50 W.N 1 Calculation of Tax amount Earnings before interest,tax and depreciation $ 350 Less : depreciation and amortization $ 100 Earnings before tax $ 250 Tax @ 40% $ 100 Estimate the value of Research asset of the firm in Million R & D expenses (last Year) $ 100 Less: Amortization for one year- $ 100/3 $ 33 Balance (A) $ 67 R & D expenses (1 year ago) $ 90 Less: Amortization for two years- $ 90/3 x 2 $ 60 Balance (B) $ 30 R & D expenses (2 year ago) $ 75 Less: Amortization for two years- $ 75/3 x 3 $ 75 Balance (C) $ - Research asset of the firm (A) + (B) + © $ 97 Operating Income adjusted for R& D expenditures In millions Net Cashflow from operations $ 250 Less: R & D expenditures adjusted for amortisations expenses during the year $ 100 Less: Amortisation $ 93 $ 7 Operating Income adjusted for R& D expenditures $ 243
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