At the end of fiscal year 2015, a firm reported the following in its balance she
ID: 2587254 • Letter: A
Question
At the end of fiscal year 2015, a firm reported the following in its balance sheet (in millions):
Net operating assets $500
Net financial obligations 300
You forecast that the firm will earn a 20% return on common equity (ROCE) in 2016 (on beginning-of-year equity), after $15 million in net financial expenses (net of taxes). You also forecast that net operating assets will grow 6%. The board of directors has decided that the firm will pay $20 million in dividends in 2016, but there will be no share issues or repurchases.
Forecast for:
a. Return on net operating assets (RNOA) for 2016 (on beginning-of-year net operating assets).
b. Free cash flow for 2016
c. Net financial obligations at the end of 2016.
d. Calculate the financial leverage ratio (FLEV) at the end of 2015 and 2016.
Explanation / Answer
End of 2015
Net Operating Assets
$ 500
Net financial obligations
$ 300
a. Return on Net Operating Assets for 2016
Forecast for growth of Net Operating Assets
6%
Net Operating Assets
$ 530
(500 * 106%)
Expected ROCE
20%
Return on Net Operating Assets
$ 106
(530 * 20%)
b. Free Cash Flows
Return on Net Operating Assets
$ 106
Less: Payment of Financial Obligations
$ 20
Free Cash Flows
$ 86
(106 - 20)
c. Net Financial Obligations at the end of 2016
Net Financial Obligations at the beginning of 2016
$ 300
Less: Payment of Financial Obligations
$ 20
Net Financial Obligations at the end of 2016
$ 280
(300 - 20)
d. Financial Leverage Ratio
= Total Debt / Total Equity
2015
2016
Net Financial Obligations
$ 300
$ 280
Net Operating Assets
$ 500
$ 530
Total Equity
$ 200
$ 250
Financial Leverage Ratio
1.5
1.12
End of 2015
Net Operating Assets
$ 500
Net financial obligations
$ 300
a. Return on Net Operating Assets for 2016
Forecast for growth of Net Operating Assets
6%
Net Operating Assets
$ 530
(500 * 106%)
Expected ROCE
20%
Return on Net Operating Assets
$ 106
(530 * 20%)
b. Free Cash Flows
Return on Net Operating Assets
$ 106
Less: Payment of Financial Obligations
$ 20
Free Cash Flows
$ 86
(106 - 20)
c. Net Financial Obligations at the end of 2016
Net Financial Obligations at the beginning of 2016
$ 300
Less: Payment of Financial Obligations
$ 20
Net Financial Obligations at the end of 2016
$ 280
(300 - 20)
d. Financial Leverage Ratio
= Total Debt / Total Equity
2015
2016
Net Financial Obligations
$ 300
$ 280
Net Operating Assets
$ 500
$ 530
Total Equity
$ 200
$ 250
Financial Leverage Ratio
1.5
1.12
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