You have been provided with three years of historical data for Providence Instru
ID: 2639229 • Letter: Y
Question
You have been provided with three years of historical data for Providence Instruments, a firm that has paid dividends.
Year 2
Net Income
$141
Capital Expenditures
$194
Depreciation
$135
Non-Cash Working Capital
$306
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.
Year 2
Net Income
$141
Capital Expenditures
$194
Depreciation
$135
Non-Cash Working Capital
$306
Explanation / Answer
Some underlying principles listed below for your understanding:
A positive change in working capital figure (current assets are greater than current liabilities) means a cash inflow for the period measured
Depreciation reduces net income on the income statement, but it does not reduce the Cash account on the balance sheet. Hence not appearing in this statement.
raising 27% of its external financing needs from debts will have no impact on the cashflow since, it shows only the amount of flow of cash and not the debt source. It is already covered under capital.
Account Title Amount in Million $ Cash reserve at the start of year 2 97 Cash inflow from change in working capital 40 Cash inflow from Net income 141 Cash Outflow from Divident payout -28.2 Cash Outflow from Capital Expenditures -194 Net Cash Reserve at end of year 2 55.8Related Questions
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