Problem 3-10. Free cash flow Financial information for Powell Panther Corporatio

Question

Problem 3-10. Free cash flow

Financial information for Powell Panther Corporation is shown below:

Powell Panther Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)

? 2008 2007
Sales $3,640.0 $2,800.0
Operating costs excluding depreciation and amortization 2,821.0 2,380.0
EBITDA $819.0 $420.0
Depreciation and amortization 94.0 78.0
Earnings before interest and taxes $725.0 $342.0
Less: Interest 80.0 62.0
Earnings before taxes $645.0 $280.0
Taxes (40%) 258.0 112.0
Net income $387.0

$168.0


Common dividends $348.0

$134.0



Powell Panther Corporation: Balance Sheets as of December 31 (Millions of Dollars)

? 2008 2007
Assets
Cash and equivalents $45.0 $36.0
Accounts receivable 370.0 336.0
Inventories 764.0 588.0
Total current assets $1,179.0 $960.0
Net plant and equipment 941.0 784.0
Total assets $2,120.0

$1,744.0


Liabilities and Equity
Accounts payable $290.0 $252.0
Notes payable 73.0 56.0
Accruals 146.0 112.0
Total current liabilities $509.0 $420.0
Long-term bonds 728.0 560.0
Total debt $1,237.0 $980.0
Common stock 793.0 713.0
Retained earnings 90.0 51.0
Common equity $883.0

$764.0


Total liabilities and equity $2,120.0

$1,744.0
What was the 2008 free cash flow?

Explanation / Answer

a. Net Working Capital for 2007 = Current Assets - Current Liabilities Net Working Capital for 2007 = $360 - $201.5 = $158.5 million Net Working Capital for 2008 = Current Assets - Current Liabilities Net Working Capital for 2008 = $372 - $247 = $125 million b. Free Cash Flow = EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital Free Cash Flow = $150(1-0.4) + $30 - $33.5 = $86.5 million c. The 2008 Free Cash Flow was available for distribution to the investors, including shareholders and debt-holders. It looks like Powell Panther decided to use the free cash to pay dividends to shareholders rather than repay debt-holders, repurchase stock, or buy marketable securities.

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