Question 3 In 2012, net cash provided by operations for ABC Company was $106,484
ID: 2812127 • Letter: Q
Question
Question 3
In 2012, net cash provided by operations for ABC Company
was $106,484. The company spent $702 on property and plant. It also acquired another company costing $31,536.
Additionally, the company paid its debt of $25,000, and dividend of $29,377.
The company made an interest revenue of $50 and paid an interest of
$394. The tax rate is 35%.
(a Calculate the amount of free cash flows for
all debt and
equity shareholders for ABC
Company for year 2012
.
(b) Calculate the amount of free cash flows for common
equity shareholders for ABC Company
for year 2012.
Explanation / Answer
Answer (a):
Free cash flows for all debt and equity shareholders = Free cash flows for Firm(FCFF) = Net operating cash flow + (Interest Expense - Interest revenue) * (1-Tax) - Net Capital Expenditure (long term investments)
=$106,484 + ($394 - $50) * (1 - 35%) - ($702 + $31,536)
= $74,496.60 = $74,497 (rounded off)
Answer (b):
Free cash flows for common equity shareholders (FCFE) = FCFF - Interest * (1- Tax rate) - Repayment of borrowing
= $74,496.60 - ($394 - $50) * (1 - 35%) - $25,000 = $49,273
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