Free cash flow of Company Q in the year 2019.

Question

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Answer 1

Question

Chapter 3, Problem 24QP

a)

Summary Introduction

To discuss: Free cash flow of Company Q in the year 2019.

a)

Expert Solution

Explanation of Solution

Generally free cash flow involves three elements they are as follows,

Interest paid to the debt holders of the company.
Cash available to the shareholders of the company.
Finally, subtract cash necessary to pay for new investments.

Net working capital = Net current assets−Net current liabilities=(Accounts payables in 2018- Accounts payables in 2019)−(Receivables in 2019−Receivables in 2018)−(Inventories in 2019−inventories in 2018)−(Other current assets in 2019−Other current assets in 2018)=($3,403−$3,143)−($1,375−$1,335)−($122−$117)−($1,089−$616)=−$258

Hence, net working capital is -$258.

Cash flow from operations = Net income+Interest+Depreciation−Additions to net working capital=$5,465+$517+$1,402−$258=$7,126

Here, capital expenditure is $3,049. Therefore,

Free cash flow= Cash flow from operations−Capital expenditure=$7,126−$3,049=$4,077

Hence, free cash flow is $4,077.

b)

Summary Introduction

To determine: Tax to be paid by Company Q if it is entirely financed by equity.

b)

Expert Solution

Explanation of Solution

From the income statement it is observed that, interest expense amounting to $517 has paid to debt fund holders. If company has entirely financed by equity there is no need of payment of interest. So that amount is also treated as income. On that income, Company has to pay 21% corporate tax to the government.

Tax= $517×0.21=$108.57

Therefore the amount of $108.57 has been additionally paid by company to government.

c)

Summary Introduction

To determine: Company’s free cash flow if the type of funding is through equity only.

c)

Expert Solution

Explanation of Solution

Free cash flow is calculated by deducting capital expenditures from the cash flow from operations.

Net working capital = Net current assets−Net current liabilities=($3,403−$3,143)−($1,375−$1,335)−($122−$117)−($1,089−$616)=−$258

Cash flow from operations = Net income+Interest+Depreciation−Additions to net working capital=$5,465+0+$1,402−$258=$6,945

The amount of net income is given in the question as $5,465.

Here, capital expenditure is $3,049. Therefore,

Free cash flow= Cash flow from operations−Capital expenditure=$6,945−$3,049=$3,896

$3,896 is the free cash flow of company if it was funded totally by equity.

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The Fortune Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 24 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Year 0 Year 1 Year 2 Year 3 Year 4 Investment $ 28,000 Sales revenue $ 14,500 $ 15,000 $ 15,500 $ 12,500 Operating costs 3,100 3,200 3,300 2,500 Depreciation 7,000 7,000 7,000 7,000 Net working capital spending 340 390 440 340 ?

Answer 2

Question

Chapter 3, Problem 24QP

a)

Summary Introduction

To discuss: Free cash flow of Company Q in the year 2019.

a)

Expert Solution

Explanation of Solution

Generally free cash flow involves three elements they are as follows,

Interest paid to the debt holders of the company.
Cash available to the shareholders of the company.
Finally, subtract cash necessary to pay for new investments.

Net working capital = Net current assets−Net current liabilities=(Accounts payables in 2018- Accounts payables in 2019)−(Receivables in 2019−Receivables in 2018)−(Inventories in 2019−inventories in 2018)−(Other current assets in 2019−Other current assets in 2018)=($3,403−$3,143)−($1,375−$1,335)−($122−$117)−($1,089−$616)=−$258

Hence, net working capital is -$258.

Cash flow from operations = Net income+Interest+Depreciation−Additions to net working capital=$5,465+$517+$1,402−$258=$7,126

Here, capital expenditure is $3,049. Therefore,

Free cash flow= Cash flow from operations−Capital expenditure=$7,126−$3,049=$4,077

Hence, free cash flow is $4,077.

b)

Summary Introduction

To determine: Tax to be paid by Company Q if it is entirely financed by equity.

b)

Expert Solution

Explanation of Solution

From the income statement it is observed that, interest expense amounting to $517 has paid to debt fund holders. If company has entirely financed by equity there is no need of payment of interest. So that amount is also treated as income. On that income, Company has to pay 21% corporate tax to the government.

Tax= $517×0.21=$108.57

Therefore the amount of $108.57 has been additionally paid by company to government.

c)

Summary Introduction

To determine: Company’s free cash flow if the type of funding is through equity only.

c)

Expert Solution

Explanation of Solution

Free cash flow is calculated by deducting capital expenditures from the cash flow from operations.

Net working capital = Net current assets−Net current liabilities=($3,403−$3,143)−($1,375−$1,335)−($122−$117)−($1,089−$616)=−$258

Cash flow from operations = Net income+Interest+Depreciation−Additions to net working capital=$5,465+0+$1,402−$258=$6,945

The amount of net income is given in the question as $5,465.

Here, capital expenditure is $3,049. Therefore,

Free cash flow= Cash flow from operations−Capital expenditure=$6,945−$3,049=$3,896

$3,896 is the free cash flow of company if it was funded totally by equity.

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Answer 3

Question

Chapter 3, Problem 24QP

a)

Summary Introduction

To discuss: Free cash flow of Company Q in the year 2019.

a)

Expert Solution

Explanation of Solution

Generally free cash flow involves three elements they are as follows,

Interest paid to the debt holders of the company.
Cash available to the shareholders of the company.
Finally, subtract cash necessary to pay for new investments.

Net working capital = Net current assets−Net current liabilities=(Accounts payables in 2018- Accounts payables in 2019)−(Receivables in 2019−Receivables in 2018)−(Inventories in 2019−inventories in 2018)−(Other current assets in 2019−Other current assets in 2018)=($3,403−$3,143)−($1,375−$1,335)−($122−$117)−($1,089−$616)=−$258

Hence, net working capital is -$258.

Cash flow from operations = Net income+Interest+Depreciation−Additions to net working capital=$5,465+$517+$1,402−$258=$7,126

Here, capital expenditure is $3,049. Therefore,

Free cash flow= Cash flow from operations−Capital expenditure=$7,126−$3,049=$4,077

Hence, free cash flow is $4,077.

b)

Summary Introduction

To determine: Tax to be paid by Company Q if it is entirely financed by equity.

b)

Expert Solution

Explanation of Solution

From the income statement it is observed that, interest expense amounting to $517 has paid to debt fund holders. If company has entirely financed by equity there is no need of payment of interest. So that amount is also treated as income. On that income, Company has to pay 21% corporate tax to the government.

Tax= $517×0.21=$108.57

Therefore the amount of $108.57 has been additionally paid by company to government.

c)

Summary Introduction

To determine: Company’s free cash flow if the type of funding is through equity only.

c)

Expert Solution

Explanation of Solution

Free cash flow is calculated by deducting capital expenditures from the cash flow from operations.

Net working capital = Net current assets−Net current liabilities=($3,403−$3,143)−($1,375−$1,335)−($122−$117)−($1,089−$616)=−$258

Cash flow from operations = Net income+Interest+Depreciation−Additions to net working capital=$5,465+0+$1,402−$258=$6,945

The amount of net income is given in the question as $5,465.

Here, capital expenditure is $3,049. Therefore,

Free cash flow= Cash flow from operations−Capital expenditure=$6,945−$3,049=$3,896

$3,896 is the free cash flow of company if it was funded totally by equity.

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Answer 4

Question

Chapter 3, Problem 24QP

a)

Summary Introduction

To discuss: Free cash flow of Company Q in the year 2019.

a)

Expert Solution

Explanation of Solution

Generally free cash flow involves three elements they are as follows,

Interest paid to the debt holders of the company.
Cash available to the shareholders of the company.
Finally, subtract cash necessary to pay for new investments.

Net working capital = Net current assets−Net current liabilities=(Accounts payables in 2018- Accounts payables in 2019)−(Receivables in 2019−Receivables in 2018)−(Inventories in 2019−inventories in 2018)−(Other current assets in 2019−Other current assets in 2018)=($3,403−$3,143)−($1,375−$1,335)−($122−$117)−($1,089−$616)=−$258

Hence, net working capital is -$258.

Cash flow from operations = Net income+Interest+Depreciation−Additions to net working capital=$5,465+$517+$1,402−$258=$7,126

Here, capital expenditure is $3,049. Therefore,

Free cash flow= Cash flow from operations−Capital expenditure=$7,126−$3,049=$4,077

Hence, free cash flow is $4,077.

b)

Summary Introduction

To determine: Tax to be paid by Company Q if it is entirely financed by equity.

b)

Expert Solution

Explanation of Solution

From the income statement it is observed that, interest expense amounting to $517 has paid to debt fund holders. If company has entirely financed by equity there is no need of payment of interest. So that amount is also treated as income. On that income, Company has to pay 21% corporate tax to the government.

Tax= $517×0.21=$108.57

Therefore the amount of $108.57 has been additionally paid by company to government.

c)

Summary Introduction

To determine: Company’s free cash flow if the type of funding is through equity only.

c)

Expert Solution

Explanation of Solution

Free cash flow is calculated by deducting capital expenditures from the cash flow from operations.

Net working capital = Net current assets−Net current liabilities=($3,403−$3,143)−($1,375−$1,335)−($122−$117)−($1,089−$616)=−$258

Cash flow from operations = Net income+Interest+Depreciation−Additions to net working capital=$5,465+0+$1,402−$258=$6,945

The amount of net income is given in the question as $5,465.

Here, capital expenditure is $3,049. Therefore,

Free cash flow= Cash flow from operations−Capital expenditure=$6,945−$3,049=$3,896

$3,896 is the free cash flow of company if it was funded totally by equity.

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Answer 5

Chapter 3, Problem 24QP

a)

Summary Introduction

To discuss: Free cash flow of Company Q in the year 2019.

a)

Expert Solution

Explanation of Solution

Generally free cash flow involves three elements they are as follows,

Interest paid to the debt holders of the company.
Cash available to the shareholders of the company.
Finally, subtract cash necessary to pay for new investments.

Net working capital = Net current assets−Net current liabilities=(Accounts payables in 2018- Accounts payables in 2019)−(Receivables in 2019−Receivables in 2018)−(Inventories in 2019−inventories in 2018)−(Other current assets in 2019−Other current assets in 2018)=($3,403−$3,143)−($1,375−$1,335)−($122−$117)−($1,089−$616)=−$258

Hence, net working capital is -$258.

Cash flow from operations = Net income+Interest+Depreciation−Additions to net working capital=$5,465+$517+$1,402−$258=$7,126

Here, capital expenditure is $3,049. Therefore,

Free cash flow= Cash flow from operations−Capital expenditure=$7,126−$3,049=$4,077

Hence, free cash flow is $4,077.

b)

Summary Introduction

To determine: Tax to be paid by Company Q if it is entirely financed by equity.

b)

Expert Solution

Explanation of Solution

From the income statement it is observed that, interest expense amounting to $517 has paid to debt fund holders. If company has entirely financed by equity there is no need of payment of interest. So that amount is also treated as income. On that income, Company has to pay 21% corporate tax to the government.

Tax= $517×0.21=$108.57

Therefore the amount of $108.57 has been additionally paid by company to government.

c)

Summary Introduction

To determine: Company’s free cash flow if the type of funding is through equity only.

c)

Expert Solution

Explanation of Solution

Free cash flow is calculated by deducting capital expenditures from the cash flow from operations.

Net working capital = Net current assets−Net current liabilities=($3,403−$3,143)−($1,375−$1,335)−($122−$117)−($1,089−$616)=−$258

Cash flow from operations = Net income+Interest+Depreciation−Additions to net working capital=$5,465+0+$1,402−$258=$6,945

The amount of net income is given in the question as $5,465.

Here, capital expenditure is $3,049. Therefore,

Free cash flow= Cash flow from operations−Capital expenditure=$6,945−$3,049=$3,896

$3,896 is the free cash flow of company if it was funded totally by equity.

Answer 6

Chapter 3, Problem 24QP

a)

Summary Introduction

To discuss: Free cash flow of Company Q in the year 2019.

a)

Expert Solution

Explanation of Solution

Generally free cash flow involves three elements they are as follows,

Interest paid to the debt holders of the company.
Cash available to the shareholders of the company.
Finally, subtract cash necessary to pay for new investments.

Net working capital = Net current assets−Net current liabilities=(Accounts payables in 2018- Accounts payables in 2019)−(Receivables in 2019−Receivables in 2018)−(Inventories in 2019−inventories in 2018)−(Other current assets in 2019−Other current assets in 2018)=($3,403−$3,143)−($1,375−$1,335)−($122−$117)−($1,089−$616)=−$258

Hence, net working capital is -$258.

Cash flow from operations = Net income+Interest+Depreciation−Additions to net working capital=$5,465+$517+$1,402−$258=$7,126

Here, capital expenditure is $3,049. Therefore,

Free cash flow= Cash flow from operations−Capital expenditure=$7,126−$3,049=$4,077

Hence, free cash flow is $4,077.

Answer 7

Chapter 3, Problem 24QP

a)

Summary Introduction

To discuss: Free cash flow of Company Q in the year 2019.

Answer 8

a)

Expert Solution

Explanation of Solution

Generally free cash flow involves three elements they are as follows,

Interest paid to the debt holders of the company.
Cash available to the shareholders of the company.
Finally, subtract cash necessary to pay for new investments.

Net working capital = Net current assets−Net current liabilities=(Accounts payables in 2018- Accounts payables in 2019)−(Receivables in 2019−Receivables in 2018)−(Inventories in 2019−inventories in 2018)−(Other current assets in 2019−Other current assets in 2018)=($3,403−$3,143)−($1,375−$1,335)−($122−$117)−($1,089−$616)=−$258

Hence, net working capital is -$258.

Cash flow from operations = Net income+Interest+Depreciation−Additions to net working capital=$5,465+$517+$1,402−$258=$7,126

Here, capital expenditure is $3,049. Therefore,

Free cash flow= Cash flow from operations−Capital expenditure=$7,126−$3,049=$4,077

Hence, free cash flow is $4,077.

Answer 9

a)

Expert Solution

Answer 10

a)

Expert Solution

Answer 11

Expert Solution

Answer 12

b)

Summary Introduction

To determine: Tax to be paid by Company Q if it is entirely financed by equity.

b)

Expert Solution

Explanation of Solution

From the income statement it is observed that, interest expense amounting to $517 has paid to debt fund holders. If company has entirely financed by equity there is no need of payment of interest. So that amount is also treated as income. On that income, Company has to pay 21% corporate tax to the government.

Tax= $517×0.21=$108.57

Therefore the amount of $108.57 has been additionally paid by company to government.

Answer 13

b)

Summary Introduction

To determine: Tax to be paid by Company Q if it is entirely financed by equity.

Answer 14

b)

Expert Solution

Explanation of Solution

From the income statement it is observed that, interest expense amounting to $517 has paid to debt fund holders. If company has entirely financed by equity there is no need of payment of interest. So that amount is also treated as income. On that income, Company has to pay 21% corporate tax to the government.

Tax= $517×0.21=$108.57

Therefore the amount of $108.57 has been additionally paid by company to government.

Answer 15

b)

Expert Solution

Answer 16

b)

Expert Solution

Answer 17

Expert Solution

Answer 18

c)

Summary Introduction

To determine: Company’s free cash flow if the type of funding is through equity only.

c)

Expert Solution

Explanation of Solution

Free cash flow is calculated by deducting capital expenditures from the cash flow from operations.

Net working capital = Net current assets−Net current liabilities=($3,403−$3,143)−($1,375−$1,335)−($122−$117)−($1,089−$616)=−$258

Cash flow from operations = Net income+Interest+Depreciation−Additions to net working capital=$5,465+0+$1,402−$258=$6,945

The amount of net income is given in the question as $5,465.

Here, capital expenditure is $3,049. Therefore,

Free cash flow= Cash flow from operations−Capital expenditure=$6,945−$3,049=$3,896

$3,896 is the free cash flow of company if it was funded totally by equity.

Answer 19

c)

Summary Introduction

To determine: Company’s free cash flow if the type of funding is through equity only.

Answer 20

c)

Expert Solution

Explanation of Solution

Free cash flow is calculated by deducting capital expenditures from the cash flow from operations.

Net working capital = Net current assets−Net current liabilities=($3,403−$3,143)−($1,375−$1,335)−($122−$117)−($1,089−$616)=−$258

Cash flow from operations = Net income+Interest+Depreciation−Additions to net working capital=$5,465+0+$1,402−$258=$6,945

The amount of net income is given in the question as $5,465.

Here, capital expenditure is $3,049. Therefore,

Free cash flow= Cash flow from operations−Capital expenditure=$6,945−$3,049=$3,896

$3,896 is the free cash flow of company if it was funded totally by equity.

Answer 21

c)

Expert Solution

Answer 22

c)

Expert Solution

Answer 23

Expert Solution

Answer 24

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Free cash flow of Company Q in the year 2019.

To discuss: Free cash flow of Company Q in the year 2019.

Explanation of Solution

To determine: Tax to be paid by Company Q if it is entirely financed by equity.

Explanation of Solution

To determine: Company’s free cash flow if the type of funding is through equity only.

Explanation of Solution

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