chap 4 - E4.4. Dividend Discounting and Discounted Cash...

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E4.4. Dividend Discounting and Discounted Cash Flow Analysis for a Savings Account The scenario in Box 2.2 is a “full payout” scenario. The financial statements from Box 2.2 are reproduced here. Accounting for a savings account: Earnings withdrawn (full payout) BALANCE SHEET INCOME STATEMENT Assets $100 Owners’ equity $100 Revenue $5 Expenses 0 Earnings $5 STATEMENT OF CASH FLOWS STATEMENT OF OWNERS’ EQUITY Cash from operations $5 Balance, beginning of year $100 Cash investment 0 Earnings for the year 5 Cash in financing activities: Dividends (withdrawals) (5) Dividends (5) Balance, end of year $100 Change in cash $ 0 Question (a) Here now are the financial statements for the case of “zero payout” (or “full retention”)
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Accounting for a savings account: Earnings retained (zero payout) BALANCE SHEET INCOME STATEMENT Assets $105 Owners’ equity $105 Revenue $5 Expenses 0 Earnings $5 STATEMENT OF CASH FLOWS STATEMENT OF OWNERS’ EQUITY Cash from operations $5 Balance, beginning of year $100 Cash investment 5 Earnings for the year 5 Cash in financing activities: Dividends (withdrawals) 0 Dividends 0 Balance, end of year $105 Change in cash $ 0 Earnings are the same under both payout scenarios, but the cash flow statement differs. In the full payout case, cash investment is zero, free cash flow is $5, and the financing section reports the $5 dividend payout. In the zero payout case, cash form operations is reinvested back into the account so that free cash flow is zero and payout is also zero. Question (b)
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chap 4 - E4.4. Dividend Discounting and Discounted Cash...

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