ECO359-07MiDA - DEPARTMENT OF ECONOMICS UNIVERSITY OF...

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D EPARTMENT OF E CONOMICS U NIVERSITY OF T ORONTO ECO359 – Financial Economics II Summer 2007 Midterm: July 24 Solutions Instructions : This is a closed book test. A formula sheet is attached to the test. You are allowed the use of a calculator . Show all your work otherwise you will not get full cre dit. Only written re-grade requests submitted with a completely unaltered exam paper can be considered. You have 2 hours. Good Luck! NAME: _____________________________________________ ID#: _____________________________________________ 1 _______________ (15 points) 2 _______________ (20 points) 3 _______________ (15 points) 4 _______________ (20 points) 5 _______________ (15 points) Total _____________ (80 points)
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2 Problem 1: [15 points] ABC Inc. has released the following information on their income statement for year 2006: Sales $12,200 Cost of Goods Sold $9,000 Depreciation expense $1,600 Interest expense $200 Dividends/Share $0.15 per share Tax rate 34% Furthermore, it was also reported that at the start of beginning of the year, ABC had $8,000 in net fixed assets, current assets were $2,000, and current liabilities were $1,500. At the end of the year, net fixed assets were $8,400, current assets were $3,100, and current liabilities were $1,800. During the year, the firm redeemed $100 in outstanding long-term debt. The total number of shares outstanding in the year was 2,000 shares. a) [5 points] Find the net income and the operating cash flows in 2006. b) [5 points] Find ABC’s cash flow from assets. c) [5 points] Find the Net New Equity Raised by ABC in 2006. Solution: 1. (a) We need the income statement to to estimate Tax, NI, EBIT, and Dividends paid : Income statement for 2006 Sales $12,200 Cost of good sold 9,000 Depreciation 1,600 EBIT $1,600 Interest 200 Taxable income $1,400 Taxes (34%) 476 Net income $924 Dividends $300 Retained earnings $624 Total Dividends paid = 0.15 x 2,000 = $300
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3 b) We should calculate OCF, NCS (net capital spending), and Δ NWC as follows: Δ OCF = EBIT + Dep. – T = $1,600 + 1,600 – 476 = $2,724 NWC = NWCend – NWCbeg = (CAend – CLend) – (CAbeg – CLbeg) = ($3,100 – 1,800) – ($2,000 – 1,500) = $800 Net Capital Spending (NCS) = Δ Net fixed Assets + Dep. = [$8,400 – 8,000] + 1,600 = $2,000 => So, TCF (total cash flow) = FCF (Free cash Flow) = OCF – Δ NWC – NCS = $2,724 – 800 – 2,000 = –$76 c) The net income and OCF are positive, but the firm invested heavily in both fixed assets and net working capital => it had to raise a net $76 in funds from its stockholders and creditors to make these investments. Cash flow to creditors = interest – net new LTD = $200 – (– $100) = $300 Cash flow to stockholders = TCF – cash flow to creditors = –$76 – 300 = –$376 But, Cash flow to stockholders = dividends – net new equity raised; => net new equity raised = $300 – (–376) = $676 The firm: Invested $800 in new net working capital and $2,000 in new fixed assets Raised $76 from its stakeholders to support this new investment. Paid back $100 of its outstanding debt, by raising $676 in the form of new equity. After paying
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This note was uploaded on 07/18/2010 for the course LIFE SCIEN eco359 taught by Professor Recio during the Summer '10 term at University of Toronto- Toronto.

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ECO359-07MiDA - DEPARTMENT OF ECONOMICS UNIVERSITY OF...

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