Sample AnswerΒ
Analyzing Cash Returned to Stockholders
Question 3
FCFE = Net Income – Net Capital Expenditure -Change in working Capital+ Change in debt | ||||
Initial working capital | Working capital after increase | Change in working capital | ||
25,000,000 | 40,000,000 | 15,000,000 | ||
Net Income | Net Depreciation | Capital Expenditure | Change in working capital | FCFE |
100,000,000 | 50,000,000 | 80,000,000 | 15,000,000 | 55,000,000 |
Free cash flow is a function of sources of cash less uses of cash. For Lube Oil, the free cash flow will be the total sources of cash (Net income & Depreciation), less the total uses of cash (Capital expenditure & Working capital needs).
πΉπΆπΉ=(πππ‘ ππππππ+π·ππππππππ‘πππ)β(πΆππππ‘ππ ππ₯ππππππ‘π’ππ+πππππππ πππππ‘ππ πππππ )
Where:
πππ‘ ππππππ=$100π
π·ππππππππ‘πππ=$50π
πΆππππ‘ππ ππ₯ππππππ‘π’ππ=$80π
πππππππ πππππ‘ππ πππππ =$40πβ$25π=$15π
Substituting the values into the equation:
πΉπΆπΉ=(100+50)β(80+15)
πΉπΆπΉ=$55π
Question 4
Total Payout = Dividends + Share Repurchase( buyback) | |||
Dividend Pay Out | Share Buy Back | Total Payout | |
Β $Β Β Β Β Β Β Β Β Β Β Β Β 20,000,000.00 | Β $Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β 25,000,000.00 | Β $Β Β Β Β Β Β Β Β Β Β 45,000,000.00 | |
Cash Balance = FCFE – Payout | |||
FCFE | Payout | Cash Balance | |
Β $Β Β Β Β Β Β Β Β Β Β Β Β 55,000,000.00 | Β $Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β 45,000,000.00 | Β $Β Β Β Β Β Β Β Β Β Β 10,000,000.00 | |
The change in cash balance for the firm during the year is a function of the firmβs free cash flow less non regular expenditures.
First, we evaluate the firmβs free cash flow.
Free cash flow is a function of sources of cash less uses of cash. For Lube Oil, the free cash flow will be the total sources of cash (Net income & Depreciation), less the total uses of cash (Capital expenditure & Working capital needs).
πΉπΆπΉ=(πππ‘ ππππππ+π·ππππππππ‘πππ)β(πΆππππ‘ππ ππ₯ππππππ‘π’ππ+πππππππ πππππ‘ππ πππππ )
Where:
πππ‘ ππππππ=$100π
π·ππππππππ‘πππ=$50π
πΆππππ‘ππ ππ₯ππππππ‘π’ππ=$80π
πππππππ πππππ‘ππ πππππ =$40πβ$25π=$15π
Substituting the values into the equation:
πΉπΆπΉ=(100+50)β(80+15)
πΉπΆπΉ=$55π
Next, we evaluate the non-regular expenditure incurred by the firm which include the dividend payment of $20M and the stock buyback of $25M.
πππ‘ππ πππ π‘πππ ππ₯ππππππ‘π’ππ=π·ππ£πππππ+πβπππ ππ’π¦ππππ
πππ‘ππ πππ π‘πππ ππ₯ππππππ‘π’ππ=$20π+25π=$45π
Lastly, we evaluate the change in cash balance during the year.
πΆβππππ ππ πππ β πππππππ=πΉπΆπΉβπππ¦ππ’π‘
πΆβππππ ππ πππ β πππππππ=$55πβ$45π
πΆβππππ ππ πππ β πππππππ=$10π
Question 5
Debt at the beginning of the year | Debt at the end of the year | Increase in Debt |
Β $Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β 120,000,000.00 | Β $Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β 135,000,000.00 | Β $Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β 15,000,000.00 |
Previous FCFE | Increase in Debt | New FCFE |
Β $Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β 55,000,000.00 | Β $Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β 15,000,000.00 | Β $Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β 70,000,000.00 |
Previous Cash Balance | Increase in Debt | New Cash Balance |
Β $Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β 10,000,000.00 | Β $Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β 15,000,000.00 | Β $Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β Β 25,000,000.00 |
To evaluate the difference in previous answers due to the change in debt position, we evaluate the effect of the new debt figures.
Since the debt at the end of the year is more than the value at the beginning, there is an increase in debt during the year, which translates to an increase in sources of cash. An increase in the sources of cash, in turn, increases the free cash flow value and the cash balance.
πΌππππππ π ππ ππππ‘=$135πβ120π
πΌππππππ π ππ ππππ‘=$15π
Evaluate the change in free cash flow.
πππ€ πΉπΆπΉ=ππππ£πππ’π πΉπΆπΉ+πΌππππππ π ππ πππ β
πππ€ πΉπΆπΉ=$55π+$15π
πππ€ πΉπΆπΉ=$70π
Next, evaluate the increase in cash balance.
πππ€ πππ β πππππππ=ππππ£πππ’π πππ β πππππππ+πΌππππππ π ππ πππ β
πππ€ πππ β πππππππ=$10π+$15π
πππ€ πππ β πππππππ=$25M
Reference
Damodaran, A. (2010).Β Applied corporate finance. John Wiley & Sons.
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QuestionΒ
Week 9 Chapter 11 Questions
Select three formula-driven-problems from Chapter 11 that you wish to showcase and prepare a Microsoft Excel document showing the Excel formulas used to prepare the solution for those problems.

Analyzing Cash Returned to Stockholders
REMINDER: Part of the grade that you receive on your problems is the utilization of Formulas. Therefore, do not pick problems that only require a narrative!
Book:
Damodaran, A. (2010).Β Applied corporate finance. John Wiley & Sons.
- Chapter 11 Analyzing Cash Returned to Stockholders
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