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Analyzing Cash Returned to Stockholders

Analyzing Cash Returned to Stockholders

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).
𝐹𝐢𝐹=(𝑁𝑒𝑑 π‘–π‘›π‘π‘œπ‘šπ‘’+π·π‘’π‘π‘Ÿπ‘’π‘π‘–π‘Žπ‘‘π‘–π‘œπ‘›)βˆ’(πΆπ‘Žπ‘π‘–π‘‘π‘Žπ‘™ 𝑒π‘₯π‘π‘’π‘›π‘‘π‘–π‘‘π‘’π‘Ÿπ‘’+π‘Šπ‘œπ‘Ÿπ‘˜π‘–π‘›π‘” π‘π‘Žπ‘π‘–π‘‘π‘Žπ‘™ 𝑛𝑒𝑒𝑑𝑠)

Where:

𝑁𝑒𝑑 π‘–π‘›π‘π‘œπ‘šπ‘’=$100𝑀
π·π‘’π‘π‘Ÿπ‘’π‘π‘–π‘Žπ‘‘π‘–π‘œπ‘›=$50𝑀
πΆπ‘Žπ‘π‘–π‘‘π‘Žπ‘™ 𝑒π‘₯π‘π‘’π‘›π‘‘π‘–π‘‘π‘’π‘Ÿπ‘’=$80𝑀
π‘Šπ‘œπ‘Ÿπ‘˜π‘–π‘›π‘” π‘π‘Žπ‘π‘–π‘‘π‘Žπ‘™ 𝑛𝑒𝑒𝑑𝑠=$40π‘€βˆ’$25𝑀=$15𝑀
Substituting the values into the equation:
𝐹𝐢𝐹=(100+50)βˆ’(80+15)
𝐹𝐢𝐹=$55𝑀

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 firm’s free cash flow less non regular expenditures.

First, we evaluate the firm’s 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).

𝐹𝐢𝐹=(𝑁𝑒𝑑 π‘–π‘›π‘π‘œπ‘šπ‘’+π·π‘’π‘π‘Ÿπ‘’π‘π‘–π‘Žπ‘‘π‘–π‘œπ‘›)βˆ’(πΆπ‘Žπ‘π‘–π‘‘π‘Žπ‘™ 𝑒π‘₯π‘π‘’π‘›π‘‘π‘–π‘‘π‘’π‘Ÿπ‘’+π‘Šπ‘œπ‘Ÿπ‘˜π‘–π‘›π‘” π‘π‘Žπ‘π‘–π‘‘π‘Žπ‘™ 𝑛𝑒𝑒𝑑𝑠)

Where:

𝑁𝑒𝑑 π‘–π‘›π‘π‘œπ‘šπ‘’=$100𝑀
π·π‘’π‘π‘Ÿπ‘’π‘π‘–π‘Žπ‘‘π‘–π‘œπ‘›=$50𝑀
πΆπ‘Žπ‘π‘–π‘‘π‘Žπ‘™ 𝑒π‘₯π‘π‘’π‘›π‘‘π‘–π‘‘π‘’π‘Ÿπ‘’=$80𝑀
π‘Šπ‘œπ‘Ÿπ‘˜π‘–π‘›π‘” π‘π‘Žπ‘π‘–π‘‘π‘Žπ‘™ 𝑛𝑒𝑒𝑑𝑠=$40π‘€βˆ’$25𝑀=$15𝑀
Substituting the values into the equation:
𝐹𝐢𝐹=(100+50)βˆ’(80+15)
𝐹𝐢𝐹=$55𝑀

Next, we evaluate the non-regular expenditure incurred by the firm which include the dividend payment of $20M and the stock buyback of $25M.

π‘‡π‘œπ‘‘π‘Žπ‘™ π‘œπ‘›π‘’ π‘‘π‘–π‘šπ‘’ 𝑒π‘₯π‘π‘’π‘›π‘‘π‘–π‘‘π‘’π‘Ÿπ‘’=𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑+π‘†β„Žπ‘Žπ‘Ÿπ‘’ π‘π‘’π‘¦π‘π‘Žπ‘π‘˜
π‘‡π‘œπ‘‘π‘Žπ‘™ π‘œπ‘›π‘’ π‘‘π‘–π‘šπ‘’ 𝑒π‘₯π‘π‘’π‘›π‘‘π‘–π‘‘π‘’π‘Ÿπ‘’=$20𝑀+25𝑀=$45𝑀

Lastly, we evaluate the change in cash balance during the year.

πΆβ„Žπ‘Žπ‘›π‘”π‘’ 𝑖𝑛 π‘π‘Žπ‘ β„Ž π‘π‘Žπ‘™π‘Žπ‘›π‘π‘’=πΉπΆπΉβˆ’π‘ƒπ‘Žπ‘¦π‘œπ‘’π‘‘
πΆβ„Žπ‘Žπ‘›π‘”π‘’ 𝑖𝑛 π‘π‘Žπ‘ β„Ž π‘π‘Žπ‘™π‘Žπ‘›π‘π‘’=$55π‘€βˆ’$45𝑀
πΆβ„Žπ‘Žπ‘›π‘”π‘’ 𝑖𝑛 π‘π‘Žπ‘ β„Ž π‘π‘Žπ‘™π‘Žπ‘›π‘π‘’=$10𝑀

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.

πΌπ‘›π‘π‘Ÿπ‘’π‘Žπ‘ π‘’ 𝑖𝑛 𝑑𝑒𝑏𝑑=$135π‘€βˆ’120𝑀
πΌπ‘›π‘π‘Ÿπ‘’π‘Žπ‘ π‘’ 𝑖𝑛 𝑑𝑒𝑏𝑑=$15𝑀

Evaluate the change in free cash flow.

𝑁𝑒𝑀 𝐹𝐢𝐹=π‘ƒπ‘Ÿπ‘’π‘£π‘–π‘œπ‘’π‘  𝐹𝐢𝐹+πΌπ‘›π‘π‘Ÿπ‘’π‘Žπ‘ π‘’ 𝑖𝑛 π‘π‘Žπ‘ β„Ž
𝑁𝑒𝑀 𝐹𝐢𝐹=$55𝑀+$15𝑀
𝑁𝑒𝑀 𝐹𝐢𝐹=$70𝑀

Next, evaluate the increase in cash balance.

𝑁𝑒𝑀 π‘π‘Žπ‘ β„Ž π‘π‘Žπ‘™π‘Žπ‘›π‘π‘’=π‘ƒπ‘Ÿπ‘’π‘£π‘–π‘œπ‘’π‘  π‘π‘Žπ‘ β„Ž π‘π‘Žπ‘™π‘Žπ‘›π‘π‘’+πΌπ‘›π‘π‘Ÿπ‘’π‘Žπ‘ π‘’ 𝑖𝑛 π‘π‘Žπ‘ β„Ž
𝑁𝑒𝑀 π‘π‘Žπ‘ β„Ž π‘π‘Žπ‘™π‘Žπ‘›π‘π‘’=$10𝑀+$15𝑀
𝑁𝑒𝑀 π‘π‘Žπ‘ β„Ž π‘π‘Žπ‘™π‘Žπ‘›π‘π‘’=$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

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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