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Analyzing Cash Returned to Stockholders

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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 the 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 cashless uses of cash. For Lube Oil, the free cash flow will be the total sources of cash (Net income & Depreciation), less the total benefits of money (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

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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 firm’s cash balance change during the year is a function of the firm’s free cash flow less nonregular expenditures.

First, we evaluate the firm’s free cash flow.

Free cash flow is a function of sources of cashless uses of cash. For Lube Oil, the free cash flow will be the total money of money (Net income & Depreciation), less the unlimited 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 nonregular expenditure incurred by the firm, which includes 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 the 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

We consider the effect of the new debt figures to evaluate the difference in previous answers due to the change in debt position.
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 head money 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

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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 you receive on your problems is the utilization of Formulas. Therefore, do not pick issues that only require a narrative!

Book:

Damodaran, A. (2010).Β Applied corporate finance. John Wiley & Sons.

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