Exercises Part 4 - Sommersemester PDF

Preview

Summary

Sommersemester...

Description

Karime Mimoun, CFA Summer Semester 2017

Fundamentals of Corporate Finance Exercises Problem 3.4 (previous ratio problem continued) For the companies A and B you additionally get following information for the previous year: in EUR Operative Cashflow Cashflow from investing activities Cashflow from financing activities

A 140 -90 -20

B 282 -120 30

Answer the following questions for the companies A and B: a) Calculate the total cash flow and explain briefly the meaning of this number. What do you observe for the two companies? Solution: a) The cash balance changes in the amount of the total cash flow, i.e. by the sum of the three components of cash flow (= CFO + CFI + CFF). A: 140 + (-90) + (-20) = 30 B: 282 + (-120) + 30 = 192 Noticeable is the relatively high operating CF of A and B. Additionally, with company A the level of investment (CFI = -90) is above depreciation, so the company has net investments of 50. It is building up assets and expanding business operations. The striking point with B is that the investment is low compared to fixed assets over 780 and it just covers the depreciation of 120. Despite the low investment activity, the company raises new capital from outside, since the CFF is positive.

Problem a) Define the concept of cash flow. b) How does the direct determination of the (operational) cash flow differ from the indirect determination? Solution a) Cash flow refers to the change in the stock of cash between two points in time (cash flow = inflows outflows). b) In the direct calculation, the inflows and outflows within one period are determined and subtracted. For this purpose, all relevant payments must be known. The indirect method is based on information of the financial statements which are also available to external people. The starting point is the annual net Karime Mimoun, CFA, Fundamentals of Corporate Finance, SS 2017

Page 1

income. This must then be adjusted for all transactions, which were profit effective but not cash effective, or vice versa. The most important factors are depreciation and provisions (both profit effective but not cash effective). In addition, changes in working capital positions lead to differences between cash and profit effectiveness.

Problem 3.6 Furniture AG closes its first financial year after foundation with the following results (in EUR): Sales Revenues Materials Wages, salaries and social security contributions Expenses for pensions Taxes Transfer to retained earnings Balace sheet profit

7.000.000 2.500.000 1.500.000 200.000 1.500.000 800.000 500.000

1. The balance sheet profit will be carried forward to the next period. 2. The costs of retirement benefits are paid to an insurance company. 3. Trade liabilities result in € 700,000 at year end, trade receivables end up at € 500,000 and inventory is up € 1,000,000. Determine the cash flow of the first fiscal year according to the indirect method and provide proposals how to increase the cash flow. Note: Balance sheet profit is net income minus retained earnings. Balance sheet profit is meant to be distributed to shareholders as a dividend.

Solution DIRECT (for information only, not required in exam) in EUR Inflows Revenues (reduced by receivables & 5.500.000 inventory) Outflows Materials - 2.500.000 Wages / salary / SC - 1.500.000 Taxes - 1.500.000 Liabilities + 700.000 = Cash Flow Operations 500.000

INDIRECT Retained earnings Balance sheet profit

in EUR 800.000,00 500.000,00

= Net income + Depreciation

1.300.000,00 -

+/- Pension provisions

1.000.000,00

- Increase in inventories - Increase in receivables + Increase in liabilities = Cash Flow Operations

500.000,00 700.000,00 500.000,00

Measures to increase CF: • Increase turnover • Reduce costs (→ higher net income margin) • Optimization of stocks • Reduction of receivables • Increase account payables, longer payment period

Karime Mimoun, CFA, Fundamentals of Corporate Finance, SS 2017

Page 2

Problem 3.7 CarPart Inc shows the following income statement and balance sheet (in EUR): Income'statement Revenues COGS Gross'profit SG&A R&D EBITDA Depreciation EBIT Interest=expenses EBT Taxes=on=income Net'income

2017 5,000,000 3,500,000 1,500,000 600,000 200,000 700,000 100,000 600,000 50,000 550,000 160,000 390,000

Balance'sheet Cash%&%short-term%investments Receivables% Inventory Other%short-term%assets Current'assets' Property,%pant%&%equipment% Total'assets

2016 200,000 350,000 700,000 250,000 1,500,000 2,000,000 3,500,000

2017 160,000 300,000 850,000 250,000 1,560,000 2,400,000 3,960,000

Payables Other%short-term%liabilities Current'liabilities' Long-term%debt Other%long-term%liabilities Total'liabilities Equity' Total'liability'&'equity'

900,000 300,000 1,200,000 300,000 140,000 1,640,000 800,000 2,440,000

700,000 350,000 1,050,000 550,000 130,000 1,730,000 800,000 2,530,000

Additional information: 1. SG&A includes € 70,000 restructuring provisions 2. Capital expenditures amount to € 650,000 3. An asset is sold at its book value of € 150,000 4. Dividends are paid over € 90,000

Calculate the cash flows and provide a brief analysis.

Karime Mimoun, CFA, Fundamentals of Corporate Finance, SS 2017

Page 3

Net$income Non-cash)charges Depreciation+&+amortization+ Restructuring+provision+ Working)capital) Receivables+ Inventory Payables Other+short-term+liabilities

390,000 100,000 70,000

50,000 -150,000 -200,000 50,000

CFO$

310,000

Capital+expenditures+ Asset+sale

-650,000 150,000

CFI$

-500,000

Long-term+debt Other+long-term+liabilities Equity Dividends+payed

250,000 -10,000 0 -90,000

CFF

150,000

Change+in+cash+ Cash+at+beginning

-40,000 200,000

Cash$at$end$

160,000

CFO – cash flow from operations is positive. However, CFO is lower than net income, meaning there is higher cash outflow from operations than booked in the income statement. Reason is a sales decline indicated by decreasing receivables, payables and increasing inventory. CFI – capital expenditures are higher than depreciation and proceeds of asset sale indicating business expansion. CFF – capital expenditures are partially financed with a bank loan and CFO Overall, the financial health of CarPart Inc is solid with a positive CFO. The sales decline is a growing thread. However, if the investments in new assets lead to sales growth the company can improve its financial situation. The additional bank loan results in a D/E ratio of 0.7 (550,000/800,000) and given the previous year interest coverage ratio of 12.0 the overall debt capacity is not critical.

Karime Mimoun, CFA, Fundamentals of Corporate Finance, SS 2017

Page 4...