Question

Answer each of the following three cases

1. XX firm is a full-service truck leasing, maintenance, and rental firm with operations in North America and Europe. The following are selected numbers from the financial statements for 1992 and 1993 (in millions).

Revenues

(Less) Operating Expenses (Less) Depreciation

= EBIT

(Less) Interest Expenses (Less) Taxes

= Net Income

Working Capital

Total Debt

1992

$5,192.0 ($3,678.5) ($573.5) $940.0 ($170.0) ($652.1) $117.9 $92.0 $2,000 mil

1993

$5,400.0 ($3848.0) ($580.0) $972.0 ($172.0) ($670.0) $130.0 <$370.0> $2,200 mil

The firm had capital expenditures of $800 million in 1992 and $850 million in 1993. The working capital in 1991 was $34.8 million, and the total debt outstanding in 1991 was $1.75 billion. There were 77 million shares outstanding, trading at $29 per share.

A. Estimate the cash flows to equity in 1992 and 1993.

B. Estimate the cash flows to the firm in 1992 and 1993.

C. Assuming that revenues and all expenses (including depreciation and capital expenditures) increase 6%, and that working capital remains unchanged in 1994, estimate the projected cash flows to equity and the firm in 1994. (The firm is assumed to be at its optimal financial leverage.)

D. How would your answer in (c) change if the firm planned to increase its debt ratio in 1994 by financing 75% of its capital expenditures (net of depreciation) with new debt issues?

Answer 1

Answer to the question B

Free cash flow to the firm -

	1992	1993
Net income	117.9	130
Adjustmnet to reocnile net income to cash flows from operating activities
depreciation - non cash expense	573.5	580
Change in net working capital	-57.2	462
cash flows from operating activities	634.2	1172
less capital expenditure	-800	-850
Free cash flows to firm	-165.8	322

free cash flowws to the firm = cash flows from operating activities - capital expenditure

Answer to A

Cash flows to the equity = Freecash flows to the firm as calculated bove +increase in debt as per question

Cash flows to equity	1992	1993
Free cash flows to firm	-165.8	322
Increase in debt	250	200
Total cash flows to the equity	84.2	522