Exercises £10.1. £10.2. Drill Exercises Classification of Cash Flows (Easy) State whether the following transactions affect cash flow from operations, free cash flow, financing flows, or none of them. a. Payment of a receivable by a customer b, Sale to a customer on credit c. Expenditure on plant d. Expenditure on research and development e. Payment of interest f Purchase ofa short-term investment with excess cash g. Sale af accounts receivable Calculation of Free Cash Flow from the Balance Sheet and Income Statement (Easy) A firm reported comprehensive income of $376 million for 2009, consisting of $500 mil- lion in operating income (afier tax) less $124 million of net financial expense (after tax), It also reported the following comparative balance sheet (in millions of dollars): Balance Sheet 2009 2009 2008 Operating cash 60 Accounts payable 1,200 1,040 Short-term investments (at market) Accounts receivable Inventory Property and plant Accrued liabilities. 390-450 Long-term debt Common equity Calculate free cash flow using Method | and Method 2.356 Part Two The Analssis vf Financial Seawomenes £10.3. £10.4. £10.5. Analyzing Cash Flows (Medium) Consider the following comparative balance sheets for the Liquidity Company: December 31 2008 2007 Operating cash 5 435,000 $ 50,000 ‘Accounts receivable 40,000 “0 Inventories 100,000 Oe Land (unamortized cost) 400,000 800,000 Plant assets 200,000 200,000 Less: accumulated depreciation (100,000) 0- 7,075,000 7,050,000. Accounts payable 25,000 “OF Capital stock 1,050,000 150,000 $1,075,000 $1,050,000 go ‘The company paid a dividend of $150,000 during 2008 and there were no equity contribuc tions of stock repurchases. a. Caleulate free cash flow generated during 2008. b, Where did the increase in cash come from? ©. How would your calculation in part (a) change if the firm invested deposits rather than paying a dividend? short-term Free Cash Flow for a Pure Equity Firm (Easy) The following information is from the financial report of a pure equity company (one with ‘no net debt). In millions of dollars. Common shareholders’ equity, December 31, 2008 1748 Common dividends, paid December 2009 83 Issue of common shares on December 31, 2009 34.4 Common shareholders’ equity, December 31, 2009 226.2 ‘The firm had no share repurchases during 2009, Calculate the firm’s free cash flow for 2009. Free Cash Flow for a Net Debtor (Easy) ‘The following information is for a firm that has net debt on its balance sheet (in millions of dollars). ‘Common shareholders’ equity, December 31, 2007 174.8 Common dividends, paid December 2008 83 Issue of common shares, December 2008 344 Common shareholders’ equity, December 31, 2008 226.2 Net debt, December 31, 2007 543 Net debt, December 31, 2008 37.4 ‘There were no share repurchases during 2008. The firm reported net interest after tax of $4 million on its income statement for 2008, and this interest was paid in cash. Calculate the firm’s free cash flow for 2008.£10.6. £10.7. E10.8. £109, Chapter 10 The Analisis ofthe Cash law Statement 357 Applying Cash Flow Relations (Easy) AA irm reported free cash flow of $430 million and operating income of $390 million. a. By how much did its net operating assets change during the period? b. The firm invested $29 million cash in new operating assets during the period. What ‘were its operating accruals? ©. The firm incurred net financial expenses of $43 million after tax, paid a dividend of $20 million, and raised $33 million trom share issues. What was the change in its net debt position during the period? Applying Cash Flow Relations (Medium) An analyst prepared reformulated balance sheets for the years 2009 and 2008 as follows (in millions of dollars): 2009 2008 Operating assets $640 $590 Financial assets 250 M0 890, 700 Financial debt “770 “130, Operating liabilities 20 30 Common equity _700 _540 $890 $700 The firm reported $100 million in comprehensive income for 2009 and no net financial income or expense a. Calculate the free cash flow for 2009. b. How was the free cash flow disposed of? ¢. How ean a firm with financial assets and financial income or expense? jiabilities have zero net financial Applications Free Cash Flow and Financing Activities: General Electric Company (Easy) The following summarizes free cash flows generated by General Electric from 2000-2004 (in millions of dollars). 20002001 2002-2003 2004 Cash from operations 30,009 39,398 «34,848 «36,102 36,484 Cash investments 99 40,308 «61,227 21,843 38,414 Free cash flow (7,690) (910) (26,379) 14,259 11,930) a. Explain why such a profitable firm as General Electric can have negative free cash flow: b. In 2005, the firm announced that the years of building its set of businesses was “largely behind ity” so it would be slowing its investment activity, What is the likely effect on free cash flow? How will GE's financing activities likely change? What are the alterna- tive financing alternatives in light of the changed free cash flow? Real World Connection Exercises £5.13 and £6.10 also deal with General Electtic, Method 1 Calculation of Free Cash Flow for General Millls, Inc. (Easy) Refer 10 the reformulated balance sheets and income statements for General Mills, Ine., in Exhibits 9.5 and 9,11 in Chapter 9. Calculate free cash flow for 2008 from these statements,