HQ1-1. For each of the following activities state whether there is an increase, decrease, or no change in a firm’s cash: (Think/explain each situation)
HQ2-1. Statement of Cash Flows Omala Inc. reported 2017 net income of $10 million and depreciation of $2 million. The top part of Omala, Inc.’s 2016 and 2017 balance sheets is listed below (in millions of
dollars). You must calculate the 2017 net cash flow from operating activities for Olama, Inc.
Current assets: 2016 2017 Current liabilities: 2016 2017
Cash and securities $ 11 $ 14Accrued wages and taxes $ 12 $ 13
Accounts receivable 50 56 Accounts payable 30 34
Inventory 54 80 Notes payable 26 32
Total $ 115 $ 150 Total$ 68 $ 79
Calculate the 2017 net cash flow from operating activities for Omala, Inc..
Cash Flows from Operating Activities
Net income
Additions (sources of cash):
Depreciation
Increase accrued wages and taxes
Increase in accounts payable
Subtractions (uses of cash):
Increase in accounts receivable
Increase in inventory
Net cash flow from operating activities:
HQ2-2. Free Cash Flow You are considering an investment in Fivestone, Inc. and want to evaluate the firm’s free cash flow. From the income statement, you see that Fivestone earned an EBIT of $32 million, paid taxes of 25% ($8 million), and its depreciation expense was $3 million. Fivestone’s gross fixed assets increased by $16 million from 2016 to 2017. The firm’s current assets increased by $10 million and spontaneous current liabilities increased by $6 million.
Calculate Fivestone’s operating cash flow, investment in operating capital and free cash flow for 2017.
First calculate Fivestone’s operating cash flow by:
OCF = EBIT – Taxes + Depreciation
Then, Investment in operating capital for 2017 by:
IOC = ΔGross fixed assets + ΔNet operating working capital
Finally, Fivestone’s free cash flow for 2017 by:
FCF = Operating cash flow – Investment in operating capital
HQ2-3. Market Value versus Book Value Mann’s Buns Bakery, Inc. balance sheet lists net fixed asset as $28 million. The fixed assets could currently be sold for $38 million. Muffin’s current balance sheet shows current liabilities of $11 million and net working capital of $9 million. If all the current accounts were liquidated today, the company would receive $15 million cash after paying $12 million in liabilities. What is the book value of Mann’s Buns Bakery’s assets today? What is the market value of these assets?
Formulas Needed:
Step 1. Net working capital (book value) =
Current assets (book value) – Current liabilities (book value)
Step 2. Total assets (book value) = Current assets (book value) + Fixed assets (book
value)
Step 3. Net working capital (market value) =
Current assets (market value) – Current liabilities (market value)
Step 4. Total assets (market value) =
Current assets (market value) + Fixed assets (market value)
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