3-17 FREE CASH FLOW Financial information for Powell Panther Corporation is shown here. Powell Panther Corporation: Income Statements for Year Ending December 31 (Millions of Dollars) 2018 2017 Sales $ 1,200.0 $1,000,0 Operating costs excluding depreciation and amortization 1,020.0 850.0 EBITDA $ 180.0 $ 150.0 Depreciation and amortization 30.0 25.0 Earnings before interest and taxes (EBIT) $ 150.0 $ 125,0 Interest 21.7 20.2 Earnings before taxes (EBT) $ 1283 $ 104.8 Taxes (40%) 51.3 41.9 Net income $ 77.0 $ 62.9 Common dividends $ 60.5 $ 46.4 Powell Panther Corporation: Balance Sheets as of December 31 (Milions of dollars) 2018 2017 Assets Cash and equivalents $ 12.0 $ 10.0 Accounts receivable 180.0 150,0 Inventories 180.0 200.0 Total current assets $ 3720 5360.0 Net plant and equipment 300.0 250,0 Total assets $ 672.0 $610,0 Liabilities and Equity Accounts payable $108.0 $ 90.0 Accruals 72.0 60.0 Notes payable 67.0 51.5 Total current liabilities $247.0 $201.5 Long-term bonds 150.0 150.0 Total liabilities $3970 $ 351.5 Common stock (50 million shares) 50.0 50.0 Retained earnings 225.0 208.5 Common equity $275.0 $ 258.5 Total liabilities and equity $672.0 $ 610.0 a. What was net operating working capital for 2017 and 2018? Assume the firm has no excess cash. b. What was the 2018 free cash flow? c. How would you explain the large increase in 2018 dividends? 35,000 30,000 3-14 FREE CASH FLOW Arlington Corporation's financial statements (dollars and shares are in millions) are provided here. Balance Sheets as of December 31 2018 2017 Assets Cash and equivalents $ 15,000 $ 14,000 Accounts receivable Inventories 33,320 27,000 Total current assets $ 83,320 $ 71,000 Net plant and equipment 48.000 46,000 Total assets $131,320 $ 117,000 Liabilities and Equity Accounts payable $ 10,100 $ 9,000 Accruals 8,000 6,000 Notes payable 7.000 5,050 Total current liabilities $ 25,100 $ 20,050 Long-term bonds 20,000 20,000 Total liabilities $ 45,100 $ 40,050 Common stock (4,000 shares) 40,000 40,000 Retained earnings 46.220 36,950 Common equity $ 86,220 $ 76,950 Total liabilities and equity $131,320 $ 117,000 Income Statement for Year Ending December 31, 2018 Sales $210,000 Operating costs excluding depreciation and amortization 160,000 EBITDA $ 50,000 Depreciation and amortization 6,000 EBIT $ 44,000 Interest 5,350 EBT $ 38,650 Taxes (40%) 15,460 Net income $ 23,190 Dividends pald $ 13,920 a. What was net operating working capital for 2017 and 2018? Assume that all cash is excess cash; i.e., this cash is not needed for operating purposes. b. What was Arlington's 2018 free cash flow? c. Construct Arlington's 2018 statement of stockholders' equity. 98 Part 2 Fundamental Concepts in Financial Management Challenging Problems 15-18 d. What was Arlington's 2018 EVA? Assume that its after-tax cost of capital is 10% e. What was Arlington's MVA at year-end 2018? Assume that its stock price at December 31, 2018 was $25. 3-15 INCOME STATEMENT Edmonds Industries is forecasting the following income statement: Sales $10,000,000 Operating costs excluding depreciation and amortization 5,500,000 EBITDA $ 4.500,000 Depreciation and amortization 1.200,000 EBIT $ 3,300,000 Interest 500,000 EBT $ 2.800,000 Taxes (40%) 1,120,000 Net income $ 1680,000 The CEO would like to see higher sales and a forecasted net income of $2,100,000. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 6%. The tax rate, which is 40%, will remain the same. (Note that while the tax rate remains constant, the taxes paid will change.) What level of sales would generate $2,100,000 in net income