Picture1
(Picture 2)
As the problem and the website https://www.chegg.com/homework-help/investments-12th-edition-chapter-18-problem-10cfap-solution-9781260013832?trackid=15c9829fa36d&strackid=2aaa23795631 which include the reference answer to the problem above :Although the number 2019 is different,actually all the datas of year 2019 are the same as year 2013,in other words the two problems are the same
Please look at the Step 4 in Picture 2 ,the calculation of free cash flow to equity holders as shown below:
$ in million
Investment in working capital -24 increase in AR=$3,increase in inventory=$20,Decrease in AP=$1
But my answers are as follows:
$ in million
Investment in working capital -31.13 increase in AR=$3,increase in inventory=$20,Decrease in AP=$1,increase in Cash=$7.13
FCFE -6.8
As the definition of working capital includes cash in Ross book Corporate Finance(as the following picture show)Does it miss the increase in Cash=$7.13????
10. While valuing the equity of Rio National Corp. (from the previous problem), Katrina Shaar is considering the use of either cash flow from operations (CFO) or free cash flow to equity (FCFE) in her valuation process. a. State two adjustments that Shaar should make to cash flow from operations to obtain free cash flow to equity. b. Shaar decides to calculate Rio National's FCFE for the year 2013, starting with net income. Determine for each of the five supplemental notes given in Table 18H whether an adjustment should be made to net income to calculate Rio National's free cash flow to equity for the year 2013, and the dollar amount of any adjustment. c. Calculate Rio National's free cash flow to equity for the year 2013. 632 PART V Security Analysis Table 18F 2013 2012 Cash $ 13.00 $ 5.87 Rio National Corp. summary year-end balance sheets (U.S. $ millions) 30.00 27.00 Accounts receivable Inventory 209.06 189.06 $252.06 $221.93 Current assets Gross fixed assets 474.47 409.47 Accumulated depreciation (154.17) (90.00 Net fixed assets 320.30 319.47 $572.36 $ 25.05 $541.40 $ 26.05 Total assets Accounts payable Notes payable portion of long-term debt 0.00 0.00 0.00 0.00 Current liabilities $ 26.05 $ 25.05 240.00 Long-term debt 245.00 Total liabilities $265.05 $271.05 150.00 160.00 Common stock Retained earnings 147.31 120.35 Total shareholders' equity $307.31 $270.35 Total liabilities and shareholders' equity $572.36 $541.40 Table 18G Revenue $300.80 (173.74) Total operating expenses Rio National Corp. summary income statement for the year ended December 31, 2013 (U.S. $ millions) 127.06 Operating profit Gain on sale 4.00 131.06 Earnings before interest, taxes, depreciation & amortization (EBITDA) Depreciation and amortization (71.17) 59.89 Earnings before interest & taxes (EBIT) Interest (16.80) (12.93) Income tax expense Net income $ 30.16 Table 18H Note 1: Note 2: Rio National Corp. supplemental notes for 2013 Note 3: Rio National had $75 million in capital expenditures during the year. A piece of equipment that was originally purchased for $10 million was sold for $7 million at year-end, when it had a net book value of $3 million. Equipment sales are unusual for Rio National. The decrease in long-term debt represents an unscheduled principal repayment; there was no new borrowing during the year. On January 1, 2013, the company received cash from issuing 400,000 shares of common equity at a price of $25.00 per share. A new appraisal during the year increased the estimated market value of land held for investment by $2 million, which was not recognized in 2013 income. Note 4: Note 5: CHAPTER 18 Equity Valuation Models 6 Table 181 $3.20 Dividends paid (U.S. $ millions) Weighted-average shares outstanding during 2013 Dividend per share Earnings per share Beta 16,000,000 $0.20 $1.89 Rio National Corp. common equity data for 2013 1.80 Note: The dividend payout ratio is expected to be constant. Table 18J 4.00% 9.00% Risk-free rate of return Expected rate of return on market index Median industry pricelearnings (P/E) ratio Expected industry earnings growth rate Industry and market data December 31, 2013 19.90 12.00% Problem
