Q # 2 (10 marks)

The financial statements for Dramdocks Consulting included the following information (in $millions): (1) Comparative Balance Sheets: Dec 31, 2018 | Dec 31, 2019

ASSETS Cash 30 33 Accounts Receivable 160 190 Short Term Investments 65 55 Inventory 315 370 Prepaid expenses 15 10 Land 100 100 Plant & Equipment 650 715 Less: Accum. Dep'n 230 420 280 435 TOTAL Assets 1,105 1,193 LIABILITIES Accounts Payable 250 315 ST Notes Payable 100 90 Accrued Liabilities 50 41 Bond Payable (25 years, 6.5%) 305 305 Preferred Shares (8%) 100 60 Common Shares 100 95 Retained Earnings 200 287 TOTAL Liabilities & S/Equity 1,105 1,193

(2) Income Statement for the year ending December 31, 2019

Sales 725 Expenses Cost of Goods Sold 190 Rent 50 Salaries 185 Operating expenses 81.5 Depreciation 50 Total Expenses 556.5 Net Operating Income 168.5 Interest Expense 18.5 Earnings after interest 150 Taxes (30%) 45 Net Income 105

Question # 4 continued

Required:

(a) Calculate (include labelled equations): (i) Free Cash Flow from Operations

(ii)Free Cash Flow to the Firm

(iii) Free Cash Flow to Common Equity

(b) Define Free Cash Flow to Common Equity and give 1 example (including $ amount) of how Dramdocks Consulting used the Free Cash Flow to Common Equity