22BP Nova Electrics anticipates cash ... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 2: 22BP (page 52)

Nova Electrics anticipates cash flow from operating activities of $6 million in 20X1. It will need to spend $1.2 million on capital investments to remain
competitive within the industry. Common stock dividends are projected at
$.4 million and preferred stock dividends at $.55 million.
a. What is the firm鈥檚 projected free cash flow for the year 20X1?
b. What does the concept of free cash flow represent?

Short Answer

Expert verified

a. Projected free cash flow of Nova Electrics for the year 20X1: $3,850,000

b. Free cash flow means the net cash balance generated by an organization during a particular period.

Step by step solution

Projected free cash flow of Nova Electrics for the year 20X1

$Projected free cash flow = Cash flow from operating activity - cashoutflow from investing activity - common stock dividend - preferred stock dividend = $ 6, 000, 000 - $ 1, 200, 000 - $ 400, 000 - $ 550, 000 = $ 3, 850, 000$

Free cash flow

Free cash flow represents the cash generated by an organization after deducting all the cash outflows. The free cash flow of the company supports the operational and investment decision of the company.

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Stud Clothier
Balance sheet 20X1
Assets		Liabilities and Equity
Cash	\)60,000	Account payable	\(220,000
Account receivable	240,000	Accrued taxes	30,000
Inventory	350,000	Bonds payable (long term)	150,000
Plant and equipment	410,000	Common stock	80,000
		Paid in capital	200,000
		Retained earnings	380,000
Total assets	\)1,060,000	Total LIbilities and Equity	$1,060,000

Sales	$900,000
Shares outstanding	50,000
Cost of goods sold	400,000
Interest expenses	40,000
Selling and administration expenses	60,000
Depreciation expenses	20,000
Preferred stock dividend	80,000
Taxes	50,000

Times mirror and glass company
Sales	\(126,000
Less: Cost of goods sold	93,000
Gross profit	\)33,000
Less: selling and administrative expenses	11,000
Lease Expenses	4,000
Operating profit*	\(18,000
Less: Interest expenses	3,000
Earning before taxes	\)15,000
Less: Taxes (30%)	4,500
Earning after taxes	$10,500

	20X1	20X2
Sales	\(3,230,000	\)3,370,000
Cost of goods sold	2,130,000	2,850,000
Gross profits	\(1,100,000	\)520,000
Selling and administrative expenses	298,000	227,000
Operating profits	\(802,000	\)293,000
Interest expense	47,200	51,600
Income before taxes	\(754,800	\)241,400
Taxes (35%)	264,180	84,490
Income after tax	\(490,620	\)156,910

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Short Answer

Step by step solution

Projected free cash flow of Nova Electrics for the year 20X1

Free cash flow

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