Cash flows

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Cash flows Exercises with solutions Accounting, Finance & Control Accounting, Finance & Control 2 1. Cash flows Table 1: P&L Account Year (t) Company A Company B Revenues 75 75 - Operating Costs -50 -50 EBITDA 25 25 - D&A -5 -5 EBIT 20 20 - Financial expenses -10 -10 EBT 10 10 - Taxes -3 -3 Net Profit 7 7 Table 2: Balance sheet Company A Company B ASSETS Year (t-1) Year (t) Year (t-1) Year (t) Current assets Account receivable 15 18 15 12 Inventories 7,5 9,5 7,5 6,8 Other 30 30 15 20 Non current assets Fixed assets 100 96,1 120 120,6 Total assets 152,5 153,6 157,5 159,4 LIABILITIES Year (t-1) Year (t) Year (t-1) Year (t) Current liabilities Account payables 13 15,7 13 12 Other 20 30 0 0 Non current liabilities Long-term debt 55 40 85 90 Equity Share capital 60 60 50 55 Reserves 4,5 7,9 9,5 2,4 Total liabilities & equity 152,5 153,6 157,5 159,4 Table 3: Investment strategy Year (t) Company A Company B Purchase of new assets 1,1 7 Disposal of assets 0 -1,4 Accounting, Finance & Control 3 The tables above report the P&L account and balance sheet of Company A and B. The two companies have an identical structure of revenues and costs (Table 1), they have almost the same size (Table 2) but they undertake different investment strategies (Table 3) and different financial strategies. In particular: • In year t, Company A repays part of its debt (-15) but it does not issue new debt. Company B repays part of its debt (-15) and it issues new debt (+20). Furthermore, Company B undertakes a share capital increase (+5). The two companies do not pay dividends. Company A and B have the same net profits in year t. A financial analyst wants to understand if these companies are equally able to generate cash. • Compute and discuss the FCFF and FCFE 1.1 Solution Company A Company B EBIT 20…