Question 1 - Estimating Cash Flows: Diebold Incorporated

Diebold Incorporated manufactures, markets, and services automated teller machines in

the United States. The following are selected numbers from the financial statements for
1992 and 1993 (in millions):

Revenues
(Less) Operating Expenses
(Less) Depreciation
= Earnings before Interest and Taxes
(Less) Interest Expenses
(Less) Taxes
= Net Income
Working Capital

1992
$544.0
($465.1)
($12.5)
$66.4
($0.0)
($25.3)
$41.1
$175.0

1993
$620.0
($528.5)
($14.0)
$77.5
($0.0)
($29.5)
$48.0
$240.0

The firm had capital expenditures of $15 million in 1992 and $18 million in 1993. The
working capital in 1991 was $180 million.
A. Estimate the cash flows to equity in 1992 and 1993.
B. What would the cash flows to equity in 1993 have been if working capital had
remained at the same percentage of revenue it was in 1992.

Question 2 - Estimating Cash Flows: Ryder System

Ryder System is a full-service truck leasing, maintenance, and rental firm The following
are selected numbers from the financial statements for 1992 and 1993 (in millions).
2014
Revenues
(Less) Operating Expenses
(Less) Depreciation
= EBIT
(Less) Interest Expenses
(Less) Taxes
= Net Income
Working Capital
Total Debt

$5,192.0
($3,678.5)
($573.5)
$940.0
($170.0)
($652.1)
$117.9
$92.0
$2,000 mil

2015
$5,400.0
($3848.0)
($580.0)
$972.0
($172.0)
($670.0)
$130.0
<$370.0>
$2,200 mil

The firm had capital expenditures of $800 million in 2014 and $850 million in 2015. The
working capital in 2013 was $34.8 million, and the total debt outstanding in 2013 was
$1.75 billion. There were 77 million shares outstanding, trading at $29 per share.
A. Estimate the cash flows to equity in 2014 and 2015.
B. Estimate the cash flows to the firm in 2014 and 2015.
C. Assuming that revenues and all expenses (including depreciation and capital
expenditures) increase 6%, and that working capital remains unchanged in 2016, estimate
the projected cash flows to equity and the firm in 2016. (The firm is assumed to be at its
optimal financial leverage.)
D. How would your answer in (c) change if the firm planned to increase its debt ratio in
2016 by financing 75% of its capital expenditures (net of depreciation) with new debt
issues?
Question 3 - Estimating Cash Flows: Occidental Petroleum
Occidental Petroleum produces and markets crude oil. The following are selected
numbers from the financial statements for 1992 and 1993 (in millions).

Revenues
(Less) Operating Expenses
(Less) Depreciation
= EBIT
(Less) Interest Expenses
(Less) Taxes
= Net Income
Working Capital
Total Debt

1992
$8,494.0
($6,424.0)
($872.0)
$1,198.0
($510.0)
($362.0)
$326.0
($45.0)
$5.4 billion

1993
$9,000.0
($6,970.0)
($860.0)
$1,170.0
($515.0)
($420.0)
$235.0
($50.0)
$5.0 billion

The firm had capital expenditures of $950 million in 1992 and $1 billion in 1993. The
working capital in 1991 was $190 million, and the total debt outstanding in 1991 was
$5.75 billion. There were 305 million shares outstanding, trading at $21 per share.
A. Estimate the cash flows to equity in 1992 and 1993.
B. Estimate the cash flows to the firm in 1992 and 1993.
C. Assuming that revenues and all expenses (including depreciation and capital
expenditures) increase 4%, and that working capital remains unchanged in 1994, estimate
the projected cash flows to equity and the firm in 1994. (The firm is assumed to be at its
optimal financial leverage.)

Question 1
A. FCFE in 1992 = $41.10 + $12.50 - $15 - (175 - 180) = $43.60 million
FCFE in 1993 = $48 + $14 - $18 - (240 - 175) = - $21 million
B. Working Capital as Proportion of Revenues: 1992 = 175/544 = 32.17%
Change in Revenues in 1993 = 620 - 544 = 76
FCFE in 1993 = $48 + $14 - $18 - (175/544) * (620 - 544)
= $19.55 million
Question 2
A. FCFE1992 = $117.9 + $573.5 - $800 - ($92 - $34.8) + (2000-1750)
= $84.20 million
FCFE1993 = $130 + $580 - $850 - (-370 - 92) + (2200 - 2000)
= $522 million
B. FCFF1992 = $117.9 million + $170 (1 - (652/770)) + $573.5 - $800 - ($92 - $34.8)
= - $139.75 million
(The tax rate is extraordinarily high = 652/770; the taxable income is 770 million (940 170))

FCFF in 1993 = $130 million + $172 (1 - (670/800)) + $580 - $850 (-370 - 92) = $349.95 million

Question 3
1991

1992

1993

1994

1994
(no debt)

Revenues

$8,494 $9,000 $9,360 $9,360

- Operating Expenses

$6,424 $6,970 $7,249 $7,249

- Depreciation
= EBIT

$872

$860

$894

$894

$1,198 $1,170 $1,217 $1,217

- Interest Expenses

$510

$515

$536

$536

- Taxes

$362

$420

$437

$437

= Net Income

$326

$235

$244

$244

+ Depreciation

$872

$860

$894

$894

- Capital Expenditures

$950

$1,000 $1,040 $1,040

- Working Capital

($235)

+ Net Debt Issues

($350) ($400)

=FCFE
+ Interest Expenses (1t)
- Net Debt Issues
=FCFF
Working Capital
Total Debt
Debt Ratio
Tax Rate

($5)

($0)

($0)

$63

$0

$133

($300)

$162

$98

$242

$185

$202

$202

$63

$0

$301

$300

$190 ($45) ($50) ($50)

$5,750 $5,400 $5,000

($50)

($350) ($400)
$725

$285

43.84%
52.62% 64.12% 64.12% 64.12%

To get the new debt issues in 1994, take 43.84% of the net capital expenditures in that year (1040 - 894)