Question

You are the CFO of Happy Valley Co.,Ltd., there is a potential project for you to invest in: acquiring (buying) another firm, HappyParadise Co.,Ltd., in year 2010. You want to estimate the NPV of this investment. (1) The first step is to estimate the Free Cash Flow of HappyParadise for year 2010. 17 pts a. You get the income statement for 2010 of HappyParadise as below: Income Statement for Year 2010 ($ million) Net Sales Cost of Goods Sold Depreciation Earnings before interest and taxes Interest Paid Taxable income Taxes (Tax Rate: 10%) Net Income Unfortunately, some data is missing in this income statement, please fill the blanks. 2 pts b. Based on this income statement, what is the Operating Cash Flow of HappyParadise for year 2010? 5 pts

Answer 1

(a)-Income Statement
Particulars	Amount ($ in millions)
Net Sales	150.00
Less: Cost of goods sold	50.00
Less: Depreciation	10.00
Earnings before interest & taxes (EBIT)	90.00
Less: Interest Expenses	10.00
Earnings before taxes (EBT)	80.00
Less: Tax at 10% [$80.00 Million x 10%]	8.00
Net Income	72.00
(b)-Operating cash flow
Operating cash flow = EBIT + Depreciation - Taxes
Operating cash flow = $90.00 Million + $10.00 Million - $8.00 Million
Operating cash flow = $92.00 Million

(a)-Income Statement
Particulars	Amount ($ in millions)
Net Sales	150.00
Less: Cost of goods sold	50.00
Less: Depreciation	10.00
Earnings before interest & taxes (EBIT)	90.00
Less: Interest Expenses	10.00
Earnings before taxes (EBT)	80.00
Less: Tax at 10% [$80.00 Million x 10%]	8.00
Net Income	72.00
(b)-Operating cash flow
Operating cash flow = EBIT + Depreciation - Taxes
Operating cash flow = $90.00 Million + $10.00 Million - $8.00 Million
Operating cash flow = $92.00 Million

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