Question

How to do question (b)?

Digital Bhd Balance Sheet as o' 31 D,cember 2017 2018 milion) nillion) million Cash 300 Fixed assets Fixed assets at cost 1.566 (610 2,373 2,718 Acoumulated depreciation Total Assets 6)1.135 1.250 2,055 2.635 Current liabilties Accounts payable Other aceruas Long-term Liablities 10% Debentures de 2000 Total Liabilities 81 20 30 1,000 1,764 701 1,361 Shareholders Equity Common stock, RM 1 par, 100.000,000 shares issued and outstand 100 105 2,535 100 105 344 1,250 Share Premium So ted 105 Retained earnings Total Liabilities & shareholders' equity 2,055 Additional information 1) Oepreciatian for 2016, 2017 and 2018 was RM200 million, RM250 milion, and RM275 milion respecbvely 2) Nostorkwas acd orrerchased and lke mary fast growing companies, Dignal Bhd paid no diidends fox the last.5 years (3) corporate tax rate a flat 34% and Digital pays 10% interest on ts debentures (4 Market share price af Digital Bhd in 2016, 2017 and 2018 was RM 3927, RM 26. 10 and RM 11.55, respectively (b) Construct the statement of cash flows using the indirect method. Analysis the statement to answer the question. Also, use the following three (3) ratios and explanation on "Free Cash Flow" to help strengthen your analysis. Free cash flow is frequently use in financial management/corporate finance and hope that this question can help you to have a better understanding of the important aspect of cash floww vs ( Reinvestment ratio Purchase of new property plant and equipment Cash flows from operating activities (The ability of the company to generate cash from operating activities for the purpose of covering its asset acquisition payments) Dividend paid Dividend payment ratio Cash flows from operating activities (The ability of the company to generate cash from operating activities for the purpose of covering its dividend commitment to common shareholders) Operation Index Ratio- Cash flows from operating activities Net income The ability of the company to turn net income from an accrual basis into actual cash flow) Free Cash-Flow (FCF) or Cash Flow From Assets (CFFA) Cash that the firm is free to distribute to creditors and stockholders because it is not needed for working capital and fixed assets investments. In financial management, it is imperative that we need to know how cash is generated from utilizing assets and how it is paid to those who the asset purchase The following is the formula for Cash flow from Asset (Free Cash Flow) (A) CFFA = OCF-NCS-dNVVC OR (B) CFFA = CFCR + CFSH Formula A: OCF (Operating Cash Flow) Cash generated from a firm's normal business activities. OCF = Earnings Before Interest and Taxes + Depreciation Expenses-Taxes OCF Net Income + Depreciation + Interest Expense NCS Ending net Fixed Asset - Beginning net Fixed Asset + Depreciation. Alternatively NCS (Net Capital Spending) Net Investment in Fixed Asset (A negative NCS value means no investment but disposition of fixed assets over the year] current year. Working Capital (the current operating assets and liabilities) Current Assets - Current Liabilities. ANWC (Changes in Net Working Capital) Change in Working Capital between prior and ANWC Ending net working capital - beginning net working capital Digital Bhd Income Statement for the year ended 31 December 2017 2018 2016 (RM 'million) 1,578 631 947 (RM 'million) Sales Cost of sales Gross profit Expenses (RM 'million) 2,106 906 3,265 1,502 1,2001,763 Marketing Research and development Administration 316 158 126 600 495 211 179 885 882 327 294 1503 Total expenses 260 143 Operating profit Interest expense Profit before taxes Income taxes Profit after taxes (net income) 347 63 284 97 187 315 95 220 75 145 40

Answer 1

Ans to Q-b.

Please give positive ratings so I can keep answering. Thanks!

Cashflow Statement	2017	2018		Free Cashflow (CFFA)=		OCF-NCS-changes in NWC
Profit after taxes	145.00	77.00			2016	2017	2018
Add:				Operating cash flow (OCF)		490.00	495.00
Interest on debentures	95.00	143.00		Cashflow from investing activities (NCS)		808.00	345.00
Depreciation	250.00	275.00		Changes in Net working Capital (NWC)
Operating cash flow	490.00	495.00		Cash	30.00	40.00	62.00
Changes in Current asset and Liabilities				Accounts Receivable	175.00	351.00	590.00
Increase in Accounts Receivable	(176.00)	(239.00)		Inventory	90.00	151.00	300.00
Increase in Inventory	(61.00)	(149.00)		Current Assets	295.00	542.00	952.00
Increase in Accounts Payable	25.00	53.00		Accounts Payable	56.00	81.00	134.00
Increase in other accruals	5.00	10.00		Other accruals	15.00	20.00	30.00
Cashflow from Operating activities	283.00	170.00		Current Liabilities	71.00	101.00	164.00
				Net working Capital	224.00	441.00	788.00
Addition/(Deletion in Fixed Assets)	(808.00)	(345.00)		Changes in Net working Capital (NWC)		217.00	347.00
Cashflow from investing activities	(808.00)	(345.00)
				Free Cashflow (CFFA)=		(535.00)	(197.00)
Interest paid	(95.00)	(143.00)
Debentures issued	630.00	340.00		So free Cashflow is negative. Depending on the trend it can be said the CFFA will be negative in the coming years too.
Cashflow from financing activities	535.00	197.00
Net Change in cash balances	10.00	22.00
Opening Cash Balance	30.00	40.00
Closing Cash Balance	40.00	62.00
So company's cash flow is going to acquire more fixed assets.
So company's cash flow is coming from operations and by issuing debentures.