Question

2 LaForge Systems, Inc has net income of $285 million for the year 2008. Using normation from the company's fianal statemnts given here, show the adjustmenes co net income that would be required to find A. FCF B. FCFE C.In addition, show the adjusments to FCFF that would reslt in FCFE Lalorge Systemms, Inc Balance Sheet 1 December 200 Current assets Gress fixeds Net fixod assets Liabilisics and sharcholden' quity Carrent liabliies Accounts payable Notes payable Accrued taxes and expenses Toal curren labiities Long.cene deb 1050 Comenoa suck Adlitional paid-in capital Retained carning Total sharcholder quity Toeal liabilities aed sharebolders' equity 1 December 2008 Operating cnes and cxp Inierest espense Income bcfore tax Tass (a 40 percent) Nes income Addlition to rctained carmings Statement of Cash Flows la million 31 Doccmber 200 Net income Changm i working eapital Accounts receivable Accounts payable Accrued taxes and expenses Cash poovided byr operaxing acivitie Investing activitics Purchascs of fised as Cash used for investing activities Financing activities Notes payable (La) Long-cerm financing issuaces Common stock dividends Cash used for financing activitics Cush and equivalents incresse (decrease Cash and equivalens at beginning of year Csh and equivalents at end of year Supplemental cash flow disdlosures Interest paid $130 Income tanes paid 5190

Answer 1

1. FCFF represents the amount of cash flow from operations available for distribution after depreciation expenses, taxes, working capital, and investments are accounted for and paid.

The formula for FCFF = Net Income + Non Cash Charges (Depreciation) + Interest (1-Tax Rate) - Investment working capital - Capital Investment

Investment working capital and Capital Investment are directly taken from statement from cash flow.

= $285 + $180 + $130 (1-0.40) - ($39 + $44 - $22 - $23) - $349

= $285 + $180 + $78 - $38 - $349

FCFF = $156 millions

2. FCFE represents the amount of cash flow available to equity shareholders.

The formula for FCFE = Net Income + Non Cash Charges (Depreciation) - Investment working capital - Capital Investment + Net Borrowing

Investment working capital and Capital Investment are directly taken from statement from cash flow.

Net borrowing = 2008 Long term debt and notes payable - 2007 long term debt and notes payable

= $285 + $180 - ($39 + $44 - $22 - $23) - $349 + ($1,050 + $310 - $1,010 - $300)

=$285 + $180 - $38 - $349 + $50

FCFE = $128 millions

3. We can also derive FCFE from FCFF as follows :

FCFE = FCFF - Interest (1 - Tax Rate) + Net Borrowing

= $156 - $130 (1-0.40) + ($1,050 + $310 - $1,010 - $300)

= $156 - $78 + $50

FCFE = $128 millions