At the beginning of time, t=0, Habibi Corp. has the following balance sheet: Assets Liabilities and Equity Cash: $10 Million Current Liabilities: none Other Current Assets: none Long term debt: $5 Million Net fixed assets: none Equity: 5 Million (of which $2Million is retained earnings) In its 1st year of operations, which begins at t=0 and ends at t=1, Habibi Corp. engages in the following transactions: It records sales of $7 Million. Unfortunately, some of its customers are unable to pay upfront, but they promise to pay the following year – the amount owed by these customers’ totals to $2 Million. The firm’s operating costs other than depreciation are $4 Million. However, the firm gets behind on $1 Million that it owes to its suppliers, though it promises to pay them the next year. At the beginning of the year, the firm spends $2 Million for new equipment. It will depreciate this purchase straight-line over a five year period (beginning with the financial statements that it will release at t=1). At the end of the year, the firm pays a tax of 20% on its EBIT (assume its interest expense is $0). It then pays out half of its net income as a dividend. Finally, it raises $1 Million by issuing additional debt – it keeps this money in cash.
1. Recreate the statement of cash flows that the firm will release at t=1. Be sure to indicate separate totals for the three classifications of cash flows. Also indicate the ending balance of cash.
2. Calculate the firm’s free cash flow (FCF) for the year ended at t=1.
3. Find the firm’s operating cash flow (OCF) for the year ended at t=1. Remember that OCF is different from “cash flows from operating activities,” which appears on the statement of cash flows.