Calculate free cash flow for 2003 and calculate net

Question

Question 1:

Below is an excerpt from the cash flow statement of a firm for fiscal year 2003:

Required:

a. Calculate free cash flow for 2003.

b. Calculate net payments to debt holders and issuers for 2003.

c. Calculate comprehensive income for 2003.

Question 2:

Part A

The following is a condensed version of the statement of shareholders' equity for Dell Computer Corporation for fiscal year ending January 31, 2003 (in millions of dollars):

Balance at February 1, 2002	4,694
Net income	2,122
Unrealized gain on debt investments	26
Unrealized loss on derivative instruments	(101)
Foreign currency translation gain	4
Comprehensive income	2,051
Shares issued on exercise of options, including tax benefits of $260	418
Repurchase of 50 million shares	(2,290)
Balance of January 31, 2003	4 )371

Other information:

1. Dell's tax rate is 35%

2. The repurchase occurred when the stock traded at $28 per share.

Required:

Prepare a reformulated statement of shareholders' equity for 2003 for Dell Computer Corporation. The reformulated statement should identify comprehensive income.

Part B

The following is extracted from Dell's balance sheet at January 31, 2003 (in millions of dollars):

Net financial assets   9,167

Common equity (2,579 million shares outstanding)  4,873

Analysts are forecasting consensus earnings per share of $1.01 for the year ending January 31, 2004.

a. Calculate net operating assets at January 31, 2003.

b. Net financial assets are expected to earn an after-tax return of 4% in 2004. What is the forecast of operating income implicit in the analysts' eps forecast?

c. Forecast the residual operating income for 2004 that is implicit in the analysts' forecast. Use a required annual return for operations of 9%.

d. Dell's shares are currently trading at $34 each. With the above information, value the shares under the following set of scenarios using residual income methods:

(i) Sales will grow at 5% per year after 2004.

(ii) Operating assets and operating liabilities with both grow at 5% per year after 2003.

(iii) Operating profit margins (after tax) will be the same as these forecasted for 2004.

e. Under the same scenarios, forecast free cash flow for 2004.

f. Under the same scenarios, forecast abnormal growth in operating income for 2005.

g. Show that, with a long term growth rate of 5%, the following formula will give the same value as that in part (d) of the question:

V₀^E = OI₁x 1/0.09[G2 - g/1.09 - g] + net Financial Assets

where G₂ is the (one plus) cum-dividend growth rate in operating income two years ahead and g is (one plus) the long-term growth rate.