Week 2 Homework
FIN430 Investment Analysis
Keith Vandeventer
E8.10. Accounting Relations for Kimberly-Clark Corporation (Medium)
Below are summary numbers from reformulated balance sheets for 2007 and 2006 for
Kimberly-Clark Corporation, the paper products company, along with numbers from the
reformulated income statement for 2007 (in millions).
2007 2006
Operating assets $18,057.0 $16,796.2
Operating liabilities 6,011.8 5,927.2
Financial assets 382.7 270.8
Financial obligations 6,496.4 4,395.4
Operating income (after tax) 2,740.1
Net financial expense (after tax) 147.1
a. Calculate the following for 2007 and 2006:
(i) Net operating assets.
(ii) Net financial obligations.
(iii) Shareholders’ equity.
b. Calculate free cash flow for 2007.
Free cash flow = Operating income – Change in net operating assets
= $2,740.10 – ($12,045.20 - $10,869.00)
= $1,563.90
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c. Show that the accounting relation for change in net operating assets (equation 8.5 in
the chapter) works for Kimberly-Clark.
NOA (end) = NOA (beginning) + Operating income – Free cash flow
$12,045.20 = $10,869.00 + $2,740.10 - $1,563.90
d. What was the net payment to shareholders (the net dividend) in 2007?
CSE (end) = CSE (beginning) + Comprehensive income – Net payout
Comprehensive income = Operating income – Net financial expense
$2,593.00 = $2,740.10 - $147.10
$5,931.50 = $6,744.40 + $2,593.00 – Net payout
Net payout = $3,405.90
E9.5. Calculating the Loss to Shareholders from the Exercise of Stock Options (Easy)
In 2007, an employee was granted 305 options on the stock of a firm with an exercise
price of $20 per option. In 2012, after the options had vested and when the stock was
trading at $35 per share, she exercised the options. The firm’s income tax rate is 36
percent. What was the after-tax cost to shareholders of remunerating this employee with
options?
2007: 305 x $20 = $6,100
2012: 305 x $35 = $10,675
Total profit (before tax): $10,675 - $6,100 = $4,575
Income tax (36%) = $1,647
Net profit (after tax): $4,575 - $1,647 = $2,928
After-tax cost to shareholders: $2,928/305 = $9.6 per stock option
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E11.8. Free Cash Flow and Financing Activities: General Electric Company (Easy)
The following summarizes free cash flows generated by General Electric from 2000–2004
(in millions of dollars).
2000 2001 2002 2003 2004
Cash from operations 30,009 39,398 34,848 36,102 36,484
Cash investments 37,699 40,308 61,227 21,843 38,414
Free cash flow (7,690) (910) (26,379) 14,259 (1,930)
a. Explain why such a profitable firm as General Electric can have negative free cash
flow.
Although GE generated large cash flows from operations, they also had huge
investments (possibly new businesses). This left them with negative free cash flow.
b. In 2005, the firm announced that the years of building its set of businesses was
“largely behind it,” so it would be slowing its investment activity. What is the likely
effect on free cash flow? How will GE’s financing activities likely change? What are
the financing alternatives in light of the changed free cash flow?
Since cash from operations from the businesses either continues at, or grows from
the 2004 level, free cash flow will/should increase and will eventually become
positive. Instead of borrowing or issuing shares to finance a free cash flow deficit,
GE will/should have cash to pay out.
Alternatives to consider:
1. Pay down debt.
2. Invest the cash flow in financial assets.
3. Pay out dividends or buy back its stock.
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