Seminar 6: Q.610

1
Seminar 6 Q.6-10

• Applied Corporate Finance

2
Z-Tec Corporation

• The firm has net positive financing needs, since
  its net income is less than projected net capital
  expenditures.
• Hence it cannot afford to pay any dividends
• as it is, it must raise additional equity
  capital.

3
Z-Tec Corporation (2)

• It will be 4 years before dividends can be paid

4
Conrail

• The average debt ratio during this period was
  40
• Total noncash working capital at the end of 1990
  was 10 million

5
Conrail
220.8
266.4
-44.2
271.8
275.4
6
Conrail (2)

• The average accounting return on equity
• 13.5
• The required rate of return
• 0.07 1.25(0.125 - 0.07) 13.875
• Conrails projects have done badly on average.
• Its average dividends have been much lower than
  the average FCFE.
• Hence, it would seem that Conrail has been paying
  too low dividends

7
Cracker Barrel
8
? Debt/Capital Ratio

• Free Cash flow to Equity
• Net Income
• - (1- ?) (Capital Expenditures - Depreciation)
• - (1- ?) (? Noncash Working Capital)

9
Cracker Barrel
10
Cracker Barrel (2)

• The required rate of return on equity was
• 0.071.2(0.055) 13.6
• While Cracker Barrel earned 25 on equity.
• Hence management is using its resources well, and
  the money is better retained and invested in the
  business rather than returned to investors.

11
Manpower

• Next year Manpower will have 70.06m to pay out
  as dividends
• (B) At the end of next year, Manpower should have
  a cash balance 143 70.06 - 12 201.06