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E8.4.

Applying the Treasurers Rule


a. The treasurers rule:
C I i d = Cash applied to debt trading
$2,348 23 (14 + 54) = $2,365 million
After paying interest and receiving $40 million (14 54) from the negative net dividend,
there was $2,365 of cash left over from the free cash flow. The treasurer used it to buy
debt, either by buying back the firms own debt or investing in debt assets.
b. From the treasurers rule,
C I i = d + cash from trading in debt
-$1,857 32 = d + cash from trading in debt
= ($1,050 + stock repurchases share issues) + cash from trading
in debt
(The dividend is $1.25 per share 840 million shares = $1,050 million)
The cash shortfall after paying the dividend is $1,857 + 32 + 1,050 = $2,939
million. The treasurer meets this shortfall by selling debt either issuing the
firms own debt or selling debt assets (financial assets) that the firm holds or
by issuing shares.
E8.5. Balance Sheet and Income Statement Relations
a. Net financial assets = Financial obligations financial assets
= $432 - $1,891
= -$1,459 million
That is, the firm has net financial obligation (negative NFA)
Net operating assets = Common equity + Net financial obligations
= $597 + 1,459
= $2,056 million
b. Operating income (after tax) = Comprehensive income + NFE (after tax)
= $108 + 47
= $155 million
E8.6. Using Accounting Relations
The reformulated balance sheet:
Net Operating Assets
2012

Net Financial Obligations and Equity


2011

2012

2011

Operating assets
Operating liabilities

205.3
40.6

189.9 Financial liabilities


34.2 Financial assets
NFO
CSE
155.7

NOA

164.7

(a) Dividends

= Net income CSE

120.4
45.7
74.7
90.0
164.7

120.4
42.0
78.4
77.3
155.7

(Clean-surplus equation)

= 1.9
(These are net dividends)
(b) C I

= OI NOA
= 21.7 9.0
= 12.7

E8.7. Using Accounting Relations


(a)Income Statement:
Start with the income statement where the answers are more obvious:
A = $9,162
B = 8,312
C=

94

(Comprehensive income = operating revenues operating expenses net financial expenses)


Balance sheet:
D = 4,457
E = 34,262
F = 34,262
G = 7,194
H = 18,544

Before going to the cash flow statement, reformulate the balance sheet into net operating
assets (NOA) and net financial obligations (NFO):

Cash Flow Statement:


Free cash flow:

J = 690

[C - I = OI - NOA]

Cash investment:

I = (106)
(a liquidation)

[I = C - (C - I)]

Total financing flows:

M = 690

[C - I = d + F]

Net dividends:

K = 865

[Net dividends = Earnings - CSE]

Payments on net debt:

L = (175)
[F = d + F - d]
(more net debt issued)

(b)
Operating accruals can be calculated in two ways:
1.

2.

(c)

NFO

Operating accruals

Operating accruals

Operating income Cash from operations

850 584

266

NOA Investment

160 (-106)

266

NFE (C - I) + d

59 690 + 865

234

E8.10. Accounting Relations for Kimberly-Clark Corporation


a. Reformulate the balance sheet:
2007
Operating assets
Operating liabilities
Net operating assets (NOA)
Financial obligations
Financial assets

2008

$18,057.0
6,011.8
12,045.2
$6,496.4
382.7

6,113.7

$4,395.4
270.8

$16,796.2
5,927.2
10,869.0

(i)

4,124.6

(ii)

Common equity
$ 5,931.5
$ 6,744.4
b. Free cash flow = Operating income Change in net operating assets
= $2,740.1 (12,045.2 10,869.0)
= $1,563.9
c. NOA (end) = NOA (beginning) + Operating income Free cash flow
$12,045.2

= $10,869.0 + 2,740.1 1,563.9

d. CSE (end) = CSE (beginning) + Comprehensive income Net payout


Comprehensive income = Operating income Net financial expense
$2,593.0 = $2,740.1 147.1
$5,931.5 = 6,744.4 + 2593.0 Net payout
Thus, net payout = $3,405.9

(iii)