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With regard to D2007 Q1(b),
The max dividend capacity (before working capital) is 114 – 80 – 10 = 24M.
However, from the cash flow statement in part(a), the total change in working capital is 1.1 + 0.5 + 3.5 = 5.1M.
This leaves dividend capacity of 24M – 5.1M = $18.9M
can we solve it through the free cashflow to equity method which is covered in your notes
and if we can use that free cashflow method the dep will be added and deducted and therefore should not be shown on face of the cashflow forecast , am i right ??i found this question so confusing and was unable to do it , but when i see your previous year’s comment that the dividend capacity is free cashflow to equity then appreciated your efforts.
No – the question specifically asks for a cash flow forecast, and adding and subtracting depreciation would not make sense.
This is mainly a financial accounts question. The statement of cash flows in part (a) ,with a dividend of 28M leaves a cash deficit of 4M. Therefore the maximum dividend capacity (so as not to have a cash deficit) would be 24M.
However, this is assuming that working capital is being reduced by a total of 5.1. In fact they should not be reducing the working capital (given that the revenue and cost of sales are both projected to increase, then if anything they should be budgeting on increasing the working capital).
Therefore the dividend capacity is really a maximum of 24M – 5.1M – $18.9M (although this would mean no increase in the working capital, and for the reason I have already written, they should probably be increasing it which would lower the dividend capacity further).
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