Dividend policy and share repurchases

Your task is to evaluate the company's dividend policy and forecast the possibilities for share repurchases in the next three years. You have the following information at your disposal:

2017 2018 2019

Sales revenue (EUR): 1000 1100 1200

Net profit: 100 110 120

Depreciation 40 45 50

Investments in fixed assets 50 60 70

Investments in net working capital (excluding cash) 10 30 60

Interest - bearing loans 10 15 75

Dividend payout ratio (net profit) 0% 40% 50%

a. Assume that the company started its operations in 2017. initially without money and loans. How big will the company's cash balance be at the end of each year in the period 2017-2019?

Let us now assume that the company intends to double its investments in net working capital in the beginning of 2020, compared to the share of sales revenue in 2019 (ie from 5% to 10%). The company hopes that these investments will enable the company to increase sales revenue by 20% per year (every next 3 years, ie in 2020, 2021 and 2022). When preparing the forecasts, it can be assumed that the company's net return on sales and dividend payout ratio will remain the same in the forecast years as in 2019. The company's investments and depreciation of fixed assets are forecast to grow by 10% per year. In addition, we expect the company to repay all loans taken by the end of 2019 (ie 75 million) in three equal annual installments.

b. Forecast the company's cash balance by the end of each year, in the period 2020-2022.

c. Assume that the optimal cash balance for a company is estimated at 100 million. For how much is the company expected to repurchase shares each year?

To help solve the task:

So to question a. As well as answering questions b and c, you can follow the following cash flow forecasting scheme:

Sales revenue

Net profit

+ Depreciation

- Fixed asset investments

- Change in net working capital

- Repayment of loans

+ Borrowing

= FCFE (free cash flow for equity)

Dividends paid

Change in cash balance

Cash balance at the end of the period *

* Excluding share repurchases during the forecast period